UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year ended October 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File No. 0-22920
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NUMEREX CORP.
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(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 11-2948749
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(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
100 Four Falls Corporate Center
Suite 407
Route 23 and Woodmont Road
West Conshohocken, Pennsylvania 19428-2961
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (610) 892-0316
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Securities Registered Pursuant to Section 12(b) of the Act: None
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Securities Registered Pursuant to Section 12(g) of the Act:
Class A Common Stock, no par value 10,914,592
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(Title of Class) (Number of Shares Outstanding
as of January 20, 1998)
Indicate by check mark whether the Registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (ii) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant is 37,395,342. (1)
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DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Company's Annual Report to Shareholders for the
year ended October 31, 1997 are incorporated by reference in Part I and Part II
of this Report and certain provisions of the Company's Proxy Statement to be
filed in connection with its 1998 Annual Meeting of Shareholders are
incorporated by reference in Part III of this Report.
Other documents incorporated by reference are listed in the Exhibit Index.
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(1) The aggregate dollar amount of the voting stock set forth equals the number
of shares of the Company's Common Stock outstanding, reduced by the amount
of Common Stock held by officers, directors and shareholders owning 10% or
more of the Company's Common Stock, multiplied by $6.00, the last reported
sale price for the Company's Common Stock on January 16, 1998. The
information provided shall in no way be construed as an admission that any
officer, director or 10% shareholder in the Company may be deemed an
affiliate of the Company or that such person is the beneficial owner of the
shares reported as being held by him, and any such inference is hereby
disclaimed. The information provided herein is included solely for
recordkeeping purposes of the Securities and Exchange Commission.
PRELIMINARY NOTE
Unless otherwise indicated or the context otherwise requires: (i) the
"Company" refers to Numerex Corp. and its wholly-owned subsidiaries, (ii) all
references to Common Stock in this report refer to the Company's Class A Common
Stock, (iii) all information in this report has been adjusted to reflect a
five-for-two stock split paid in October 1994, (iv) all references in this
report to fiscal years are to the Company's fiscal year ended October 31 of each
year, and (v) all references in this report to "pounds sterling" or (Pound) are
to British pounds sterling.
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TABLE OF CONTENTS
Page
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Table of Contents....................................................... (i)
Exchange Rate Data...................................................... (i)
PART I
Item 1. Business ..................................................... 1
Item 2. Properties ................................................... 24
Item 3. Legal Proceedings............................................. 25
Item 4. Submission of Matters to a Vote of Security Holders........... 25
Item 4.1 Certain Executive and Key Employees of the Registrant ........ 25
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters.................................................... 25
Item 6. Selected Financial Data....................................... 26
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 26
Item 8. Financial Statements and Supplementary Data................... 26
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure .................................. 26
PART III
Item 10. Directors and Executive Officers of the Registrant ........... 27
Item 11. Executive Compensation ....................................... 27
Item 12. Security Ownership of Certain Beneficial Owners and
Management ................................................ 27
Item 13. Certain Relationships and Related Transactions ............... 27
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K .................................................. 27
List of Financial Statements ................................. 27
List of Exhibits ............................................. 28
Signatures ................................................... 32
Index to Financial Statements ................................ F-1
EXCHANGE RATE DATA
The following table sets forth certain exchange rates for British pounds
sterling based on the noon buying rate in New York City for cable transfers, as
certified for customs purposes by the Federal Reserve Bank of New York. Such
rates are set forth as U.S. dollars per British pound sterling. On January 16,
1998, the noon buying rate was U.S. $1.6342 per (Pound)100.
Fiscal Years Ended October 31,
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1997 1996 1995 1994
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Exchange rate at end of period ........... 1.6743 1.6278 1.5805 1.6350
Average exchange rate during period ...... 1.6444 1.5506 1.5884 1.5250
Highest exchange rate during period ...... 1.7123 1.6278 1.6355 1.6368
Lowest exchange rate during period ....... 1.6020 1.5083 1.5505 1.4615
The Company currently publishes its consolidated financial statements in
British pounds sterling, the functional currency of the country in which
substantial majority of the Company's revenues are presently generated.
(i)
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PART I
Item 1. Business.
THE COMPANY
Numerex is a telecommunications holding company comprised of business
entities providing an array of information transport products and services. The
Company's primary focus is on transport technologies representing wireline,
broadband, and wireless communications. Through its transport technology
business units, the Company has developed products and services for wireline
communications (proprietary Derived Channel technology), broadband
communications (Fiber Optic and proprietary EDCOMM software), and wireless
communications (patented Cellemetry technology, through the Company's investment
in Uplink). Additionally, the Company provides network management systems to
operating telephone companies.
The Company's primary strategic objectives are to:
o Increase coverage and penetration for all transport technologies.
o Transition from product revenues to recurring revenue wherever
possible.
o Acquire complimentary products, services, and technologies.
o Acquire or develop applications which can profitably capitalize on
deployed transport technologies.
The Company's largest wireline communications customer, British
Telecommunications plc ("British Telecom"), has been successfully deploying the
Company's Derived Channel technology for the purposes of providing enhanced
alarm reporting services to customers through its telephone network in the
United Kingdom. The service, referred to by British Telecom as "RedCARE", now
supports more than 270,000 subscribers and is available to more than 98% of the
commercial marketplace in the United Kingdom.
In 1997, the Company entered into commercial trials of its Derived Channel
technology with Bell Canada for potential deployment of the technology
throughout Bell Canada's territories, and with Telemonitoreo (including Telecom
and Telefonica of Argentina) for potential deployment of the Derived Channel
technology throughout Argentina.
Building on the success of British Telecom's RedCARE system, the successful
completion of the Canadian and Argentinian trials, and sales and marketing
activities in other territories, the Company believes it is well positioned to
expand the subscriber base of existing Derived Channel technology users and to
sell new systems into other worldwide markets.
The Company's Broadband Communications business unit provides systems
design, products, integration services, installation and operator training for
interactive voice, video, and data via fiber optic transport. The principal
application for the Company's fiber optic transport expertise to date has been
in the area of educational enhancement, through distance learning. With more
than 1,000 existing distance learning and campus sites, serving more than 1.2
million students, the Company believes it is well positioned to capitalize on
the public need for enhanced education and the anticipated growth of the
distance learning market.
The Company, through its investment in Uplink Security, Inc. ("Uplink"), is
positioned to provide low cost, reliable, wireless transport utilizing
BellSouth's proprietary Cellemetry technology. Cellemetry, as a means of data
transport, combined with uniquely developed message processing and interface
technologies,
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has positioned Uplink to become an industry leader in its initial application
endeavor, low cost wireless alarm transport. Additionally, from an application
perspective, Cellemetry is an excellent compliment to the Company's Derived
Channel technology for security alarm transport purposes.
The Company's Network Management products are used to test and monitor the
performance of data and voice communications networks. The Company's high-end
network fault management product line is marketed to customers in North America,
South America, Western Europe, and the Pacific Rim. Through its network
management products the Company has developed relationships with major
telecommunications companies throughout the world.
The Company's history began in July 1992 when Bronzebase Limited
("Bronzebase"), a newly formed corporation acquired 90% of the outstanding stock
of Versus Technology Limited ("Versus Technology UK") and certain proprietary
intellectual property rights, including rights to derived channel technology and
rights to market such technology in certain countries, including the United
Kingdom. Bronzebase acquired the remaining Versus Technology UK stock in
September 1993. In February 1994, as a result of a stock exchange, Bronzebase
and its subsidiary Versus Technology UK, became subsidiaries of Numerex
Corporation.
In July 1994, the Company acquired all of the outstanding stock of Digital
Audio Limited ("DA Systems"). Also in July 1994, the Company purchased certain
network management assets, through a newly formed subsidiary of the Company,
Digilog Inc. ("Digilog"). In November 1994, the Company's subsidiary, DCX
Systems, Inc. ("DCX Systems"), completed the acquisition of certain derived
channel business assets, including the rights to manufacture, market and sell
the Company's Derived Channel technology in North America, South America,
Eastern Europe, and parts of the Pacific Rim. Along with these rights, the
Company assumed relationships with six of the seven Regional Bell Operating
Companies and GTE Corporation in the United States, each of which has purchased
and installed systems using earlier versions of the Derived Channel technology.
In February 1997, the Company acquired 100% of the outstanding stock of
Broadband Networks, Inc. ("BNI") of State College, Pennsylvania. Certain
employees of BNI hold stock options which if fully exercised will result in
Numerex's interest being reduced to 82%. In addition, the Company has certain
rights to purchase the shares upon exercise of the options.
In May 1997, the Company sold all of the stock of its wholly owned
subsidiary, DA Systems, to Detection Systems, Inc. ("DSI") of Rochester, N.Y. In
a companion transaction, a subsidiary of the Company entered into a License
Agreement with DSI whereby DSI may manufacture and distribute certain of the
Company's products in the United Kingdom in return for royalty payments.
In July 1997, the Company completed its initial investment in Uplink. This
investment, conveyed a 19.5% of Uplink's common stock to the Company, provides
for loans to Uplink against performance milestones, and provides certain options
which could lead to the acquisition of a controlling interest in Uplink by the
Company.
The Company is a Pennsylvania Corporation with executive offices located at
100 Four Falls Corporate Center, Suite 407, Route 23 & Woodmont Road, West
Conshochocken, Pennsylvania 19428-2961. The Company's telephone number is
(610) 941-2844.
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RISK FACTORS
All statements and information herein and incorporated by reference herein,
other than statements of historical fact, are forward-looking statements that
are based upon a number of assumptions concerning future conditions that
ultimately may prove to be inaccurate. Many phases of the Company's operations
are subject to influences outside its control. Any one, or any combination of
factors could have a material adverse effect on the Company's results of
operations. These factors include: competitive pressures, economic conditions,
changes in consumer spending, currency exchange fluctuations, tariffs, political
instability, interest rate fluctuations, trade restrictions, and other
conditions affecting capital markets. The following factors should be carefully
considered, in addition to other information contained in this document. This
document contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements include, among other things, statements
regarding trends, strategies, plans, beliefs, intentions, expectations, goals
and opportunities. Also, they include statements regarding increases in user and
customer base (see Item 1. "Business" - "The Company", "Derived Channel System"
and "Broadband Communications"); statements relating to expansion opportunities
(see Item 1. "Business" - "The Company", "Derived Channel System" and "Broadband
Communications"); statements related to growth through a variety of sales and
marketing efforts, technological developments, the introduction of new and
enhanced products and new product applications (see Item 1. "Business" - "The
Company", "Derived Channel Systems", "Broadband Communications", "Wireless
Communications" and "Network Management Products"); statements regarding
positive results relating to acquisitions (see Item 1. "Business" - "The
Company", "Derived Channel System" and "Broadband Communications"); statements
regarding various aspects of competition (see Item 1. "Business" - "Derived
Channel System" - "Competition", "Broadband Communications" "Competition" and
"Network Management Products" - "Competition"); statements regarding future
results of operations, profitability, exchange rates and activities relating
thereto (see Item 7. "Management's Discussion and Results of Operations" -
"General" and "Foreign Currency"); statements regarding increased interest and
growth in industries and markets served by the Company and demand for the
Company's product offerings (see Item 1. "Business" - "The Company", "Derived
Channel Systems" and "Broadband Communications"); statements regarding
sufficiency of cash flow, funding operations and availability of additional
capital (see Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operation" - "Liquidity and Capital Resources");
statements regarding the Company's ability to retain key employees (see Item 1.
"Business" - "Derived Channel Systems" - "Sales and Marketing" and "Broadband
Communications"); statements concerning the nature of applicable regulatory
restrictions and limitations (see Item 1. "Business" - "General" -
"Regulation"); and statements relating to the availability of supplies used in
the Company's business (see Item 2. "Properties." Actual events, developments
and results could differ materially from those anticipated or projected in the
forward-looking statements as a result of certain uncertainties set forth below
and elsewhere in this document. Any investment in the Company's securities
involves a high degree of risk. Subsequent written or oral statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the cautionary statements in this report and
those in the Company's reports previously filed with the Securities and Exchange
Commission.
The following factors, in addition to the other information contained in
this report should be considered carefully in evaluating an investment in the
Company.
Limited Operating History; Acquisition History. The Company commenced
operations in July 1992 with the acquisition of Versus Technology UK, which
conducts the Company's Derived Channel
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System business in the United Kingdom. The Company acquired its network
management products business in July 1994. In November 1994, the Company
acquired the rights to market its Derived Channel System in North America and
several other worldwide markets. In addition, the Company acquired BNI in
February 1997 and made an investment in Uplink in July 1997. Due to the
Company's limited operating history and the limited history in connection with
its recent acquisitions, there can be no assurance as to the level of gross
profit margin or operating results which the Company will achieve, nor can there
be any assurance that the Company's operations will be profitable in the future.
Dependence Upon British Telecom. Direct sales to the Company's major
customer, British Telecom, accounted for approximately 16.4% and 31.6% the
Company's sales for the fiscal years ended October 31, 1997 and 1996,
respectively. Such sales, in fiscal 1996 and 1997 consisted of network equipment
deployed by British Telecom in connection with its RedCARE alarm reporting
service and revenues pursuant to a software contract between the Company and
British Telecom. The Company's agreement to supply certain network equipment to
British Telecom relating to its RedCARE service will expire in August 1999.
Under such agreement, British Telecom is not required to purchase any minimum
amount of equipment. In addition to direct sales to British Telecom, a
substantial majority of the Company's remaining Derived Channel System sales
consists of STUs sold to alarm system distributors and installers for resale to
British Telecom's RedCARE subscribers. The Company is dependent upon the
marketing efforts of British Telecom to generate demand for the enhanced alarm
reporting service or other applications, which in turn results in sales of the
Company's network equipment to British Telecom and customer premises equipment
(STUs) to alarm system distributors and installers. There can be no assurance
that British Telecom will take any further steps to increase the market
penetration of its RedCARE service or other applications by attracting
additional subscribers or by offering its RedCARE service in new regions of the
United Kingdom or that any market development or geographic expansion efforts
undertaken by British Telecom will be successful. In the event that British
Telecom fails to attract additional RedCARE subscribers or does not otherwise
expand its RedCARE service and other applications in the United Kingdom, the
Company's sales of Derived Channel System products would be expected to decrease
over time. Also, as market penetration approaches more complete coverage, the
Company believes sales will grow at a lower rate. A reduction of sales to
British Telecom, a reduction by British Telecom in its marketing efforts for its
RedCARE service or other applications, a failure by British Telecom to offer its
RedCARE service in new regions, or an impairment of British Telecom's ability to
add new subscribers, would have a material adverse effect on the Company. See
"Item 1. Business -- Sales and Marketing -- United Kingdom Security Market for
the Derived Channel System."
Risks of the Company's Geographic Expansion Program. To date, a substantial
majority of the Company's revenues has been generated from Derived Channel
product sales within the United Kingdom. The Company has undertaken efforts to
increase its market penetration in North America, South America and the Pacific
Rim and to expand into other parts of Western Europe. Each country typically has
its own technical certification and network standards, local distribution
channels, and local competitive dynamics. Additionally, technical infrastructure
differences in each country will likely increase the cost associated with
expansion efforts. In order for the Company's Derived Channel expansion efforts
to be successful, the Company's products will need to be selected for use in the
new geographic markets by telephone companies and alarm system distributors and
installers. There can be no assurance that the Company's products will be
selected for deployment in these markets or that the Company will be able to
successfully expand into new geographic markets. In addition, international
expansion opportunities may be pursued by BNI which would likely result in
increased start-up costs and involve many of the above factors. Unless, and
until,
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the Company is able to generate new sales from these efforts, the start-up costs
and other expenses arising from the Company's expansion activities may adversely
affect the Company's future results of operations.
Transitioning Product Revenue to Recurring Revenue. As part of the
Company's strategy, it is attempting, where possible, to transition the Company
from receiving revenue from the sale of certain products, to sharing in
recurring revenues, primarily with telephone companies and other service
providers. This may result in the Company's revenues from the sale of products
to be adversely affected, while potentially increasing future revenues. There
can be no assurances that the Company's efforts to transition this business will
be successful or that future revenues and profitability will be enhanced.
Risks Associated with the Availability, Funding, Timing, Terms and Effects
of Possible Acquisitions. One of the elements of the Company's strategy is to
consider the acquisition of complementary businesses and or product lines. There
can be no assurance that appropriate acquisition opportunities will be
identified or available; that the Company will have, or be able to obtain,
sufficient resources to fund any such acquisition; that financing for any such
acquisition will be available to the Company on acceptable terms, if at all;
that any such acquisition will be consummated, or, if consummated, the timing
thereof; or that any such acquisition will be beneficial to the Company. In the
event the Company obtains financing for any such acquisition, the Company may
become subject to restrictive loan covenants or other unfavorable terms if funds
are borrowed or dilution if equity securities are sold. In addition, the
diversion of senior management's time and attention associated with any future
acquisitions could have an adverse effect on the Company's operations. Further,
once acquired these acquired businesses must be integrated by the Company. Such
integration will place further demands on management and may require the Company
to increase staffing at the management level. There can be no assurance that
these acquisitions, including the Company's recent acquisitions, can be
successfully integrated or that additional management personnel will be
available to the Company. In this regard the Company recently acquired a 19.5%
equity interest in Uplink. As part of that acquisition the Company provided a $5
million line of credit which can be drawn against a defined set of milestones
over a 24 month period, of which $2 million has been funded. The Company has
been granted various options whereby it may acquire a controlling interest in
Uplink. There can be no assurances that the Company's return on its investment
will justify its investment or that the Company will exercise any of the options
to acquire a greater equity interest in Uplink.
Reliance on Key Personnel. The Company's future performance depends in
large part upon the services of certain executive officers and other key
personnel. The Company has entered into employment agreements with some, but not
all, of such persons. The loss of the services of one or more of these
individuals could have an adverse effect upon the Company. The Company's future
performance will also depend upon its ability to attract and retain other highly
qualified management, engineering, marketing, finance and sales personnel. There
can be no assurance that the Company will be able to continue to attract and
retain such persons. See "Item 4.1 -- Certain Executive Officers of the
Registrant" and "Proposal One -- Election of Directors" contained in and
incorporated by reference from the Company's Proxy Statement relating to the
1998 Annual Meeting of Shareholders.
Potential Adverse Effect of Competition in Products and Technologies. The
Company's operations are characterized by significant competition with other
companies offering alternative products and/or technologies. In certain cases,
competing products and technologies may offer price or performance
characteristics rendering them more attractive to potential customers than the
Company's products. Many of the Company's competitors have greater financial,
technical, manufacturing and marketing resources than
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the Company. There can be no assurance that customers will not elect to use
alternatives to the Company's products or that the Company's competitors will
not develop new products, product features or pricing policies which are more
attractive to customers than those offered by the Company. The Company's
financial results may be negatively impacted as a result of increased
competition. See "Item 1. Business."
Failure to Effect Technological Changes. Technology is subject to rapid
change, and the introduction of new products, technologies and applications in
the Company's markets could adversely affect the Company's business. Also,
technical infrastructure differences within each market will increase the cost
of deployment. The Company's success will be dependent upon its ability to
enhance existing products and introduce new products and applications on a
timely basis. The Company expects to implement additional enhancements to the
Derived Channel System. If the Company is unable to design, develop, manufacture
and introduce additional enhancements to existing products and competitive new
products and applications on a timely basis, its business could be adversely
affected.
Foreign Exchange Translation and Liquidity Risk. A substantial majority of
the Company's operations currently is conducted in the United Kingdom. Most of
the Company's transactions are denominated in pounds sterling and do not involve
routine exchange into other currencies. However, a portion of the Company's
production costs are denominated in United States dollars even though the bulk
of its revenues currently are denominated in pounds sterling. As a result, the
Company is exposed to fluctuations in exchange rates in the event these
transactions are not properly hedged. Although the Company does not have an
on-going currency hedging program, it occasionally hedges its operations
selectively against fluctuations in foreign currency as needed, using forward
U.S. dollar contracts. The Company anticipates that it may utilize additional
forward U.S. dollar contracts as needed to hedge against fluctuations in the
exchange rate between the U.S. dollar and the British pound sterling. The
exchange rate between United States dollars and the British pound sterling has
varied significantly over the last several years and may continue to vary
significantly in the future. In addition, any appreciation in the value of the
dollar relative to the pound sterling (i.e., a decrease in the number of dollars
into which pounds sterling may be exchanged) will have the effect of reducing
the Company's reported earnings in dollars when compared to pounds sterling, the
result of which could have an adverse effect on the market price for the
Company's Common Stock. As the Company enters new geographic markets outside the
United States, the Company will be subject to additional foreign exchange
translation and liquidity risks.
Product and Other Liability Risks. The Company's products involve the risk
of liability to the telephone company employing a Derived Channel System, in the
event the Company's products damage the telephone company's network or
equipment, and to the end-user of the Company's alarm reporting equipment, in
the event the Company's products malfunction and fail to report an intrusion.
Potential liability risks are also associated with the Company's broadband
communications and network management products. In the event of a product
liability claim, other manufacturers, distributors and installers of the
Company's products may bear some or all of the liability. Although the Company
maintains product liability insurance, there can be no assurance that if the
Company were to incur substantial liability for product claims, its insurance
would provide adequate coverage against such liability. Accordingly, the
Company's results of operations could be materially adversely affected in the
event of any product liability judgment or settlement in excess of available
insurance coverage.
Possible Lack of Patent Protection. The Company holds patents covering
primary derived channel technology used by the Company in systems installed in
the United Kingdom, the United States and various foreign countries. The United
Kingdom patent expires in October 2002 and the United States patent expires
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in December 2001. There can be no assurance that any additional patents will be
issued to the Company in any or all appropriate jurisdictions, that litigation
will not be commenced seeking to challenge such patent protection or that any
such challenges will not be successful, that processes or products of the
Company do not or will not infringe upon the patents held by third parties or
that the scope of the patents issued to the Company will successfully prevent
third parties from developing similar or competitive products or technologies.
See "Item 1. Business -- Intellectual Property."
Reliance on Limited Manufacturing Facilities and Sources of Supply. A fire
or other disaster at the Company's manufacturing facilities or those of its
subcontractors would cause major disruptions to the Company's operations due to
the short lead-times demanded by certain of the Company's customers. A
substantial disruption at the Company's manufacturing facilities or those of its
subcontractors could have a material adverse effect on the Company's business.
In addition, certain of the components used in the Company's products are
obtained from sole source suppliers. In the event that the Company could not
obtain any of these components on a timely basis or at all, the Company's
business could be adversely affected. See "Item 2. Properties."
Failure to Comply with Standards and Certification Requirements. Many of
the Company's products are subject to a variety of standards and certification
requirements, including those applicable to products connected to the public
telephone network in the countries in which it conducts business. In the event
that the Company's current or future products did not comply with any such
standards or in the event that all required certifications were not received and
maintained, the sale of such products would be delayed and the Company's
operating results could be adversely affected. See "Item 1. Business --
Regulation."
Relationship with Dominion and Gwynedd; Conflicts of Interest. The Company
has entered into various transactions and arrangements with Dominion Group
Limited, a Member Company of Dominion Holdings or a corporation which previously
carried on certain activities of such entity (collectively, "Dominion").
Dominion is an investment and merchant banking firm which has provided financial
advisory and investment banking services to the Company. Gwynedd owns
approximately 30.3% of the outstanding Common Stock of the Company. The
shareholders of Dominion are also shareholders of Gwynedd. Gwynedd has the right
to designate one member of the Company's Board of Directors (two members if the
Board consists of more than seven directors) as long as Gwynedd owns at least
ten percent of the outstanding Common Stock. Mr. Ryan serves as Gwynedd's
designee. Pursuant to a letter agreement between Dominion and the Company
effective January 1, 1995 which terminated December 31, 1996, Dominion provided
financial advisory services to the Company, including the evaluation of debt and
equity financing alternatives; development of new joint venture and licensing
relationships and assistance in the structuring thereof; technical writing,
computer and other related services; identification of investment opportunities
for the Company in the security and telecommunications areas; and such other
services as may be agreed from time to time. The Company paid to Dominion a fee
$20,000 per month and reimbursed Dominion for certain expenses during the term
of the agreement. In addition, the agreement provided that the Company would pay
Dominion a negotiated finder's fee, comparable to that which the Company would
pay to an unaffiliated party, for any transaction resulting from an investment
opportunity identified by Dominion, although none was paid. Dominion received
fees and expense reimbursement (including reimbursements of legal and accounting
fees incurred by Dominion for services rendered to the Company or its
subsidiaries) of $240,000 and $88,038 for the fiscal year ended October 31,
1996. During the fiscal year ended October 31, 1997, the Company paid $234,000
to Dominion for investment banking related services. The Company believes the
above arrangements with Dominion were on terms no less favorable to the Company
than those which could have been obtained from an unaffiliated party for
substantially
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similar services. During fiscal 1995 the Company's subsidiary, DA Systems,
manufactured certain products for CellTel Data Services, Inc. ("CellTel"), a
company in which Dominion owns a controlling interest. Sales to CellTel
approximated $368,500 during fiscal 1995. In October 1996 Numerex invested
$375,000 in return for an initial 10% equity interest in CellTel. These funds
were used by CellTel to repay the account receivable relating to the 1995
product sales. In 1999 Numerex has the right to put its initial equity interest
to Dominion and Dominion can call this interest for $500,000. In addition, in
1999, if the above-referenced call is not exercised by Numerex, it may acquire
an additional 10% interest in CellTel for $1.00. The Company believes that the
terms related to the manufacture and sale of products to CellTel and its
investment in CellTel are no less favorable to the Company than those generally
available from an unaffiliated party. There can be no assurance that conflicts
of interest will not arise in connection with present and future transactions
and arrangements between the Company, Dominion and Gwynedd that may have a
material adverse effect on the Company. See "Item 12. Security Ownership of
Certain Beneficial Owners and Management", and ("Proposal One -- Election of
Directors" and "Certain Relationships and Related Transactions" contained in and
incorporated by reference from the Company's Proxy Statement relating to the
1998 Annual Meeting of Shareholders.)
Concentration of Share Ownership. At October 31, 1997 Gwynedd owned
approximately 30.3% of the outstanding Common Stock of the Company. Accordingly,
Gwynedd at October 31, 1997 had the ability to substantially influence the
outcome of the election of directors of the Company as well as other proposals
requiring shareholder approval by a simple majority. Such influence by Gwynedd
may be considered to have anti-takeover effects and may delay, defer or prevent
a takeover attempt that a shareholder might consider in its best interest. In
addition, the Company has entered into an agreement which gives Gwynedd the
right to designate one director on the Board of Directors (two directors if the
Board consists of more than seven directors) as long as Gwynedd owns at least
ten percent of the outstanding Common Stock. In addition to Gwynedd's ownership
of Common Stock, Kenneth F. Manser, a director and executive officer of the
Company, at October 31, 1997, owned approximately 12% of the outstanding Common
Stock . See "Item 12. Security Ownership of Certain Beneficial Owners and
Management," "Proposal One -- Election of Directors" and "Certain Relationships
and Related Transactions" contained in and incorporated by reference from the
Company's Proxy Statement relating to the 1998 Annual Meeting of Shareholders.
"Anti-Takeover" and "Anti-Greenmail" Provisions. The Company's Articles of
Incorporation and Bylaws, as well as the laws of the Company's state of
incorporation, contain provisions which may have the effect of deterring
takeovers and making it more difficult to gain control of the Company, including
provisions restricting the right of any person or entity, other than current ten
percent shareholders, to hold or vote more than ten percent of the Company's
outstanding voting securities without the approval of the Board of Directors. In
addition provisions on certain employment and severance agreements as well as
certain provisions under the Company Employee Stock Option Plan and Non-Employee
Director Option Plan may be deemed to have an "anti-takeover" effect. See
"Executive Compensation - Employment and Related Agreements" and "Stock Option
Plans" contained in and incorporated by reference from the Company's Proxy
Statement relating to the 1998 Annual Meeting of Shareholders.
Potential Adverse Effect on Market Price Due to Shares Eligible for Sale.
At October 31, 1997, the Company had a total of 10,937,592 shares of Common
Stock outstanding. Although a significant number of these shares are deemed
"restricted securities" within the meaning of the Securities Act of 1933 (the
"Act") and may not be sold in the absence of registration under the Act unless
an exemption from registration is available, such as Rule 144 under the Act
("Rule 144"), nonetheless, they are presently eligible to be sold pursuant to
Rule 144. The Company has granted Gwynedd the right to one demand and
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an unlimited number of "piggyback" registrations with respect to 1,228,905
restricted shares of Common Stock held by Gwynedd which became eligible for sale
under Rule 144 under the Securities Act of 1933 beginning in July 1996. The
Company, at October 31, 1997, had outstanding options to purchase 712,000 shares
of Common Stock, of which 107,100 are currently exercisable. Sales of
substantial amounts of Common Stock could adversely affect the prevailing market
price of the Common Stock.
DERIVED CHANNEL SYSTEM
Industry Background
As a result of technological advances in the telecommunications industry,
telephone companies are able to broaden their product portfolios by offering
enhanced services to telephone customers. Many of these new services, such as
call waiting, call forwarding, voice mail and security monitoring services, are
being offered by telephone companies to customers on a fee basis across
substantial portions of their user base. The Company believes that of particular
interest to telephone companies and their customers are those add-on services
which can be offered using existing equipment on an overlay basis without
requiring additional telephone line construction. In addition, the Company
believes that telephone companies are attracted to technologies, such as the
Company's Derived Channel System, that offer a cost effective solution for
applications that typically require dedicated lines, thereby providing a more
productive use of the existing telephone network.
At the same time, the Company believes that people all over the world are
becoming more security conscious, and that security concerns have increased the
demand for security systems. Additionally, in recent years, more sophisticated
methods have been used to defeat security systems that use a telephone line to
signal an alarm. Intruders are increasingly cutting telephone lines and
disabling other parts of security systems. Under these circumstances, many
security systems are compromised, thereby providing the intruder undetected
access to the premises. In an effort to better manage the underwriting risks,
insurance companies, particularly in the United Kingdom, have required
commercial and high-end residential customers to incorporate security systems
meeting certain specifications, such as a line interruption detection
capability, as a condition of providing insurance. Consequently, more
sophisticated alarm systems are being utilized, including wireless
communications devices, dedicated lines and the Company's Derived Channel
System.
Technology
The Company's patented technology creates a "derived channel" on an
existing telephone line by using an inaudible frequency below the voice
communications spectrum (under 50Hz) for data transmission. The derived channel
technology uses this inaudible or low tone frequency to transmit monitoring
information between a microprocessor at the user's protected premises and a
microprocessor located at the telephone company's central office. The Derived
Channel System operates over a regular voice telephone line whether or not the
telephone is in use and does not interfere with a voice telephone call. In
addition, the low tone signal can be encrypted for additional security. The
Derived Channel System is a two-way communication system that continuously
monitors the integrity of a user's telephone line and security system. The
Company has more recently developed an in-band signaling capability which
utilizes a bi-directional modulated signal in the 200-300 Hz band which enables
the Company's family of Derived Channel products to be compatible with digital
transmission equipment (i.e. fiber optics) currently implemented or being
implemented in many communications networks.
The Company believes that its Derived Channel System differs from most
other technologies in three meaningful ways: (1) the Derived Channel System
operates over existing telephone lines, thereby sparing
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the telephone company the cost of additional line installation and system
overhead, and eliminating the need for costly dedicated line service to the
telephone customer; (2) the Derived Channel System communicates by means of a
continuous and inaudible signal, which can be encrypted, and is transmitted even
while the telephone is otherwise in use; and (3) telephone line integrity and
security system operation are automatically monitored at frequent intervals
through polling generated by the network equipment located at the telephone
company's central office and continuous signaling originating at the protected
premises, thereby providing protection and prompt reporting of line disruptions,
telephone system outages or alarm conditions.
The Company believes that the Derived Channel System represents a marked
improvement over the most common monitored alarm signaling system, which is an
automatic dialer (also know as a digital communicator). These devices are
reactive by nature. When an intrusion is detected, an automatic dialer attempts
to seize the subscriber's telephone line and dial the number of the alarm
monitoring company to report the intrusion. Generally, in the event the
telephone line is in use or has been cut, a standard automatic dialer will be
unable to report the alarm condition. Unlike the standard automatic dialer, the
Derived Channel System is proactive. As such, it continuously monitors line and
system's integrity, and automatically reports any line disruption or failure to
the alarm monitoring company. The Derived Channel works whether or not the
telephone line is otherwise engaged.
The Company believes that in addition to alarm monitoring services, the
Derived Channel System can be used for other applications in which remote site
monitoring or signaling would be beneficial. These applications could include
fire alarm transmission; line integrity monitoring (e.g., critical phone lines
to a nuclear power plant); critical event monitoring (e.g., changes in
environmental conditions); and automatic meter reading. The Company intends to
adapt its Derived Channel technology to emerging communications networks if
market conditions warrant. For example, the Company has already demonstrated
compatibility with Asymmetrical Digital Subscriber Loop ("ADSL"), and, through
preliminary testing, that its Derived Channel technology can be adapted to
Integrated Systems Digital Networks ("ISDN"), GSM networks, as well as cable
distribution networks used by cable television companies. See "Item 1. Business
- - Research and Development.
Products
The Company's Derived Channel System permits the implementation of a secure
alarm reporting service using existing telephone lines. The Derived Channel
System links the protected premises, message switch software, and the customer's
alarm monitoring company utilizing standard telephone lines. The Derived Channel
System consists of:
The Message Switch. The Message Switch is comprised of two minicomputers
(for redundancy purposes) which house the Company's switching software. This
software is designed to identify and transmit information to the appropriate
alarm monitoring company following receipt of an alarm signal from a Scanner.
The Company typically sells or licenses the switching software while the
minicomputers are independently manufactured and can be purchased directly or
through the Company.
The Scanner. The Scanner is a pair of microprocessors situated in a
telephone company's central office which monitors multiple Subscriber Terminal
Units (STU) and transmits alarm conditions to a message switch. The Scanner
interrogates or polls each STU, at proscribed intervals, using the subscriber's
standard telephone line. The response to the poll indicates that the system is
functioning properly or that an alarm condition exists. When an alarm condition
is detected, the Scanner transmits the appropriate information to the Message
Switch for routing to the designated alarm monitoring company. Scanners have
historically been sold to telephone companies for installation in secure
locations within the central office.
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Subscriber Terminal Unit (STU). The STU is a single printed circuit board
containing a microprocessor, signal recognition circuits, and terminals for
multiple alarm inputs. The STU is located on the protected premises and connects
the subscriber's alarm panel to the Scanner using the customer's telephone line.
The STU continuously communicates with the Scanner to indicate that the
telephone line and the STU are working properly, and to transmit alarm signals
as they are generated. The Company sells STUs to alarm system distributors and
installers for resale to owners of the protected premises.
DERIVED CHANNEL DIAGRAM
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The Company's Derived Channel System operates continuously even while the
telephone line is engaged. In the event telephone service is interrupted or the
STU malfunctions, the Scanner transmits a message via the Message Switch to the
alarm company to advise that an out-of-service condition exists, allowing the
monitoring company to take appropriate action.
Sales and Marketing
In marketing its Derived Channel System, the Company has historically sold
networking equipment (Message Switches and Scanners) to telephone companies for
installation on telephone company premises, and has concentrated its marketing
efforts on major telephone companies in the United Kingdom, the United States,
and Australia. More recently the Company has been active in Canada, Latin
America and Western Europe. To date, ten telephone companies have installed and
have Derived Channel Systems operating, including British Telecom, six of the
seven Regional Bell Operating Companies in the United States, and Telecom
Australia. In addition, trial systems have been installed in Canada in
cooperation with Bell Canada, and in Argentina, in partnership with
Telemonitoreo S.A.
Once a Derived Channel System has been installed, the Company typically
markets customer premises equipment (STUs) directly to alarm system distributors
and installers. Historically, the Company has depended upon telephone companies
and alarm system distributors and installers to market the Derived Channel
System alarm reporting service. In the future, the Company intends to maintain
its level of marketing support provided to telephone companies and alarm system
distributors, and to seek more comprehensive associations with telephone
companies to enable the Company to market Derived Channel security alarm
transport directly to the industry in an effort to capture a share of the
recurring revenue generated by the applications. See "Item 1. Business - "The
Canadian Security Market for the Derived Channel System" and "The Argentinean
Security Market for the Derived Channel System."
Set forth below is a summary of telephone companies with Derived Channel
Systems deployed and the Company's estimate of the installed STU base.
Derived Channel Technology Deployed
- -------------------------------------------------------------------------------
Telephone Company Estimated STU Base
- ----------------------------------------- ------------------------------
Ameritech Manitoba Tel Australia 25,000
Bell Atlantic/Nynex Pacific Telesis North America 60,000
BellSouth Telecom Australia United Kingdom 270,000
British Telecom U.S. West
GTE Corporation
The United Kingdom Security Market for the Derived Channel System
The Company's largest customer, British Telecom, has been successful in
implementing the Company's Derived Channel System by offering an enhanced alarm
reporting service known as RedCARE through its telephone network in the United
Kingdom. The Company believes that the RedCARE service is now available to more
than 98% of the potential commercial subscribers served by British Telecom.
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The Company believes there are approximately 2.7 million alarm systems
installed in the United Kingdom. Of these, the Company believes approximately
700,000 are monitored alarm systems. Of the 700,000 monitored alarm systems, the
Company believes approximately 270,000 utilize British Telecom's RedCARE
service. With an estimated 38% of the monitored alarm market, the Company
believes sales in the United Kingdom will grow at a slower rate in the future.
The Company believes additional growth potential in the United Kingdom exists in
areas such as fire alarm reporting and other telemetry applications. However,
there can be no assurances that British Telecom will pursue these opportunities.
The Company has had a long standing relationship with British Telecom.
British Telecom purchases Message Switches and Scanners from the Company to
expand its RedCARE alarm reporting service. The Company is a party to an
agreement with British Telecom that establishes the terms of purchase for
Derived Channel System network equipment. Under the agreement British Telecom is
required to provide a rolling forecast of the quantity of network equipment
likely to be ordered during specific periods, but is not required to order any
minimum amount of such equipment. This agreement expires in August 1999. A prior
agreement with British Telecom has also been extended to cover certain
additional network equipment.
Direct sales to British Telecom for the fiscal years ended October 31, 1997
and 1996, were approximately (Pound)2.9 million and (Pound)5.8 million,
respectively. Direct sales to British Telecom accounted for approximately 16.4%
and 31.6% of the Company's net sales for the fiscal years ended October 31, 1997
and 1996, respectively.
British Telecom is the primary marketer of RedCARE service to its
customers. In addition, several major insurance companies in the United Kingdom
have required the use of an alarm reporting service, such as the RedCARE system,
that can detect telephone line disruption, as a condition of policy renewal. As
a result, the Company has not engaged in extensive marketing efforts in the
United Kingdom. Accordingly, the Company has been dependent upon the sales
efforts of British Telecom to attract RedCARE subscribers and the resulting
network equipment and STU sales. Approximately 49.5% of Derived Channel Systems
sales over the last four fiscal years represented sales to British Telecom. STU
sales to alarm systems distributors and installers for use with the RedCARE
system and all sales in the United States by DCX Systems accounted for
substantially all of the balance.
The United States Security Market for the Derived Channel System
The Company believes the United States market represents a significant
opportunity for its Derived Channel System for use in alarm reporting services
and other applications. According to industry sources as of December 1997, more
than 24 million alarm systems have been installed in the United States, more
than 50% of which are monitored systems.
Through its current relationships with Ameritech, Bell Atlantic/NYNEX,
BellSouth, GTE, Pacific Telesis, and U.S. West, Derived Channel Systems have
been installed which now support approximately 60,000 subscribers. The Company
intends to continue working with the Regional Bell Operating Companies, GTE, and
alarm systems distributors and installers in the United States for the purposes
of expanding existing Derived Channel Systems and increasing the number of
subscribers. However, the Company's primary strategy in the United States is to
become a direct provider of Derived Channel services.
Historically, the Company has depended on the Regional Bell Operating
Companies and GTE to offer and promote Derived Channel services with some
assistance from the Company. The Company is now
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working with several Regional Bell Operating Companies to enable it to offer
derived channel services directly. Under this scenario, it is contemplated that
an operating telephone company would provide the physical connection to the
subscriber's telephone line and the remainder of the service would be provided
by the Company. Although there can be no assurances that arrangements of this
type with operating telephone companies can be consummated, the Company believes
that entrance into the services side of the business will position the Company
to increase the number of Derived Channel subscribers in the United States, to
participate in the recurring revenue aspects of the services business, and to
better predict associated revenue performance in the future.
The Canadian Security Market for the Derived Channel System
The Company believes the Canadian market represents a significant
opportunity for its Derived Channel System for use in alarm reporting services
and other applications. According to industry sources as of December 1997, there
are approximately 600,000 monitored systems in Canada, making the Canadian
market comparable in size to the market in the United Kingdom.
In August of 1997, the Company, through its subsidiary DCX Systems
Company ("DCX Systems"), entered into an agreement with Bell Canada. Under the
terms of the agreement, subject to the successful completion of a field trial,
the Company will provide the equipment necessary to support a full deployment of
the Company's proprietary Derived Channel System throughout the Bell Canada
network (principally Ontario and Quebec provinces). The agreement terminates
four years after the achievement of 52,000 Derived Channel connections, but is
subject to various renewal provisions. In exchange for providing Bell Canada
with a ubiquitous Derived Channel network, DCX Systems will receive a portion of
the recurring revenue generated by the applications which will run on the Bell
Canada network. In connection with the agreement Bell Canada will be granted a
non-exclusive, transferable paid up license to use the programs and software
associated with the Derived Channel equipment. DCX Systems makes certain
warranties in connection with the equipment and agrees to provide certain
services. DCX Systems will also provide, at no additional cost, certain
maintenance services. Numerex serves as surety for the obligations of DCX
Systems under the Agreement, while Bell Canada has assumed various obligations
under the Agreement, including those related to providing central office space
for installation of the equipment. Should the trial conclude favorably, although
no assurances can be given, the Company expects deployment to begin in the
second quarter of fiscal 1998.
As is the case in the United Kingdom where British Telecom offers and
markets the Derived Channel System as RedCARE, Bell Canada would offer and
market the system under the name "SecuRoute." The Company would support the
marketing efforts of Bell Canada and would sell STUs directly to alarm systems
distributors and installers.
The Argentinean Security Market for the Derived Channel System
The Company believes the Argentinean market represents a significant
opportunity for its Derived Channel System for use in alarm reporting services
and other applications. Security industry marketing data is not as readily
available for Argentina as for other markets the Company is addressing, however,
approximately 11 million people live in Buenos Aires alone, and with the growing
level of security consciousness in Latin America, the Company believes the
demand for security systems will increase, generating opportunities for its
Derived Channel System.
The Company has entered into an agreement with its business partner in
Argentina, Telemonitoreo S.A., under which the Company will sell and contribute
equal amounts of Derived Channel networking equipment to Telemonitoreo, for
deployment in Argentina, in return for a revenue sharing agreement. An
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initial networking equipment deployment shipment was made to Telemonitoreo at
the end of fiscal 1997, with deployment expected to begin early in 1998.
Other Security Markets for the Derived Channel System.
The Company plans to develop and expand existing relationships with
international business partners and operating telephone companies for the
purposes of increasing the use of the Derived Channel System for information
transport applications. During the year the Company announced the appointment of
Pan Dacom as a distributor to represent its Derived Channel System in Germany.
Additionally, other initiatives in South America, Western Europe and Asia have
been undertaken. The Company intends to continue to expand its sales efforts
geographically to ultimately market its Derived Channel System on a worldwide
basis, and may establish, as needed, regional sales offices to support this
effort.
Competition
Because of its proprietary nature, management believes that the Company is
the only provider of Derived Channel System products. The Company's principal
competition in the commercial security market consists of alternative methods of
monitoring line integrity, such as dedicated telephone line service. Although
security systems using a dedicated telephone line are considered reliable, they
are a more expensive alternative to the Company's Derived Channel System.
Additionally, various wireless communication systems, including long range
radio, digital packet radio and various cellular systems, are marketed as
alternatives to the Company's Derived Channel System. The Company believes these
alternatives are more expensive and/or less reliable than the Company's Derived
Channel System. They do not provide continuous monitoring of security system
integrity, and can be compromised through jamming and other techniques,
resulting in the alarm monitoring company not being alerted. As such, the
Company believes that Derived Channel represents, from a price performance
perspective, the most secure and most reliable form of primary alarm data
transport, and that wireless alternatives are more appropriately considered as
back-up technologies.
While the automatic dialer typically used in an alarm system is less
expensive than the Company's STU, it lacks the ability to communicate when the
telephone line is cut or becomes inoperable. It cannot communicate the existence
of a line problem to an alarm monitoring center and cannot be polled to
determine the status of the alarm system. In those security applications where
communications integrity and constant monitoring are important, the Company
believes that its Derived Channel System competes effectively both in terms of
price and performance.
Research and Development
The Company historically has contracted with third parties to conduct,
under the Company's supervision, research and development projects related to
the Derived Channel System. The Company anticipates that an increase in future
research and development expenditures will be necessary to remain competitive in
the rapidly changing telecommunications industry and that more development work
will be done in-house.
In Band Signaling. The Company completed the first In Band signaling
project which utilizes a bi-directional modulated signal in the 200-300 Hz
band. The resulting product enables the Company's family of Derived Channel
products to become compatible with the new digital transmission equipment (i.e.
fiber optics) being utilized in various communications networks.
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Link Guard. The Company recently completed work on the development of a
means (referred to as Link Guard) of reducing the number of dedicated circuits
required by a Derived Channel Systems services provider to connect deployed
Scanners to a related Message Switch. This project can materially reduce the
operating costs associated with managing a Derived Channel network.
Serial Data. Traditional alarm systems communicate data in zoned formats.
The Company believes the next generation of alarm systems, and other
applications, will require data to be transmitted in serial formats.
Accordingly, the Company has been adopting all aspects of the Derived Channel
System to accept serial data transmissions in the future. The Company expects to
introduce Derived Channel Systems possessing this capability in 1998.
Emerging Communications Platforms. The Derived Channel System was designed
to accommodate mixed telephone network environments and cable distribution
networks. Accordingly, the Company has committed development resources to
demonstrate compatibility with wireline and wireless communications technologies
such as ADSL, ISDN, and GSM.
BROADBAND COMMUNICATIONS
Industry Background
Historically, cable television systems operators (MSOs) have been the sole
providers of video delivery systems. Today, there are more than 10,000 separate
cable TV systems in the United States providing video delivery services to more
than 95% of the households in the United States. Internationally, the
availability of cable TV services varies greatly from country to country with
approximately 33% penetration in Western Europe and considerably less
availability in Asia, Latin America, and Eastern Europe. Much like international
telephone service, international cable TV has been highly regulated with a
limited number of operators in each country with very little competition.
The emergence of wireless cable, Direct Broadcast Satellite (DBS) systems
and other alternative video delivery systems has threatened the preeminence of
the MSOs in the home entertainment market. In addition, the Telecommunications
Act of 1996, which has substantially removed the legal barriers for telephone
companies in the United States to enter the video delivery market, has posed yet
another competitive threat to the MSOs.
As these competitive pressures have mounted in the United States, MSOs have
been forced to respond by upgrading or rebuilding their networks to provide more
advanced services such as interactive video, data services, Internet access, and
video-on-demand, while controlling their costs. The resulting network migrations
often involve the incorporation of fiber optic technology. At the same time, in
an effort to take advantage of the perceived opportunity, telephone companies
are upgrading traditional copper based local-loop technology, which has limited
video and data communications capabilities, to fiber optic technology. In
contrast to the past, where consumers were generally limited to a single source
for video service and a single source for local telephone service, consumers
will increasingly be able to choose between two or more providers of highly
integrated services in the future.
In addition to the competitive landscape changes in the United States cable
TV and telephony markets, governmental initiatives and deregulation of overseas
communications markets have fostered growth and competition in many
international markets. Because of the early stage of development of many of
these markets and stringent system performance criteria established by
government regulators, the provision of cable TV service in many countries will
require significant investment in advanced video transmission equipment. Major
United States-based MSOs and operating telephone companies have seized this
opportunity to expand their international presence through partnerships, joint
ventures, and other initiatives.
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One of the competitive responses of the MSOs has been the development and
introduction of private fiber optic networks. Private networks are defined as
being independent of the primary public subscriber network, and are sometimes
referred to as "Institutional Networks." These networks are typically found in
campus environments or are implemented for distance learning and video
conferencing applications. Users include large corporations, colleges,
universities, military, government, municipalities and medical institutions.
The Company believes its Broadband Communications Business Unit, BNI, is
well positioned to capitalize on the opportunities presented by the above
described set of market dynamics. Competition between MSOs and telephone
companies in the United States and in the international market is expected to
make the performance and reliability of transmission networks a critical
component of provider success. By positioning itself in the market as a provider
of fully integrated, value-added interactive video and data systems, including
campus media retrieval and internet access, the Company believes it has a
significant advantage over other participants in the market which tend to be
product suppliers.
Broadband Networks, Inc.
BNI designs, develops, and markets complete system solutions for broadband
communications networks employed in cable television, high speed data, and other
communications applications. The Company generally manufactures the products
upon which its systems are based but also incorporates third party products
where appropriate.
Broadband transmission systems permit network operators to provide
additional channels of television programming as well as enhanced services that
include full motion interactive video, video-on-demand, video switching, data
networks, internet access, fax service and network management. The use of fiber
optics in the broadband transmission network provides improved signal quality
for long distance transmission, increased bandwidth, immunity to interfering
signals, and significant cost savings over coaxial cable-based network
technologies. BNI believes its systems enable the deployment of sophisticated
architectures generally at lower costs and with less hardware and complexity
than competing offerings.
BNI, as one of the pioneers in the design and development of products for
interactive video and LAN connectivity, has been involved in the developing
market for video-on-demand applications and internet access.
Products and Services
BNI has developed and continues to enhance its comprehensive line of
software and fiber optic transmission products which addresses a wide variety of
modern network requirements.
System Solution Services
BNI designs and implements systems utilizing BNI manufactured products and
products supplied by third parties. It also trains the end-users as an integral
aspect of providing complete system solutions. The Company believes the BNI
total system solution focus differentiates BNI from its competitors while
providing BNI with an additional source of profitable revenue. A recent example
of the total system solution focus is embodied in the BNI partnership with
Galaxy Cable which resulted in a winning bid for the initial implementation of a
distance learning network for the State of Nebraska. BNI provided the complete
system design, all of the necessary equipment, and system integration services
for a comprehensive set of offerings which include full motion video
conferencing, high speed data transfer, internet access and fax services to
twenty-four (kindergarten-12 and college) locations.
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EDCOMM(TM) System
EDCOMM(TM) is BNI's network management, scheduling and video switching
system for private network applications. EDCOMM(TM) is a third generation
software system which supports user-friendly control of all network devices,
including VCRs, cameras, and switches, and permits the scheduling and conduct of
video conferencing via a handheld remote control device. The EDCOMM(TM) system
incorporates BNI software, both BNI and third party developed hardware, and is
compatible with analog and digital transmission networks. BNI believes
EDCOMM(TM) is unique with respect to its comprehensive functionality, ease of
use, and compatibility with other standard equipment, and that it facilitates
the Company's ability to offer complete systems solutions.
The following products are often included as part of BNI's integrated
system solution, but can also be sold on a stand alone basis.
TR1000 Series
TR1000 Series products enable bi-directional high quality full-motion video
and 10MB data transmissions over one or two single mode fiber strands. These
products are typically used on the inbound segment of an interactive network so
that one site can transmit a signal to a central point where all signals are
combined and retransmitted over the network.
CyberFiber
The CyberFiber 1000 fiber optic transmitter economically delivers two
bi-directional video and two data (10MB) signals over a single strand of fiber.
This product is designed for full motion video conferencing and high speed data
LAN or internet service.
The CyberFiber product was developed as a direct response to announcements
from many top MSOs regarding their plans to create "cyber" schools with high
speed links to the internet.
TR2000 Series
The TR2000 product line includes transmitters and receivers that can
deliver up to 110 channels per fiber over 750 MHz of bandwidth using high power
lasers. BNI's expertise with such lasers (both high power and low power) has
resulted in a comprehensive product line of transmitters and receivers which
allow for versatility and cost effectiveness in systems design.
TR3000 Series
The TR3000 product line provides FM multi-channel video and audio services
for up to 16 channels per fiber strand. These products are used in locations
that require high quality transmission of more than one inbound channel
simultaneously, or for long distance transmissions (greater than 26 kilometers).
BNI believes this product line to be more economical than comparable competitive
products and, as such, offers BNI an important price advantage in designing
regional interactive networks.
OEM
BNI has developed and manufactured products which have been sold under
another vendor's name. Examples of products produced under these circumstances
include ROB multiplexers and demultiplexers, RF broadband switches, and a
product that switches video channels from one transmission location to another.
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Data Modems
BNI has developed several data modem products that have been incorporated
into EDCOMM(TM) and OEM product lines.
Sales and Marketing
BNI markets its products and services directly and through a combination of
manufacturers' representatives, system integrators, and value added resellers.
The Company believes it will be necessary to expand its sales and marketing
efforts in the future to remain competitive and to take advantage of market
opportunities.
Key Customer Relationships
MSOs. BNI has established relationships with a number of MSOs which were
initially based in the private network segment of the MSOs respective
businesses. MSOs have generally looked to these private networks as a means of
augmenting and extending their public networks, and as a source of new revenues
in the increasingly competitive environment.
Telephone Companies. Regional Operating Telephone Companies (RBOCs) compete
with cable operators for the delivery of distance learning and other private
network services. BNI has successfully provided product to several RBOCs and
hopes to replicate these efforts in other areas.
Systems Integrators. BNI has developed relationships with a number of
traditional systems integrators under which BNI has provided system design
services and has assisted with the installation. The Company believes that
systems integrators provide a viable avenue to the market and intends to
continue to expand its efforts in this area.
International Markets
To date BNI's activity outside the United States has been minimal. However,
the Company believes there is an opportunity to leverage its developing
reputation as a supplier of high performance and reliable system solutions in
the international arena. Accordingly, future marketing and sales efforts may
include selected international markets.
Competition
The market for broadband transmission equipment has been characterized by
rapid technological change. The principle competitive factors in this market
include product performance, reliability, price, breadth of product line, sales
and distribution capability, technical support and service, customer relations,
and general industry and economic conditions. The ability to provide complete
systems solutions including system integration, network management capabilities,
and the expertise to migrate existing systems to more complete broadband
networks, have also become critically important vendor selection criteria in
recent years.
BNI's primary competition is the Grass Valley Group, which provides a high
speed/high capacity (DS-3) distance learning solution used by a number of
telephone companies because it utilizes the public network. Other competitors
include manufacturers of fiber transmission equipment who offer comparable
products but do not provide a complete system solution, including software. Many
of the competitors have greater financial and other resources than the Company.
19
<PAGE>
Research and Development
BNI plans to continue to devote a substantial portion of its resources to
the research and development function. In the near term, BNI will continue to
enhance its EDCOMM(TM) system, expand its data product offerings to include
100MB fiber transceivers, and introduce a version of EDCOMM(TM) which will be
capable of retrieving media in a campus environment.
WIRELESS COMMUNICATIONS
Background
In July 1997, NumereX expanded its information transport strategy by
acquiring a 19.5% in Uplink for $1 million pursuant to certain agreements (the
"Agreements") with Uplink and the shareholders of Uplink. In addition, the
Company has provided Uplink with a $5 million secured line of credit which can
be drawn upon based on certain milestone attainment. As of December 31, 1997 the
Company has advanced $2 million to Uplink under the line of credit. Pursuant to
the Agreements Numerex may exercise certain options and acquire a controlling
interest in Uplink.
Uplink has developed interface and routing technologies, and has an
exclusive license to utilize BellSouth Corporation's patented cellular telemetry
technology, known as Cellemetry(Registered), for security alarm transport
applications.
Cellemetry
Cellemetry(Registered) works by imitating a roaming cellular telephone. A
cellular telephone turned on outside a local service area requires registering
with the local cellular provider. The registration process requires a data
transmission to verify that the phone attempting to make a call is valid. The
same process is used by Cellemetry(Registered) transmitters to send and receive
information to and from the protected premises. The cellular system thinks the
Cellemetry(Registered) transmitter is a cellular phone and transmits an alarm
message over the cellular control channel. These messages are sent to a router
which distributes the information to the appropriate monitoring station.
The Uplink System
Uplink's system offers wireless alarm transport utilizing
Cellemetry(Registered) technology over existing cellular networks. Cellemetry is
a wireless means of data transport that uses cellular overhead control channels
and the IS-41 network protocol to deliver short data messages. By using the
excess capacity in the cellular control channel, two way messaging can occur
without effecting the voice channels of the cellular network. Because
Cellemetry(Registered) utilizes the existing cellular network and inexpensive
radio transmitters, Cellemetry(Registered) applications can quickly and
economically monitor equipment at remote locations.
Uplink produces wireless alarm transmission equipment which is installed at
the customer premises, administers and offers air time packages on a consistent
price basis; and provides the technical services that route alarm signals from
the cellular networks to any central station in the country, without requiring
any modification to the station's receiving equipment.
Uplink believes its products and air time transport charges are
competitively priced. As a result of combining Cellemetry(Registered) technology
with low cost transmission equipment and routing technologies significant
improvements in security transport services are now available to the industry at
affordable prices.
20
<PAGE>
Cellemetry and Derived Channel
Cellemetry(Registered) and Derived Channel, as security alarm transport
technologies, are complimentary. Derived Channel is intended to be utilized as a
primary means of alarm data transport. Cellemetry(Registered), as offered by
UPLINK, is intended to be utilized as an alternative means of alarm data
transport. As a result, the technologies can be implemented independently or
collectively.
NETWORK MANAGEMENT PRODUCTS
The Company entered the network management products business in July 1994
with its acquisition of Digilog. Digilog historically designed, manufactured and
marketed products used to test and monitor the performance of data and voice
communication networks. During fiscal 1996, the Company discontinued a number of
under-performing products in this area to focus on NAMS, the Company's
network/fault management product line.
Industry Background
With the development of smaller and more powerful computers, companies are
becoming increasingly reliant upon networks consisting of multiple personal
computers and work stations, each of which is capable of processing data and
sharing information with other users on the network. Many companies link
computer equipment by means of local area networks or "LANs" or wide area
networks or "WANs." At the same time, to realize greater efficiencies, the
management and maintenance of computer networks has become increasingly
centralized even though the networks may be global in scope. The increased
complexity of computer networks has created a need for cost-effective network
management software and hardware which can assist companies in the operation of
their computer networks to minimize network failures and improve efficiency. A
network administrator, typically located at a central site, must be able to
effectively pinpoint a network problem and take appropriate action to keep the
network operating efficiently. The Company offers solutions to these network
analysis and fault management requirements.
Products
The Company's principal network management products monitor and perform
tests to determine whether data and protocols are being accurately transmitted
and received over WANs. This particular product allows multiple network
administrators remote access to a widely dispersed network from a central
control center. The Company's products are sold either on a stand alone basis or
as integrated systems.
Network Analysis and Management System (NAMS). The Company's network
management system, is a network overlay that enables a user to monitor the
continuous operation of a WAN from a central control site. The system provides
prompt alarm notification of network failure or degradation, automatic
activation of backup devices or facilities upon failure detection and a means to
accurately identify defective network components. Because WANs often contain
system components from a variety of vendors. NAMS is designed to function with a
variety of manufacturers' products.
Sales and Marketing
The Company provides its network management products and services to
certain Regional Bell Operating Companies and certain private network operators.
NAMS products are sold by the Company's technically trained direct sales force
which works with customers to determine the optimal
21
<PAGE>
testing solution for their particular network. This initial sales effort usually
involves customization of the NAMS system to match the customer's network
design. Considerable technical support is provided to NAMS users over an
extended period of time. The Company provides training, help desk, installation
and project management services to its customers. For those selling efforts
which involve applications of WAN test products and NAMs as integrated systems,
the Company's direct sales force works in conjunction with the independent sales
representatives to facilitate the sale.
The Company, in its network management products business, is focusing on
the complex test and analysis needs of emerging large scale public and private
data and voice communication networks. The Company believes that operations of
complex telecommunication networks are migrating to a centralized network
management systems architecture which requires permanently installed test and
analysis products, such as those offered by the Company.
Competition
The network management products market is highly competitive and is
comprised primarily of providers of either test equipment and software or
providers of intelligent network equipment that come with self-diagnostic
capability. Many of the Company's competitors have substantially greater
resources than the Company. The Company believes that it is unique among vendors
in that it has a long history of being a provider of both diagnostic equipment
and testing systems. The Company also believes that its ability to successfully
integrate both of these technologies enables it to compete effectively in this
marketplace.
GENERAL
Product Warranty and Service
The Company provides customers with limited one-year warranties on its
scanners and message switch software. In addition, under the terms of the
contract with British Telecom, the Company has agreed to maintain and support
its scanners for a period of up to ten years after the expiration of the
warranty period on a time and materials basis. STUs are typically sold with a
one or two year labor and materials warranty. The Company provides a one-year
warranty on all network management products. In addition, a "help desk" and
training support is offered to all users of network management products. BNI
provides a one-year parts and labor warranty on stand alone products and a
two-year parts and labor warranty on large scale EDCOMM system. To date, the
cost to the Company of its warranty program has not been material.
License Agreements
The Company has granted a license to Radionics, Inc. ("Radionics"), an
alarm manufacturer/distributor. The license generally permits the licensee to
make, use and sell within prescribed territories, certain products used in the
Derived Channel System. The Radionics agreement provides a non-exclusive license
to sell STUs in the United States and Canada. The license agreement has been
extended to December 31, 1999, and is subject to possible extension thereafter.
Under the license agreement, the Company indemnifies the licensee for certain
circumstances, including allegations of patent infringement. Royalty payments
from these licenses have not been material nor does the Company expect material
royalty payments in the future. In addition, the Company has granted to British
Telecom a non-exclusive, non-transferable and irrevocable license in the United
Kingdom for developed software. Bronzebase, a subsidiary of the Company, is
party to a technology
22
<PAGE>
license with Detection Systems, Inc. ("DSI") dated May 7, 1997. Pursuant to the
technology license agreement DSI may manufacture STUs, import STUs into the
defined territory (United Kingdom and Ireland) and supply and offer to supply
STUs manufactured by or on behalf of DSI within the territory. During the
initial five year term Bronzebase shall not grant a license equivalent to the
subject license within the territory, provided certain performance criteria are
satisfied. However this does not otherwise restrict Bronzebase from engaging in
the licensed activities. Certain indemnifications are also provided by the
licensee and licensor. See "Item 1. Business - Sales and Marketing."
Intellectual Property
The Company holds patents covering primary derived channel technology used
by the Company in systems installed in the United Kingdom, the United States and
various foreign countries. The United Kingdom patent expires October 2002 and
the United States patent expires December 2001. In addition, the Company holds
other patents relating to the Derived Channel System in certain of the foregoing
jurisdictions. The Company also owns other intellectual property relating to its
products. It is the Company's practice to apply for patents as new products or
processes suitable for patent protection are developed. No assurance can be
given as to the scope of the patent protection.
The Company believes that the rapid technological developments in the
telecommunications industry may limit the protection afforded by patents.
Accordingly, the Company believes that its success will also be dependent upon
its manufacturing, engineering and marketing know-how and the quality and
economic value of its products.
The marks STU(Registered) and Subscriber Terminal Unit(Registered) are
registered trademarks of the Company. The Company believes that no individual
trademark or trade name is material to the Company's competitive position in the
industry.
Employees
The Company currently employs 121 employees (of which 38 are based in the
United Kingdom and 83 in the United States), consisting of 48 in manufacturing
and customer service, 18 in sales and marketing, 33 in engineering and 22 in
management and administration. None of the Company's employees is represented by
a union. The Company believes that its relationship with its employees is
satisfactory.
Regulation
The Company's products are subject to a variety of standards and
certification requirements applicable to products connected to public telephone
networks in the countries in which it conducts business. For example, in the
United Kingdom, any product that is intended to be connected to the public
switched telephone network requires compliance with certain British standards
and must be approved by the British Approval Board for Telecommunications
("BABT"). Currently, each of the Company's products that requires BABT approval
has received such approval. There are new European Union regulations on
electromagnetic compatibility which took effect in January 1996. The Company's
products comply with such European Union regulations. Additionally, it is
expected that the European Union will issue compliance standards for
telecommunications equipment in the future.
The provision of enhanced telecommunications services in the United States
by telephone companies is subject to regulations promulgated by the Federal
Communications Commission (the "FCC") and to
23
<PAGE>
restrictions imposed by the United States District Court for the District of
Columbia in its decree divesting the Bell companies from AT&T Corporation. These
regulations and restrictions have not resulted in any significant impediments to
the provision of alarm reporting services by telephone companies using derived
channel technology. In addition, the Company's products, such as STUs and
certain BNI products require certification from the FCC for compliance with
standards designed to prevent damage to the telephone network and to restrict
radio frequency interference. Derived channel products currently used in the
United States which are subject to these requirements have received all required
certifications. However, anticipated design changes to products sold in the
United States will require compliance testing and certification.
In addition, in the United States, the Company's products require
certification from Underwriters Laboratories in order to serve monitoring
applications with higher levels of insurance risk. Certain products of BNI also
require certification from Underwriters Laboratories. The Company has obtained
Underwriters Laboratories certifications for all products currently marketed in
the United States and expects that future certifications will be obtained in the
ordinary course of business.
Regulations similar to the above may exist in other countries. In the event
that the Company did not comply with any such regulations, or if the Company's
current or future products did not meet various regulatory standards or receive
and maintain all required certifications, the Company's business could be
adversely affected.
Item 2. Properties.
All of the Company's facilities are leased. Set forth below is certain
information with respect to the Company's leased facilities:
Location Principal Business Square Footage Lease Term
- -------- ------------------ -------------- ----------
Farnborough, England Derived Channel System 14,000 2006 (1)
Willow Grove, Network Management 10,000 2000
Pennsylvania Products and Derived
Channel System
State College, Broadband Technologies 13,845 1998
Pennsylvania
West Conshohocken, Principal Executive Offices 2,815 2002
Pennsylvania
- -----------------
(1) Assumes the exercise of any renewal options.
The Company conducts manufacturing, sales and marketing, engineering and
administrative activities at all locations, except its Principal Executive
Offices. The Company's total annual rent expense for the year ended October 31,
1997 was (Pound)268,135. The Company believes that its existing facilities are
adequate for its current needs. As the Company grows and expands into new
markets and develops additional products, it will require additional space which
the Company believes will be available at reasonable rates.
24
<PAGE>
The Company engages in limited manufacturing for certain Derived Channel
System network equipment and STUs and certain broadband communications products
and final equipment assembly and testing for certain of the Company's products.
The Company also uses contract manufacturers located near its facilities for
production, sub-assembly and final assembly of certain products and one contract
manufacturer in the Far East for certain high volume surface mount electronics
manufacturing used in certain intrusion alarm products. The Company believes
there are other manufacturers that could perform this work on comparable terms.
The chips, microprocessors and other components used in the Company's
products are obtained from various suppliers and manufacturers, some of which
are the sole source of such component.
Item 3. Legal Proceedings.
From time to time, the Company is involved in routine legal proceedings in
the normal course of its business. The Company believes that no currently
pending legal proceeding will have a materially adverse effect on the financial
condition or results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 4.1 Certain Executive Officers and Key Employees of the Registrant.
Set forth below is certain information concerning the executive officers
and key employees of the Company who are not also directors.
Name Age Position
---- --- --------
Charles L. McNew................. 45 Vice President and Chief Financia
Officer
Charles L. McNew has been Vice President and Chief Financial Officer of the
Company since July 1994. Mr. McNew served as Vice President -- Finance, Chief
Financial Officer and Treasurer of InterDigital Communications Corporation, a
company engaged in the development of advanced digital wireless
telecommunications systems, from June 1993 to July 1994. From March 1990 to May
1993, Mr. McNew served as the Chief Financial Officer of International
Computaprint Corporation, a company engaged in electronic publishing. From 1982
to 1990, Mr. McNew held various positions with the Digilog Division of CXR
Telecom Corporation, or its predecessor, most recently as Vice President and
Chief Financial Officer.
PART II
Item 5. Market for the Registrant's Common Stock and Related Shareholder
Matters.
During fiscal 1996 three quarterly cash dividends on its Common Stock of
$.05 per share each were declared and paid. In September 1996, the Board of
Directors discontinued this cash dividend. In deciding whether or not to declare
or pay dividends in the future, the Board of Directors will consider all
relevant factors, including the Company's earnings, financial condition and
working capital, capital
25
<PAGE>
expenditure requirements, any restrictions contained in loan agreements and
market factors and conditions.
The Company's Common Stock is included in the Nasdaq National Market under
the symbol "NMRX." The following table sets forth, for the fiscal quarters
indicated, the high and low sales prices per share for the Common Stock on the
Nasdaq National Market for the applicable periods.
Fiscal 1997 High Low
- ----------- ----- -----
First Quarter (November 1, 1996 to January 31, 1997) $4.75 $3.39
Second Quarter (February 1, 1997 to April 30, 1997) 5.13 3.65
Third Quarter (May 1, 1997 to July 31, 1997) 6.80 4.06
Fourth Quarter (August 1, 1997 to October 31, 1997) 9.25 6.50
Fiscal 1996 High Low
- ----------- ----- -----
First Quarter (November 1, 1995 to January 31, 1996) $7.25 $4.25
Second Quarter (February 1, 1996 to April 30, 1996) 6.50 4.13
Third Quarter (May 1, 1996 to July 31, 1996) 7.00 3.75
Fourth Quarter (August 1, 1996 to October 31, 1996) 4.75 3.50
As of January 12, 1998 there were 67 shareholders of record of the
Company's Common Stock which include shares held in street name by brokers or
nominees.
Recent Sales of Unregistered Securities
None.
Item 6. Selected Financial Data.
Incorporated by reference from page 10 of the Company's 1997 Annual Report
to Shareholders, pursuant to General Instruction G(2) to Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Incorporated by reference from pages 11-19 of the Company's 1997 Annual
Report to Shareholders to be filed pursuant to General Instruction G(2) to Form
10-K.
Item 8. Financial Statements and Supplementary Data.
The Financial Statements and Supplementary Data of the Company required by
this Item are set forth at the pages indicated at Item 14(a).
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
26
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
Incorporated by reference from the Company's Proxy Statement relating to
the 1998 Annual Meeting of Shareholders to be filed pursuant to General
Instruction G(3) to Form 10-K, except information concerning certain executive
officers of the Company which is set forth in Item 4.1 hereof.
Item 11. Executive Compensation.
Incorporated by reference from the Company's Proxy Statement relating to
the 1998 Annual Meeting of Shareholders to be filed pursuant to General
Instruction G(3) to Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference from the Company's Proxy Statement relating to
the 1998 Annual Meeting of Shareholders to be filed pursuant to General
Instruction G(3) to Form 10-K.
Item 13. Certain Relationships and Related Transactions.
Incorporated by reference from the Company's Proxy Statement relating to
the 1998 Annual Meeting of Shareholders to be filed pursuant to General
Instruction G(3) to Form 10-K.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents filed as part of this report:
1. List of Consolidated Financial Statements. The following financial
statements and the notes thereto of the Company are attached hereto beginning on
page F-1.
Consolidated Financial Statements of the Company
Independent Auditors' Report
Consolidated Balance Sheets at October 31, 1997 and 1996
Consolidated Statements of Operations for the years ended
October 31, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity for the years ended
October 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended
October 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
27
<PAGE>
2. List of Exhibits filed pursuant to Item 601 of Regulation S-K. The
following exhibits are incorporated by reference herein, or are being filed
herewith:
2.1(1) Agreement of Stock Exchange dated November 3, 1993 among the
stockholders of Bronzebase, Bronzebase and Numerex
2.2(6) Agreement and Plan of Merger dated as of March 8, 1994 between
Numerex Corp., a New York corporation, and Numerex Corp., a
Pennsylvania corporation
2.3(2) Agreement of Stock Exchange dated June 21, 1994 among Omega
Technology Ltd., Digital Audio Limited and the Company
2.4(3) Asset Purchase Agreement dated July 20, 1994 among CXR
Corporation, CXR Telecom Corporation and the Company related to
the purchase of certain assets of the Digilog division
2.5(4) Asset Purchase Agreement dated November 30, 1994 between Versus
Technology U.K., Inc. and the Company
2.6(10) Securities Purchase Agreement among Numerex Corp., Broadband
Networks, Inc. and the Shareholders of Broadband Networks, Inc.
dated February 21, 1997
2.7 Shareholders' Agreement among Broadband Networks, Inc., Numerex
Corp. and the Shareholders of Broadband Networks, Inc. dated
February 21, 1997
2.8 Stock Purchase Agreement between Detection Systems, Inc. and
Numerex Corp., dated May 7, 1997
2.9 Stock Purchase Agreement among Numerex Corp., Uplink Security,
Inc. and certain shareholders of Uplink Security, Inc., dated
July 16, 1997
2.10 Shareholders' Agreement among Uplink Security, Inc., Numerex
Corp., and certain shareholders of Uplink Security, Inc. dated
July 16, 1997
3.1(7) Amended and Restated Articles of Incorporation of the Company, as
amended
3.2(7) Bylaws of the Company
10.1(1) Purchase Agreement between Versus Technology U.K. and Bronzebase
Limited dated July 13, 1992
10.2(1) Employment Agreement between Kenneth F. Manser and Versus
Technology U.K. (Management Compensation Contract)
10.4(7) Amendment to License Agreement between Base Ten Systems, Inc. and
Radionics, dated February 28, 1989
10.5(1) Assignment and Assumption Agreement between Versus Technology,
Incorporated and Bronzebase, dated August 19, 1993 regarding
Radionics
28
<PAGE>
10.6(1) Agreement between British Telecom, Base Ten Systems Limited,
Versus Technology U.K., Versus Technology, Incorporated and Base
Ten Systems Inc. dated December 17, 1990 regarding Telecom
RedCARE Network
10.7(7) Agreement between British Telecom and Versus Technology U.K.
dated September 26, 1995 relating to the supply of RedCARE system
products (certain confidential information contained in this
Agreement was omitted pursuant to Rule 24b-2 and was filed
separately with the Securities and Exchange Commission)
10.8(1) Versus Technology U.K. Pension and Death Benefit Scheme
(Management Compensation Plan)
10.9(7) The Numerex Corp. Savings and Profit Sharing Plan -- Summary Plan
Description (Management Compensation Plan)
10.10(9) Amended and Restated 1994 Employee Stock Option Plan (Management
Compensation Plan)
10.11(6) Amended and Restated Stock Option Plan for Non-Employee Directors
(Management Compensation Plan)
10.12(2) Registration Agreement between the Company and Dominion dated
July 13, 1992
10.13(6) Engagement Letter Agreement between the Company and Dominion
effective January 1, 1995
10.14(6) Letter Agreement between the Company and Dominion (now Gwynedd)
dated October 25, 1994 re: designation of director
10.15(9) Employment Agreement between the Company and John J. Reis, as
amended (Management Compensation Contract)
10.16(7) Agreement for the Provision of Software and Services between
British Telecom and Versus Technology U.K. dated September 7,
1995
10.17(7) Office Space Lease Agreement between the Company and LBA
Associates dated May 31, 1995.
10.18(8) Severance Agreement between the Company and Frederick C. Shay
(Management Compensation Contract)
10.19(8) Severance Agreement between the Company and Charles L. McNew
(Management Compensation Contract)
10.20 Incentive Compensation Program for fiscal 1998. (Management
Compensation Plan)
29
<PAGE>
10.21(8) Letter Amendment dated September 24, 1996 to Agreement between
British Telecom and Versus Technology U.K. dated September 26,
1995
10.22(8) Agreement between Dominion and the Company relating to CellTel
Data Services, Inc., dated October 15, 1996
10.23 Loan Agreement, dated February 12, 1997, between Numerex Corp.
and certain of its United States subsidiaries, and PNC Bank,
National Association, regarding $10,000,000 Convertible Line of
Credit as amended on July 1, 1997
10.24 Technology License between Bronzebase Limited and Detection
Systems, Inc., dated May 7, 1997
10.25 Agreement between British Telecom and Versus Technology U.K.
dated August 7, 1997 relating to the supply of RedCARE system
products (certain confidential information contained in this
Agreement was omitted pursuant to Rule 24b-2 and was filed
separately with the Securities and Exchange Commission)
10.26 Teaming Agreement between DCX Systems Ltd. and Bell Canada dated
August 19, 1997 (certain confidential information contained in
this Agreement has been omitted pursuant to Rule 24b-2 and has
been filed separately with the Securities and Exchange
Commission)
10.27 Teaming Agreement between Numerex Corp. and Telemonitoreo, S.A.
dated January 8, 1998 (certain confidential information contained
in this Agreement has been omitted pursuant to Rule 24b-2 and has
been filed separately with the Securities and Exchange
Commission)
11 Computation of Earnings per share
13 Pursuant to Note 2 of Instruction G(2) to Form 10-K, in response
to Item 6. Selected Financial Data, "Selected Consolidated
Financial Data" set forth on page 10 of the Company's 1997 Annual
Report to Shareholders, and in response to Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" set forth on pages 11-18 of
the Company's 1997 Annual Report to Shareholders are being filed
in electronic format. No other sections of the Company's 1997
Annual Report to Shareholders shall be deemed "filed" as part of
this filing
21 Subsidiaries of Numerex Corp.
23 Consent of Deloitte & Touche LLP
27 Financial Data Schedule (electronic filing only)
30
<PAGE>
- ------------------
(1) Incorporated by reference to the Exhibits filed with the Company's Form 10
Registration Statement and Amendments No. 1 and No. 2 thereto (File No.
0-22920)
(2) Incorporated by reference to the Exhibit filed with the Company's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
July 20, 1994 (File No. 0-22920)
(3) Incorporated by reference to the Exhibits filed with the Company's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
July 25, 1994 (File No. 0-22920)
(4) Incorporated by reference to the Exhibits filed with the Company's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
December 6, 1994 (File No. 0-22920)
(5) Incorporated by reference to the Exhibits filed with the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission for
the year ended October 31, 1994 (File No. 0-22920)
(6) Incorporated by reference to the Exhibits filed with the Company's
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission (File No. 33-89794)
(7) Incorporated by reference to the Exhibits filed with the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission for
the year ended October 31, 1995 (File No. 0-22920)
(8) Incorporated by reference to the Exhibits filed with the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission for
the year ended October 31, 1996 (File No. 0-22920)
(9) Incorporated by reference to the Exhibits filed with the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission for
the year ended October 31, 1997 (File No. 0-22920)
(10) Incorporated by reference to the Exhibits filed with the Company's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
March 7, 1997 (File No. 0-22920)
(b) Reports on Form 8-K.
None
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.
NUMEREX CORP.
Date: January 28, 1998 By: /s/ John J. Reis
----------------------------------------
John J. Reis, President
and Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature Capacity Date
--------- -------- ----
/s/ Kenneth F. Manser Chairman of the Board January 28, 1998
- ------------------------
Kenneth F. Manser
/s/ Charles L. McNew Vice President and Chief January 28, 1998
- ------------------------ Financial Officer (principal
Charles L. McNew financial officer and principal
accounting officer)
/s/ George Benson Director January 28, 1998
- ------------------------
George Benson
/s/ Matthew J. Flanigan Director January 28, 1998
- ------------------------
Matthew J. Flanigan
/s/ Andrew J. Ryan Director January 28, 1998
- ------------------------
Andrew J. Ryan
/s/ Gordon T. Ray Director January 28, 1998
- ------------------------
Gordon T. Ray
/s/ Frederick C. Shay Director January 28, 1998
- ------------------------
Frederick C. Shay
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Consolidated Financial Statements of the Company:
Independent Auditors' Report F-2
Consolidated Balance Sheets as of October 31, 1997 and 1996 F-3
Consolidated Statements of Operations for the Years Ended October 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Shareholders' Equity for the Years
Ended October 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the Years Ended October 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
NumereX Corp. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of NumereX Corp.
and subsidiaries (the "Company") as of October 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity and of cash
flows for each of the three years in the period ended October 31, 1997, all
expressed in pounds sterling. 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. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements, expressed in pounds
sterling, present fairly, in all material respects, the consolidated financial
position of NumereX Corp. and subsidiaries at October 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended October 31, 1997 in conformity with generally accepted
accounting principles.
Philadelphia, Pennsylvania
December 17, 1997
F-2
<PAGE>
<TABLE>
<CAPTION>
NUMEREX CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except number of shares)
- ------------------------------------------------------------------------------------------------------------------
U.S. $
Equivalent
(Note 2) October 31,
October 31, -----------------------------
1997 1997 1996
----------- ------------- -------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $26,163 (Pound)15,626 (Pound)18,459
Accounts receivable (net of allowances
of (Pound)34 in 1997 and (Pound)63 in 1996) 7,364 4,398 5,397
Inventory 4,904 2,929 2,838
Prepaid taxes 2,093 1,250 --
Prepaid expenses 419 251 175
------- ------------- -------------
Total current assets 40,943 24,454 26,869
Property and equipment, net 1,828 1,092 773
Goodwill, net 6,026 3,599 551
Intangible assets, net 3,168 1,892 1,559
Other assets 2,465 1,472 230
------- ------------- -------------
TOTAL ASSETS $54,430 (Pound)32,509 (Pound)29,982
======= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,542 (Pound) 1,518 (Pound) 1,425
Income taxes 720 430 243
Accrued taxes other than income 89 53 358
Other accrued liabilities 1,316 786 1,656
------- ------------- -------------
Total current liabilities 4,667 2,787 3,682
------- ------------- -------------
LONG-TERM DEBT 4,501 2,688 --
------- ------------- -------------
Total liabilities 9,168 5,475 3,682
------- ------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock - no par value; authorized 3,000,000 shares;
none issued
Class A common stock - no par value; authorized
30,000,000 shares; issued 11,597,492 shares
at October 31, 1997 and 1996 30,675 18,321 18,321
Class B common stock - no par value; authorized
5,000,000 shares; none issued
Treasury stock, at cost, 684,900 and 310,000 shares
at October 31, 1997 and 1996 (3,216) (1,921) (848)
Accumulated translation adjustment (517) (308) 72
Retained earnings 18,320 10,942 8,755
------- ------------- -------------
Total shareholders' equity 45,262 27,034 26,300
------- ------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $54,430 (Pound)32,509 (Pound)29,982
======= ============= =============
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
<TABLE>
<CAPTION>
NUMEREX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
- ----------------------------------------------------------------------------------------------------------------
U.S. $
Equivalent
(Note 2) Year Ended October 31,
October 31, -----------------------------------------------
1997 1997 1996 1995
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $29,595 (Pound)17,676 (Pound)18,192 (Pound)21,045
Cost of sales (14,784) (8,830) (9,961) (8,432)
Inventory write-downs -- -- (1,473) --
------- ------------- ------------- -------------
Gross profit 14,811 8,846 6,758 12,613
Selling, general, administrative and other
expenses (including fees and other expenses
of (Pound)26 in 1997, (Pound)212 in 1996
and (Pound)240 in 1995 to the
principal shareholder) (12,551) (7,496) (7,716) (5,715)
Special charges -- -- (2,721) --
------- ------------- ------------- -------------
Operating profit (loss) 2,260 1,350 (3,679) 6,898
Interest and other income, net 2,534 1,513 1,069 773
------- ------------- ------------- -------------
Income (loss) before income taxes 4,794 2,863 (2,610) 7,671
Income taxes 1,132 676 995 2,531
------- ------------- ------------- -------------
Net income (loss) $ 3,662 (Pound) 2,187 (Pound)(3,605) (Pound) 5,140
======= ============= ============= =============
Earnings (loss) per share $ 0.33 (Pound) 0.20 (Pound) (0.31) (Pound) 0.48
======= ============= ============= =============
Weighted average shares outstanding 11,077 11,077 11,532 10,633
======= ============= ============= =============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
NUMEREX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock Accumulated
-------------------- Treasury Translation Retained
Shares Amount Stock Adjustment Earnings Total
------ ------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 31, 1994 9,635 (Pound) 2,066 (Pound) -- (Pound) (15) (Pound) 8,338 (Pound)10,389
Issuance of shares in connection with the
April 28, 1995 public offering and
May 31, 1995 underwriters overallotment
exercise, net of issuance costs 1,962 16,255 -- -- -- 16,255
Translation adjustment -- -- -- 292 -- 292
Net income -- -- -- -- 5,140 5,140
------ ------------- ------------- ----------- ------------- -------------
BALANCE, OCTOBER 31, 1995 11,597 (Pound)18,321 (Pound) -- (Pound) 277 (Pound)13,478 (Pound)32,076
Purchase of treasury stock -- -- (848) -- -- (848)
Translation adjustment -- -- -- (205) -- (205)
Cash dividends -- -- -- -- (1,118) (1,118)
Net loss -- -- -- -- (3,605) (3,605)
------ ------------- ------------- ----------- ------------- -------------
BALANCE, OCTOBER 31, 1996 11,597 (Pound)18,321 (Pound) (848) (Pound) 72 (Pound) 8,755 (Pound)26,300
Purchase of Treasury Stock -- -- (1,073) -- -- (1,073)
Translation adjustment -- -- -- (380) -- (380)
Net income -- -- -- -- 2,187 2,187
------ ------------- ------------- ----------- ------------- -------------
BALANCE, OCTOBER 31, 1997 11,597 (Pound)18,321 (Pound)(1,921) (Pound)(308) (Pound)10,942 (Pound)27,034
U.S. $ EQUIVALENT (Note 2), OCTOBER 31, 1997 N.A. $30,675 $(3,216) $(517) $18,320 $45,262
====== ============= ============= =========== ============= =============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
NUMEREX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
- -----------------------------------------------------------------------------------------------------------------------------
U.S. $
Equivalent
(Note 2) Year Ended October 31,
October 31, -----------------------------------------------
1997 1997 1996 1995
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 3,662 (Pound) 2,187 (Pound)(3,605) (Pound) 5,140
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 2,153 1,286 1,349 932
Special charges -- -- 1,624 --
Disposition of business (1,125) (672) -- --
Changes in assets and liabilities which
provided (used) cash:
Accounts receivable (591) (353) 435 (2,363)
Inventory (978) (584) 2,126 (1,855)
Prepaid expenses (104) (62) (131) 87
Accounts payable 1,485 887 (120) (102)
Income taxes (1,780) (1,063) (2,127) (781)
Accrued taxes other than income (511) (305) (168) (454)
Other accrued liabilities (1,686) (1,007) 820 459
------- ------------- ------------- -------------
Net cash provided by operating activities 525 314 203 1,063
------- ------------- ------------- -------------
INVESTING ACTIVITIES:
Proceeds from disposition of business 3,851 2,300 -- --
Purchase of property and equipment (564) (337) (559) (596)
Purchase of intangible and other assets (1,991) (1,189) (1,006) (1,039)
Acquisitions of businesses, net of cash (5,939) (3,547) -- (947)
Investment in business (2,110) (1,260) -- --
------- ------------- ------------- -------------
Net cash used in investing activities (6,753) (4,033) (1,565) (2,582)
------- ------------- ------------- -------------
FINANCING ACTIVITIES:
Net reduction in short-term borrowings (665) (397) -- (489)
Proceeds from long-term debt 4,500 2,688 -- --
Repayment of notes payable - principal shareholder -- -- -- (83)
Proceeds from issuance of common stock -- -- -- 16,330
Cash dividends paid -- -- (1,118) --
Purchase of treasury stock (1,797) (1,073) (848) --
------- ------------- ------------- -------------
Net cash provided by (used in) financing activities 2,038 1,218 (1,966) 15,758
------- ------------- ------------- -------------
EFFECT OF EXCHANGE DIFFERENCES ON CASH (553) (332) (484) 263
------- ------------- ------------- -------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (4,743) (2,833) (3,812) 14,502
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 30,906 18,459 22,271 7,769
------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END
OF YEAR $26,163 (Pound)15,626 (Pound)18,459 (Pound)22,271
======= ============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash payments for:
Interest $ 204 (Pound) 122 (Pound) 10 (Pound) 12
Income taxes 4,326 2,584 2,859 3,274
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED OCTOBER 31, 1997
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS
NumereX Corp. and its subsidiaries (the "Company") is principally engaged
in the development and marketing of a wide range of information transport
technologies. These technologies enable customers around the globe to
monitor and move information for a variety of applications ranging from
home and business security to distance learning. The Company offers
products and services in wireline (Derived Channel Systems), broadband
(fiber optics and EDCOMM(TM)), and wireless communications (Cellemetry(R)).
Additionally, the Company provides network management systems to operating
telephone companies. The Company's operating subsidiaries are located in
North America and the United Kingdom.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Currency - These consolidated financial statements are stated in British
pounds sterling, the functional currency of the country in which the
majority of the Company's sales are presently generated.
Principles of Consolidation - The consolidated financial statements include
the results of operations and financial position of the Company and its
wholly owned subsidiaries. All material intercompany transactions, balances
and profits are eliminated in consolidation.
Cash and Cash Equivalents - The Company considers all highly liquid
investments with maturities of three months or less when purchased as cash
equivalents.
Intangible Assets - Amortization is provided on all intangible assets at
rates calculated to write off the cost of each over its expected life as
follows:
o Patents straight-line over 7 years (the remaining
useful life of patents acquired)
o Developed software straight-line over 3 years
o Goodwill straight-line over 12 to 20 years
o Territorial rights straight-line over 4 years
Goodwill represents the excess of the cost of the net assets acquired over
fair value.
Territorial rights are associated with the right to manufacture, market and
sell product in certain countries. These rights were acquired as a result
of the November 30, 1994 purchase from Versus Technology, Incorporated.
The Company capitalizes software development costs when project technical
feasibility is established and concludes capitalization when the product is
ready for release. Software development costs incurred prior to the
establishment of technical feasibility are expensed as incurred.
F-7
<PAGE>
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED OCTOBER 31, 1997
- --------------------------------------------------------------------------------
Property and Equipment - Property and equipment is recorded at cost and is
depreciated or amortized over the estimated useful lives of the assets. The
rates of depreciation and amortization are as follows:
o Short-term leasehold improvements over the term of the lease (which is
less than the asset life)
o Plant and machinery 4 to 10 years
o Equipment, fixtures and fittings 3 to 10 years
Asset Impairment - Long-lived assets are reviewed by management for
impairment on an annual basis in conjunction with the preparation of the
annual budget or when a specific event indicates that the carrying value of
an asset may not be recoverable. Recoverability is assessed based on
estimates of future cash flows expected to result from the use and eventual
disposition of the asset. If the sum of expected undiscounted cash flows is
less than the carrying value of the asset, an impairment loss is recognized
for the amount of such deficiency.
Inventory - Inventory and work-in-progress are stated at the lower of cost
(first-in, first-out method) or market. Cost includes materials, direct
labor and production overheads appropriate to the relevant state of
production.
Income Taxes - The Company accounts for income taxes under the provisions
of Statement of Financial Accounting Standards (SFAS) No. 109. Deferred
income taxes are provided on temporary differences arising from the
different treatment of items for financial statement and taxation purposes,
which are expected to reverse in the future, calculated using enacted tax
rates.
The Company does not provide deferred federal income taxes on the
undistributed earnings of its foreign subsidiaries since such earnings are
not expected to be remitted to the Company in the foreseeable future.
Fair Value of Financial Instruments - The carrying amounts reported in the
consolidated balance sheets for cash and cash equivalents, accounts
receivable and accounts payable approximate their fair value because of the
immediate or short-term maturity of these financial instruments.
As more fully described in Note 9, under its revolving credit facility, the
Company incurs interest at variable rates based upon market conditions
(i.e., based upon the LIBOR rate). Accordingly, the carrying amount of debt
is a reasonable estimate of its fair value.
The Company's investments in privately held companies are stated at cost,
adjusted for any known diminution in value.
Revenue Recognition - The Company recognizes sales of its products when
title transfers to its customers. Revenue for royalty agreements is
recorded as sales when earned.
The Company performed certain software development services under contract
for a significant customer during 1996 and 1995. No such services were
performed during 1997. Revenue from the
F-8
<PAGE>
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED OCTOBER 31, 1997
- --------------------------------------------------------------------------------
fixed-price contract was recognized on the percentage of completion method
which was measured by the percentage of costs incurred to date to the
estimated total costs for the contract. Service contract costs consisted
primarily of outside consultant and software engineering fees. Through
October 31, 1996, cumulative costs of (pound)2,110,000, revenues of
(pound)3,360,000 and billings of (pound)3,360,000 had been recorded under
the contract.
Foreign Currency Transactions - Some transactions of the Company and its
subsidiaries are made in U.S. dollars. (Gains) and losses from these
transactions are included in income as they occur. Net currency transaction
losses included in determining selling, general, administrative and other
expenses amounted to (pound)0, (pound)5,000 and (pound)109,000 in 1997,
1996 and 1995, respectively.
Research and Development - Research and development expenses are charged to
the statement of operations in the period in which they are incurred.
Research and development expenses amounted to (pound)1,670,000,
(pound)1,128,000 and (pound)682,000, in 1997, 1996 and 1995, respectively.
Provision for Warranty Claims - Estimated warranty expense is charged at
the time of sale of the warranted products. Warranty expenses have not been
significant to the Company.
Earnings (Loss) Per Share - Earnings (loss) per share is computed using the
weighted average number of shares of common stock and common stock
equivalents, if dilutive, outstanding during the year.
Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may likely differ from those
estimates and assumptions, and such differences, if any, are not expected
to be significant.
Stock-Based Compensation - Effective November 1, 1996, the Company adopted
the provisions of SFAS No. 123, Accounting for Stock-Based Compensation.
SFAS No. 123 encourages, but does not require, companies to record
compensation cost for stock-based compensation plans at fair value. The
Company has elected to continue to account for stock-based compensation in
accordance with Accounting Principles Board ("APB") Opinion No. 25,
Accounting For Stock Issued to Employees, and related interpretations, as
permitted by SFAS 123. Compensation expense for stock options is measured
as the excess, if any, of the quoted market price of the Company's stock at
the date of the grant over the amount an employee must pay to acquire the
stock. (See Note 13).
Recent Accounting Pronouncements: In February 1997, the Financial
Accounting Standards Board issued SFAS No. 128, Earnings Per Share. SFAS
No. 128, which supersedes APB No. 15, Earnings Per Share, requires a dual
presentation of basic and diluted earnings per share as well as disclosures
including a reconciliation of the computation of basic earnings per share
to diluted earnings per share. Basic earnings per share excludes the
dilutive impact of common stock equivalents and is computed by dividing net
income by the weighted afterage number of shares of common stock
outstanding for the period. Diluted earnings per share, which will
approximate the company's currently reported pro forma earnings (loss) per
share, includes the effect of potential dilution from the exercise of
outstanding
F-9
<PAGE>
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED OCTOBER 31, 1997
- --------------------------------------------------------------------------------
common stock equivalents into common stock, using the treasury stock method
at the average market price of the Company's common stock for the period.
SFAS No. 128 is effective for interim and annual financial reporting
periods ending after December 15, 1997, and early adoption is not
permitted. When adopted by the Company, as required, for the fiscal quarter
ending January 31, 1998, all prior quarters' earnings (loss) per share
information will be required to be restated on a comparable basis. Assuming
that SFAS No. 128 had been implemented, pro forma basic loss per share and
pro forma diluted loss per share would not have differed from the earnings
(loss) per share presented in the accompanying consolidated statements of
operations.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This statement, which establishes standards for reporting and disclosure of
comprehensive income, is effective for interim and annual periods beginning
after December 15, 1997, although earlier adoption is permitted.
Reclassification of financial information for earlier periods presented for
comparative periods is required under SFAS No 130. As this statement only
requires additional disclosures in the Company's consolidated financial
statements, its adoption will not have any impact on the Company's
consolidated financial position or results of operations. The Company
expects to adopt SFAS No. 130 effective November 1, 1998.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. This statement, which establishes
standards for the reporting of information about operating segments and
requires the reporting of selected information about operating segments in
interim financial statements, is effective for fiscal years beginning after
December 15, 1997, although earlier application is permitted.
Reclassification of segment information for earlier periods presented for
comparative periods is required under SFAS No. 131. The Company is
evaluating whether the adoption of this statement will result in any
changes to its presentation of financial information. The Company expects
to adopt SFAS No. 131 effective November 1, 1998.
U.S. Dollar Equivalent Financial Information - The translation to U.S.
dollars as of and for the year ended October 31, 1997 is for convenience
only and was based on the noon buying rate in New York City for cable
transfers as certified for customs purposes by the Federal Reserve Bank of
New York as of October 31, 1997, the last trading day during the Company's
year ended October 31, 1997. This rate was $1.6743 to (pound)1.00. This
translation should not be construed as a representation that the
(pound)1.00 sterling amounts actually represented, have been, or could be,
converted into dollars at this or any other rate.
Reclassification - Certain prior year amounts have been reclassified to
conform with the current year presentation.
3. INVESTMENTS AND DIVESTITURES
In February 1997, the Company acquired 100% of the outstanding common stock
of Broadband Networks, Inc. ("BNI") for approximately (pound)3,547,000
($5,939,000). The acquisition was accounted for using the purchase method
of accounting. In addition, the Company invested (pound)1,000,000
($1,675,000) directly into BNI for working capital purposes. Certain
employees of BNI will continue to hold BNI
F-10
<PAGE>
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED OCTOBER 31, 1997
- --------------------------------------------------------------------------------
incentive stock options which, upon exercise, would entitle them to own
approximately 18% of BNI's currently outstanding common shares. Such
options become exercisable in 2001 and, upon exercise, the Company has
certain rights, but is not obligated to repurchase the shares.
The purchase price of BNI was allocated to the assets purchased and the
liabilities assumed based upon their fair values at the date of
acquisition. The excess of the purchase price over the fair values of the
net assets acquired was recorded as goodwill, and is amortized on a
straight-line basis over 20 years.
The following summarized unaudited pro forma information for the years
ended October 31, 1997 and 1996 has been presented as if the BNI
acquisition had occurred on November 1, 1995. The unaudited pro forma
information is based on historical results of operations adjusted for
acquisition costs and has been prepared for comparative purposes only. This
unaudited pro forma information does not purport to be indicative of the
results of operations which actually would have resulted had the BNI
acquisition been made on the date indicated or which may result in the
future.
October 31,
----------------------------------
1997 1996
------------- --------------
(In thousands)
Revenues (Pound)18,312 (Pound)21,804
Operating profit (loss) 1,315 (3,149)
Net income (loss) 1,831 (3,466)
Earnings (loss) per share 0.17 (0.30)
In July 1997, the Company invested (pound)597,265 ($1,000,000) in return
for 19.5% of the common stock of UPLINK Security, Inc. Due to the Company's
inability to exert control or significant influence over the operations of
UPLINK, the Company accounted for the investment in UPLINK using the cost
method of accounting. In addition, the Company has extended UPLINK a
$5,000,000 Line of Credit which can be drawn against a defined set of
milestones over a 24 month period. Various options contained in the
agreements provide the Company a means of acquiring a controlling interest
in UPLINK. As of October 31, 1997, the Company loaned to UPLINK
(pound)597,265 ($1,000,000). The Company's investment and loan to UPLINK
are included in "other assets" in the accompanying consolidated balance
sheet at October 31, 1997.
In May 1997, the Company recognized a credit of (pound)672, which is
included in "interest and other income" in the accompanying consolidated
statement of operations, in connection with the sale all of the stock of
its wholly owned subsidiary, DA Systems Ltd. (DA), to Detection Systems,
Inc. (DSI) of Rochester, NY. In exchange for the stock of DA, the Company,
received a (pound)2.3 ($3.8) million note receivable, secured by shares of
DSI common stock. In September 1997, the Company received cash for the full
amount of the note receivable plus interest. In a companion transaction, a
subsidiary of the Company entered into a License Agreement with DSI whereby
DSI may manufacture and supply certain products in return for royalty
payments.
F-11
<PAGE>
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED OCTOBER 31, 1997
- --------------------------------------------------------------------------------
4. SPECIAL CHARGES
During the year ended October 31, 1996, the Company recorded pre-tax
special charges of (pound)1,624,000 primarily relating to fixed and
intangible asset impairment provisions for certain obsolete and/or under
performing products and (pound)1,097,000 primarily relating to an accrual
for settlement of shareholder litigation and related legal fees (see Note
14).
5. INVENTORY
Inventory consisted of the following:
October 31,
------------------------------
1997 1996
------------ ------------
(In Thousands)
Raw materials (Pound)1,129 (Pound)1,051
Work-in-progress 411 730
Finished goods 1,389 1,057
------------ ------------
(Pound)2,929 (Pound)2,838
============ ============
The inventory write-downs of (pound)1,473,000 for the year ended October
31, 1996 are the result of determining certain inventory items to be
obsolete and/or under performing due to market conditions.
6. INTANGIBLE ASSETS
Intangible assets consisted of the following:
October 31,
------------------------------
1997 1996
------------ ------------
(In Thousands)
Developed software (Pound)3,595 (Pound)2,463
Intangible and other assets 962 905
------------ ------------
Total intangible assets 4,557 3,368
Accumulated amortization (2,665) (1,809)
------------ ------------
Intangible assets, net (Pound)1,892 (Pound)1,559
============ ============
F-12
<PAGE>
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED OCTOBER 31, 1997
- --------------------------------------------------------------------------------
7. GOODWILL
October 31,
------------------------------
1997 1996
------------ ------------
(In Thousands)
Goodwill (Pound)3,870 (Pound) 660
Accumulated amortization (271) (109)
------------ ------------
Goodwill, net (Pound)3,599 (Pound) 551
============ ============
8. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
October 31,
------------------------------
1997 1996
------------ ------------
(In Thousands)
Leasehold improvements (Pound) 272 (Pound) 218
Plant and machinery 1,474 717
Equipment, fixtures and fittings 520 380
------------ ------------
Total property and equipment 2,266 1,315
Accumulated depreciation and amortization (1,174) (542)
------------ ------------
Property and equipment, net (Pound)1,092 (Pound) 773
============ ============
9. REVOLVING CREDIT FACILITY
In February 1997, the Company entered into a U.S. dollar revolving credit
facility which provides for maximum borrowings of $10.0 ((pound)6.1)
million and includes the option to convert, at maturity, the outstanding
balance to an amortizing term loan payable over a maximum period of up to
three years, with a maximum five year amortization. At the Company's
option, interest is charged at the bank's prime lending rate less .25% or
LIBOR plus 1.25%. The Company had average borrowings of (pound)2.7 million
during 1997 at an average interest rate of 6.89%. Maximum borrowings during
1997 were (pound)2.7 million. The revolving credit facility is
collateralized by certain assets of the Company.
On October 31, 1997, there were outstanding borrowings of approximately
$4.5 (pound)(2.7) million at an interest rate of 7.0313%. In addition,
there was (pound)0.02 million outstanding short-term debt related to
borrowings of an acquired business.
F-13
<PAGE>
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED OCTOBER 31, 1997
- --------------------------------------------------------------------------------
10. INCOME TAXES
The Company's provision for income taxes is incurred primarily in the
United Kingdom.
For the years noted below, the provision for income taxes consists of the
following:
1997 1996 1995
---------- ------------ ------------
(In Thousands)
Currently payable (Pound)632 (Pound)1,292 (Pound)2,551
Deferred 44 (297) (20)
---------- ------------ ------------
(Pound)676 (Pound) 995 (Pound)2,531
========== ============ ============
Income taxes recorded by the Company differ from the amounts computed by
applying the statutory U.S. federal income tax rate to income before income
taxes. The following schedule reconciles income tax expense (benefit) at
the statutory rate and the actual income tax expense as reflected in the
consolidated statements of operations:
<TABLE>
<CAPTION>
October 31,
--------------------------------------------
1997 1996 1995
---------- ------------ ------------
(In Thousands)
<S> <C> <C> <C>
Income tax (benefit) computed at
U.S. corporate tax rate of 34% (Pound)973 (Pound)(888) (Pound)2,608
Adjustments attributable to:
Valuation allowance (74) 1,790 (54)
ACT refund (247) -- --
Nondeductible expenses 22 65 53
Foreign income taxed in the
United States 86 60 --
Income tax rate differential
between the United States
and the United Kingdom (84) (32) (76)
---------- ---------- ------------
Total (Pound)676 (Pound)995 (Pound)2,531
========== ========== ============
</TABLE>
F-14
<PAGE>
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED OCTOBER 31, 1997
- --------------------------------------------------------------------------------
The components of the Company's net deferred tax assets and (liabilities)
as of October 31 are as follows:
1997 1996
------------- -------------
(In Thousands)
Deferred tax liability:
Differences between book and tax basis
of property and equipment (Pound) (47) (Pound) --
Other (13) --
------------- -------------
(60) --
------------- -------------
Deferred tax asset:
Intangibles 316 306
Differences between book and tax basis
of property and equipment -- 300
Net operating loss carry forwards 527 212
Tax credits carry forwards 834 726
Warranty provision -- --
Other -- 3
Inventories 218 404
Accruals 87 447
------------- -------------
1,982 2,398
Valuation allowance (1,725) (2,157)
------------- -------------
Total (Pound) 197 (Pound) 241
============= =============
Net operating loss carryforwards for federal and state income taxes
available at October 31, 1997 expire as follows:
Years of
Amount Expiration
---------------- ----------
Federal operating losses (Pound) 541,122 2004-2008
State operating losses (Pound)2,458,938 1998-2000
The Company has not recognized deferred tax liabilities of (pound)171,000
and (pound)203,000 for the undistributed earnings of its United Kingdom
subsidiaries at October 31, 1997 and 1996, since the Company does not
expect these earnings to be remitted to the United States in the
foreseeable future. A deferred tax liability will be recognized when the
Company expects that it will recover the undistributed earnings in a
taxable manner, such as through receipt of dividends, a loan of the
unremitted earnings to the Company or one of its U.S. affiliates, or a sale
of the United Kingdom subsidiaries' stock. The
F-15
<PAGE>
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED OCTOBER 31, 1997
- --------------------------------------------------------------------------------
accumulated net undistributed earnings of the Company's United Kingdom
subsidiaries included in retained earnings were (pound)5,602,000 and
(pound)7,300,000 at October 31, 1997 and 1996, respectively.
11. SIGNIFICANT CUSTOMER, CONCENTRATION OF CREDIT RISK AND RELATED PARTIES
Approximately 16%, 32% and 38% of sales in 1997, 1996 and 1995,
respectively, were to British Telecommunications PLC. The accounts
receivable from British Telecommunications PLC were (pound)1,044,000 and
(pound)2,108,000 as of October 31, 1997 and 1996, respectively, and were
collected pursuant to normal credit terms.
The principal shareholder provided financial advisory, investment banking
and other services for the Company. Effective January 1, 1995, the Company
entered into a two-year agreement, which expired on December 31, 1996,
whereby the Company paid $20,000 per month plus certain reimbursable
expenses to the shareholder for financial advisory services.
Fees and other expenses relating to the principal shareholder are as
follows:
October 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
(In Thousands)
Fees (Pound)142 (Pound)155 (Pound)206
Out-of-pocket expenses 4 57 34
12. COMMITMENTS
The Company leases certain property and equipment under noncancellable
operating leases with initial terms in excess of one year. Future minimum
lease payments under such noncancellable operating leases subsequent to
October 31, 1997 are as follows:
Years Ending October 31, (In Thousands)
------------------------ --------------
1998 (Pound) 241
1999 214
2000 183
2001 134
2002 129
Thereafter 322
------------
Total (Pound)1,223
============
Rent expense, including short-term leases, amounted to approximately
(pound)287,000, (pound)328,000, and (pound)277,000 in 1997, 1996 and 1995,
respectively.
F-16
<PAGE>
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED OCTOBER 31, 1997
- --------------------------------------------------------------------------------
13. STOCK OPTION PLANS
The Company has an Employee Stock Option Plan (the "Employee Plan"), which
provides for the granting of nonqualified and incentive stock options to
all officers and key employees of the Company and its subsidiaries at
prices which represent the closing market price at the grant dates. The
aggregate number of shares which may be issued upon the exercise of options
under the Employee Plan, as amended in February 1997, is 747,500 shares of
Class A Common Stock.
Options issued under the Employee Plan typically vest ratably over a
five-year period. Certain options issued to senior management employees
under the Employee Plan have cliff vesting terms at the end of a five-year
period and terms which provide for the acceleration of vesting upon the
attainment of specified market prices for the Company's common stock for a
period of 60 days. In the event of a "change in control" as defined in the
Employee Plan, all outstanding options become fully vested and are subject
to exercise. Incentive stock options and nonqualified stock options granted
under the Employee Plan expire 10 years after the grant date unless an
option holder's employment is terminated. Under such circumstances, the
options expire from three months to one year from the date of employment
termination.
In April 1995, the Company's shareholders also approved the Nonemployee
Director Stock Option Plan (the "Director Plan"), providing for the
granting of stock options to nonemployee members of the Company's Board of
Directors at the closing market price at the grant dates. On April 1, 1996
and each anniversary date thereafter, each nonemployee director, who has
served as a director for at least one year, will receive an option to
purchase 2,500 shares of the Company's common stock. The aggregate number
of shares which may be issued upon the exercise of options granted under
the Director Plan is 62,500 shares of common stock. Options issued under
the Director Plan fully vest one year after the grant date. In the event of
a "change in control" as defined in the Director Plan, all outstanding
options become fully vested and are subject to exercise. Options granted
under the Director Plan expire 10 years after the grant date, unless an
option holder ceases to be a director of the Company. Under such
circumstances, the options expire three months from the date that the
option holder ceases to be a director.
At October 31, 1997 and 1996, 209,500 and 298,000 ratably vesting options
under the Employee Plan have been granted to key employees of the Company
at prices ranging between $3.75 and $7.50. Of these options, 92,500 have
expired and been canceled, 75,900 are currently exercisable and the
remaining options will become exercisable in 1998 through 2001. At October
31, 1997, 515,000 and 100,000 cliff vesting options under the Employee Plan
have been granted to senior management employees of the Company at prices
ranging between $4.50 and $7.56. None of these options are currently
exercisable. They will become exercisable beginning in 2002 or earlier if
the accelerated vesting conditions are met. At October 31, 1997, 16,700
options under the Director Plan have been granted to directors of the
Company at prices ranging between $4.50 and $5.13. Of these options, 9,200
are currently exercisable and the remaining will become exercisable in
1998. Options to purchase 18,750 shares of Class A common stock at a price
of $10.00 were granted as a finder's fee in connection with an acquisition.
Of these options, 15,000 are currently exercisable and the remaining will
become exercisable in 1998 and 1999.
F-17
<PAGE>
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED OCTOBER 31, 1997
- --------------------------------------------------------------------------------
The following table summarizes the activity of the aforementioned stock
option plans as of and for the years ended October 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- ---------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Shares Ex. Price Shares Ex. Price Shares Ex. Price
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, Beginning
of year 373,450 $5.51 177,250 $ 5.55 108,750 $7.53
Options granted 415,000 5.51 213,700 5.89 103,500 4.50
Options exercised -- -- --
Options cancelled (40,000) 4.97 (17,500) 10.57 (35,000) 8.60
------- ------- -------
Outstanding, End
of year 748,450 5.54 373,450 5.51 177,250 5.55
======= ===== ======= ====== ======= =====
Exercisable, End
of year 100,100 $5.96 44,550 $ 6.48 20,200 $8.18
======= ===== ======= ====== ======= =====
</TABLE>
In February 1997, the Company repriced 191,000 options with exercise prices
ranging between $9.00 and $15.00 to $4.50 which represented the closing
market price. The options, as repriced, are reflected in all periods in the
above table.
The fair value of each option on the due date of grant for 1997 and 1996 is
estimated using the Black-Scholes options pricing model with the following
weighted average assumptions for both years: no dividend yield; expected
volatility of 59%; risk-free interest rate of 5.82%; expected option lives
of 7 years; and a forfeiture rate of 2%.
The exercise price for options outstanding as of October 31, 1997 is
between $3.75 and $10.00. Such options will expire on average in 8.3 years.
The weighted average fair value of options granted during 1997 and 1996 was
$3.52 and $3.81, respectively, on the date of grant.
Had compensation expense for the Company's aforementioned stock option
plans been determined based on the fair value at the grant dates for awards
under those plans under the provisions of SFAS No. 123, the Company's net
income (loss) and earnings (loss) per share would have been changed to the
following pro forma amounts:
1997 1996
------------ --------------
Net income (loss) -- As reported (Pound)2,187 (Pound)(3,605)
Net income (loss) -- Pro Forma (Pound)1,828 (Pound)(3,751)
Earning (loss) per share -- As reported (Pound) 0.20 (Pound) (0.31)
Earning (loss) per share -- Pro Forma (Pound) 0.17 (Pound) (0.33)
F-18
<PAGE>
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED OCTOBER 31, 1997
- --------------------------------------------------------------------------------
The pro forma effect on net income (loss) and earnings (loss) per share for
1997 and 1996 by applying SFAS No. 123 may not be indicative of the pro
forma effect on net income in future years since SFAS No. 123 does not take
into consideration pro forma compensation expense related to awards made
prior to November 1, 1995 and since additional awards in future years are
anticipated.
14. LITIGATION
In July and August 1995, the Company received complaints in three separate
purported lawsuits. The complaints which were consolidated into a single
amended complaint, sought class action status and alleged violations
arising under certain federal securities laws for alleged material
misstatements and omissions in the prospectus associated with the Company's
1995 public offering. The Company and the individual defendants believe the
allegations are untrue and without merit. The complaint was filed against
certain of the Company's directors and executive officers, principal
shareholder and underwriters. The complaint sought rescission and/or
damages against all defendants including the awarding of costs and
disbursements. The defendants filed a Motion to Dismiss and in January
1996, the defendants' Motion to Dismiss was granted and the case was
dismissed. In February 1996, the plaintiffs appealed the Order of the U.S.
District Court to the United States Court of Appeals. A settlement,
effective October 24, 1996 was reached among the parties and has been
approved by the court. Certain defendants paid to a settlement fund
approximately $2,100,000 ((pound)1,254,000), which after certain costs and
expenses was paid to a class. The Company's contribution to the settlement
fund was $1,033,000 ((pound)617,000), which together with related legal
costs was expensed in 1996 (see Note 4). Accordingly, included in the line
item "other accrued liabilities" on the accompanying consolidated balance
sheet at October 31, 1996 are accruals for the settlement of the litigation
and related expenses amounting to $1,500,000 ((pound)896,000). Amounts due
under the settlement were paid in December 1996.
F-19
<PAGE>
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED OCTOBER 31, 1997
- --------------------------------------------------------------------------------
15. GEOGRAPHIC INFORMATION
Information about the Company's operations in different geographic areas
for the three years ended October 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
United States United Kingdom Eliminations Consolidated
------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales:
1997 (Pound)6,740 (Pound)10,936 (Pound) -- (Pound)17,676
1996 2,655 15,537 -- 18,192
1995 2,883 18,162 -- 21,045
Operating profit (loss)
1997 (1,904) 3,254 -- 1,350
1996 (5,492) 1,813 -- (3,679)
1995 (1,213) 8,111 -- 6,898
Identifiable assets
1997 22,627 9,889 (1,257) 31,259
1996 15,529 15,376 (923) 29,982
1995 17,943 23,593 (4,183) 37,353
</TABLE>
F-20
EXHIBIT 2.7
================================================================================
BROADBAND NETWORKS, INC.,
SHAREHOLDERS' AGREEMENT
among
BROADBAND NETWORKS, INC.,
NUMEREX CORP.
and
THE SHAREHOLDERS LISTED ON EXHIBIT A
February 28, 1997
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
PAGE
SECTION 1: GENERAL RESTRICTIONS..............................................2
1.1 Restriction on Transfers...................................2
1.2 Permitted Transferees......................................2
1.3 Representation.............................................2
1.4 Non-Compliance.............................................2
1.5 Corporate Action...........................................3
1.6 No Implied Employment......................................3
1.7 Execution and Delivery.....................................3
1.8 No Conflict................................................3
SECTION 2: TRIGGERING EVENTS.................................................3
2.1 Definition.................................................3
2.2 Notice of Occurrence.......................................4
SECTION 3: OPTIONAL AND MANDATORY PURCHASE...................................4
3.1 Option to Numerex..........................................5
3.2 Option to the Company......................................5
3.3 Option to Remaining Shareholders...........................5
3.4 Mandatory Purchase by the Company and Limited Transfer.....5
3.5 Purchase of All Shares.....................................6
3.6 Closing on Optional or Mandatory Purchase..................6
3.7 Right to Transfer..........................................6
3.8 Right to Participate in Sales..............................7
3.9 Requirement to Participate in Sales........................7
SECTION 4: CALL OPTIONS OF NUMEREX...........................................8
4.1 Call Options in Years Three, Four and Five.................8
4.2 Call Option in After Termination of First Call.............8
4.3 Demand Registration Rights.................................8
4.4 Forced Sale Option.........................................8
4.5 Closing of Option Exercise.................................9
SECTION 5: PURCHASE AND CALL PRICE...........................................9
5.1 Third Party Offers.........................................9
5.2 Other Triggering Events....................................9
5.3 First Call................................................10
5.4 Second Call...............................................10
5.5 Appraisal For Fair Market Value...........................10
SECTION 6: PAYMENT TERMS....................................................12
<PAGE>
SECTION 7: OTHER PROVISIONS.................................................13
7.1 Board of Directors........................................13
7.2 Failure to Transfer Shares................................13
7.3 Endorsement Upon Share Certificate........................13
7.4 Further Assurances........................................13
7.5 Joinder of Spouse.........................................13
7.6 Inconsistent Agreements...................................14
7.7 Notices...................................................14
7.8 Settlement of Disputes....................................14
7.9 Amendment.................................................14
7.10 Waiver....................................................14
7.11 Termination of Prior Agreements...........................14
7.12 Entire Understanding......................................15
7.13 Parties In Interest.......................................15
7.14 Severability..............................................15
7.15 Counterparts..............................................15
7.16 No Third Party Beneficiaries..............................15
7.17 Section Headings..........................................15
7.18 References................................................15
7.19 Controlling Law...........................................15
7.20 Jurisdiction and Process..................................15
7.21 Certain Definitions.......................................16
-iii-
<PAGE>
SHAREHOLDERS' AGREEMENT
-----------------------
PARTIES: BROADBAND NETWORKS, INC.,
- -------- a Delaware Corporation (the "Company")
2820 East College Avenue,
Suite B
State College, PA 16801
NUMEREX CORP.,
a Pennsylvania corporation ("Numerex")
Rose Tree Corporate Center II, Suite 5500
1400 N. Providence Road
Media, PA 19063
Certain shareholders listed on
Exhibit A attached hereto and
designated thereon as
"Management Shareholders" and
"Non-Management Shareholders."
DATE: February 28, 1997
- -----
BACKGROUND: The Company is a engaged in the business of developing, designing,
marketing and implementing complex solutions for broadband, fiberoptic,
interactive video and data networks (the "Business"). On the date hereof, the
Company, Numerex, the Management Shareholders and the Non-Management
Shareholders (collectively, the Management Shareholders and Non-Management
Shareholders shall sometimes be referred to as the "Other Shareholders") entered
into a Securities Purchase Agreement (the "Purchase Agreement"), pursuant to
which Numerex purchased shares of Common Stock of the Company ("Shares") from
(i) certain of the shareholders of the Company and (ii) directly from the
Company. Upon the date hereof, Numerex shall be the legal and beneficial owner
of 203,817 Shares. Subject to certain terms and conditions, Numerex may in the
future acquire all or a part of the remaining issued and outstanding Shares.
The Company, Numerex and the Other Shareholders desire to enter into an
agreement which (i) grants certain rights to, and imposes certain restrictions
and obligations on them in respect of the Shares of the Company which are now or
hereafter owned or held by them or any Person (as hereinafter defined) to whom
they Transfer (as hereinafter defined) such shares in accordance with this
Agreement, and (ii) provides for the management and conduct of the business of
the Company, all on the terms and conditions stated in this Agreement. Numerex,
the Other Shareholders and the Persons to whom they Transfer Shares in
accordance with this Agreement are sometimes referred to individually as a
"Shareholder" and collectively as "Shareholders".
<PAGE>
INTENDING TO BE LEGALLY BOUND HEREBY, and in consideration of the mutual
agreements stated below, the parties agree as follows:
SECTION 1: GENERAL RESTRICTIONS
1.1 Restriction on Transfers. Each Shareholder severally agrees with each
other Shareholder and with the Company that such Shareholder shall not Transfer
or attempt to Transfer, or solicit any offer for the purchase of, any Shares now
owned by such Shareholder or which such Shareholder may at any time hereafter
own, acquire or be entitled to, except in strict accordance with the provisions
of this Agreement.
1.2 Permitted Transferees. Notwithstanding Section 1.1 hereof, (a) a
Shareholder shall have the right to Transfer inter vivos or by will or the laws
of descent and distribution of all or a portion of his Shares outright to a
family member or to a trust for the benefit of a family member, if such
transferee agrees in writing to be bound by the terms and conditions of this
Agreement as if he were the transferor, (b) a Shareholder shall have the right
to Transfer inter vivos all or a portion of his Shares to another Shareholder,
provided that the transferee is already bound by the terms and conditions of
this Agreement, and (c) Numerex shall have the right to Transfer all or a
portion of the Shares of the Company owned by it to any affiliate of Numerex or
to a company which it owns, provided that as a condition to receiving such
shares, such affiliate or company agrees in writing to be bound by the terms and
conditions of this Agreement as if it were Numerex (collectively, "Permitted
Transferees"). For purposes of this Agreement, "affiliate" shall be defined as
any entity that is controlled by Numerex or the Other Shareholders, as
applicable, of which Numerex or the Other Shareholders, as applicable, holds at
least an eighty percent (80%) controlling interest.
1.3 Representation. Each Shareholder represents and warrants to the other
Shareholders that his will and other estate planning documents and techniques do
not and shall not provide for any Transfer of Shares in violation of Section 1.1
or any other provision of this Agreement.
1.4 Non-Compliance. Unless otherwise unanimously agreed upon by the
Company's board of directors, in the event any Shareholder shall Transfer or
attempt to Transfer any Shares otherwise than in strict accordance with the
provisions of this Agreement, such action shall be void and of no effect, and no
dividends or distributions of any kind whatsoever shall be paid by the Company
in respect of such Shares (all such dividends and distributions being deemed
waived by such Shareholder), and the voting rights of such Shares shall be
suspended during the period commencing with such Shareholder's initial failure
to comply with the provisions of this Agreement and ending when (i) the
Shareholder complies with the provisions of this Agreement, or (ii) the Company,
based on the unanimous approval of its board of directors, agrees in writing to
terminate such suspension and to permit such Transfer.
1.5 Corporate Action. The Company shall not register the transfer of Shares
to any transferee of any Shareholder, issue any certificate in lieu of such
Shares, or issue any new
-2-
<PAGE>
Shares, unless each and every condition hereof affecting such Shares or
certificates has been satisfied.
1.6 No Implied Employment. Each Shareholder acknowledges and agrees that
neither the issuance of Shares to such Shareholder nor anything contained in
this Agreement gives such Shareholder, if an employee of the Company, any right
to be retained in the employ of the Company, or affect the Company's right at
any time to discharge or discipline such Shareholder or to terminate his
employment.
1.7 Execution and Delivery. All consents, approvals, authorizations and
order necessary for the execution, delivery and performance by the Other
Shareholders have been duly and lawfully obtained, and the Other Shareholders
have, and as of the Closing Date will have, full right, power, authority and
capacity to execute, deliver and perform the Shareholders' Agreement. The
Shareholders' Agreement has been duly executed and delivered by Numerex and the
Other Shareholders and constitutes a legal, valid and binding agreement by
Numerex and the Other Shareholders enforceable against the Other Shareholders in
accordance with its terms.
1.8 No Conflicts. The execution, delivery and performance of the
Shareholders' Agreement and the consummation of the transactions contemplated
hereby will not conflict with or result in a material breach or violation of any
term or provision, or (with or without notice or passage of time, or both)
constitute a default under, any indenture, mortgage, deed of trust, trust
(constructive or other), loan agreement or other agreement or instrument to
which Numerex or the Other Shareholders are a party or by which Numerex or the
Other Shareholders or the Shares of Numerex or the Other Shareholders are bound,
or violate any Legal Requirement applicable to or binding upon Numerex or the
Other Shareholders.
SECTION 2: TRIGGERING EVENTS
2.1 Definition. The following events are "Triggering Events" with respect
to (a) the Shareholder to whom the event relates and (b) to the Permitted
Transferees of the Shareholder to whom the event relates (such Shareholder and
all Permitted Transferees of such Shareholder pursuant to Section 2 are
sometimes collectively referred to as an "Affected Shareholder"):
(i) The receipt by a Shareholder (sometimes referred to as a "Selling
Shareholder") of a bona fide written offer, which it desires to accept,
acceptable to such Shareholder, to acquire all or some portion of such
Shareholder's Shares ("Offer").
(ii) The death of an individual Shareholder (sometimes referred to as a
"Deceased Shareholder") and the transfer of such Shareholder's Shares by will or
the laws of descent and distribution to a Person other than a Permitted
Transferee.
(iii) The commencement of bankruptcy, reorganization or similar
proceedings by a Shareholder, the commencement of bankruptcy or similar
proceedings against a Shareholder that
-3-
<PAGE>
are not terminated within 120 days after commencement, the appointment of a
bankruptcy or other judicial representative for a Shareholder, such
Shareholder's Shares or any material part of his or her properties, provided
that any such appointment that was involuntary is not terminated within 120
days, the attachment of, execution against, levy upon or other seizure of the
Shares of a Shareholder (other than an attachment solely for jurisdictional
purposes) unless and only as long as the Company's counsel determines that the
same is being contested in good faith, an assignment by a Shareholder for the
benefit of creditors, whether or not such assignment includes Shares, an
admission by a Shareholder in writing of his or her inability to pay such
Shareholder's debts as they become due, or the attempted rejection of this
Agreement by a bankruptcy or other judicial representative who succeeds to the
Shares of a Shareholder.
(iv) The transfer or attempted Transfer by a Shareholder or any party
acting on behalf of a Shareholder of any of his or her Shares in violation of
any provision of this Agreement, or any material breach by a Shareholder of any
provision of this Agreement.
2.2 Notice of Occurrence. Within 15 days after the occurrence of any
Triggering Event, the Affected Shareholder (or his or her personal
representative) shall give notice of the occurrence ("Notice") to the Company
and the other Shareholders. Failure to give Notice shall neither prevent nor
relieve any of the parties from exercising their rights or satisfying their
obligations under this Agreement, and any other party to this Agreement may at
any time give Notice on behalf of the Affected Shareholder (or his or her legal
or personal representative). If the Affected Shareholder is a Selling
Shareholder, the Notice shall include a copy of the Offer, stating the name of
the offeror ("Offeror") and the price ("Offer Price") and other terms ("Offer
Terms") of the Offer.
SECTION 3: OPTIONAL AND MANDATORY PURCHASE
Upon the occurrence of any Triggering Events, the Affected Shareholder's
Shares shall be sold in accordance with this Section 3. For purposes of this
Section 3, "Remaining Shareholders" shall mean all Shareholders except Numerex
and the Affected Shareholders; and (ii) "Non-Affected Shareholders" shall mean
all Shareholders except for the Affected Shareholder.
3.1 Option to Numerex. Numerex shall have the first option to purchase all
or any of the Shares owned by the Affected Shareholder on the date the
Triggering Event occurred, for the Purchase Price (as defined in Section 5) and
on the Payment Terms (as defined in Section 6), by giving notice, within thirty
(30) days after the date of the Notice, to the Affected Shareholder (or his
personal representative) and to the Remaining Shareholders of the exercise of
its option. The exercise of the option by Numerex shall be effective only if the
notices given by Numerex, the Company, if applicable, and the Remaining
Shareholders, if applicable, who exercised their options indicate that Numerex,
the Company and the Remaining Shareholders together intend to purchase all of
the Shares owned by the Affected Shareholder.
3.2 Option to the Company. The Company shall have the option to purchase
all or any Shares of the Affected Shareholder ("Remaining Stock") that was not
purchased by Numerex in
-4-
<PAGE>
accordance with Section 3.1, for the Purchase Price and on the Payment Terms, by
giving written notice, within forty-five (45) days after the date of Notice, to
the Affected Shareholder (or his personal representative) and Numerex of the
exercise of its option. The notice shall state whether the Company intends to
purchase all or only a part of the Remaining Stock. The Company may only
purchase, pursuant to this Section 3.2, that number of shares of the Remaining
Stock to the extent the Company has sufficient capital surplus on retained
earnings to permit it to lawfully purchase and pay for any such shares. The
exercise of the option by the Company shall be effective only if the notices
given by the Company and the Remaining Shareholders, if applicable, who
exercised their options indicate that the Company and the Remaining Shareholders
together intend to purchase all of the Remaining Stock.
3.3 Option to Remaining Shareholders. The Remaining Shareholders shall have
the option to purchase all or any of the Remaining Stock that was not purchased
by Numerex in accordance with Section 3.1 or by the Company in accordance with
Section 3.2, for the Purchase Price and on the Payment Terms, by giving notice,
within sixty (60) days after the date of Notice, to the Affected Shareholder (or
his personal representative), Numerex and the Company of the exercise of his
option. The notice shall state whether such Remaining Shareholder intends to
purchase all or only a part of the Affected Shareholder's Shares that such
holder is entitled to purchase under this Section 3.3 and the number of the
Affected Shareholder's Shares to be purchased by him, if less than all. The
exercise of the options by the Remaining Shareholders shall be effective only if
the notices given by the Remaining Shareholders who exercised their options
indicate that such the Remaining Shareholders together intend to purchase all of
the Remaining Stock. Unless otherwise agreed upon in writing by all of the
Remaining Shareholders, each of the Remaining Shareholders shall have the option
to purchase that proportion, rounded to the nearest whole number to eliminate
fractional shares, of the Remaining Stock which the number of Shares held by him
bears to the number of Shares held by all Remaining Shareholders who exercised
their options. If any Remaining Shareholder does not exercise his option to
purchase his full proportionate share of the Remaining Stock, the other
Remaining Shareholders may purchase that proportion, rounded to the nearest
whole number to eliminate fractional shares, of the Shares not so purchased
which the number of Shares held by him bears to the number of Shares held by all
Remaining Shareholders who exercised their options, by giving written notice of
the exercise of his option to the Affected Shareholder, the other Remaining
Shareholders, the Company and Numerex within fifteen (15) days after the notice,
pursuant to this Section 3.3, is given.
3.4 Mandatory Purchase by the Company and Limited Transfer. If the Affected
Shareholder is a Deceased Shareholder and a transfer of the Deceased
Shareholders' Shares occurs by will or the laws of descent and distribution to a
Person other than a Permitted Transferee, then the Company shall purchase and
such Affected Shareholder or Shareholder's personal representative shall sell
all of such Affected Shareholder's Shares that were not purchased in accordance
with Sections 3.1, 3.2 or 3.3, for the Purchase Price and on the Payment Terms.
If the Company does not have sufficient capital surplus or retained earnings to
permit it to lawfully purchase and pay for any such Shares, or if the Company is
otherwise prohibited by law or agreement from purchasing and paying for any such
Shares, then the Non-Affected Shareholders shall use their best efforts to
remedy that situation if reasonably possible. If that situation cannot be
remedied within 90 days after the Triggering Event occurred, then, at the end of
that 90-day period, the Company's obligation to purchase and pay for any such
Shares shall be assumed by the Non-Affected Shareholders. If all of the Affected
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Shareholder's Shares are not purchased pursuant to this Section 3.4, then,
unless the failure to purchase was due to a legal prohibition caused by
insufficient retained earnings and/or capital surplus, the holders of the
unpurchased stock may (i) sue for specific performance, (ii) sue for damages,
(iii) transfer the unpurchased Shares to any Person free of the restrictions
contained in this Agreement and/or (iv) exercise any other remedies they may
have. If the Triggering Event shall be as described in Sections 2.1(iii) or
2.1(iv), then the Affected Shareholder shall be free to sell all of such
Affected Shareholder's Shares that were not purchased in accordance with
Sections 3.1, 3.2 and 3.3, provided such transferee shall agree in writing to be
bound by the terms and conditions of this Agreement as if the transferee were
the Shareholder who sold such Shares.
3.5 Purchase of All Shares. Unless otherwise agreed to by the Affected
Shareholder, all and not less than all of the Affected Shareholder's Shares must
be purchased pursuant to Sections 3.1, 3.2, 3.3 or 3.4 hereof, as the case may
be, in order that there shall be a purchase of such Affected Shareholder's
Shares within the intent, scope and terms of this Agreement, except with regard
to the Triggering Events described in Sections 2.1(iii) and 2.1(iv) where all of
the Affected Shareholder's Shares need not be purchased pursuant to Sections
3.1, 3.2, 3.3 or 3.4.
3.6 Closing on Optional or Mandatory Purchase. If Numerex, the Company
and/or the Remaining Shareholders shall have exercised their options to purchase
the Affected Shareholder's Shares pursuant to Sections 3.1, 3.2 or 3.3 hereof,
the closing of the purchase and sale contemplated by this Section 3.6 shall be
held at 10:00 a.m., on the earlier of the 90th day following the date Notice is
given or the 30th day after the exercise of the option that results in options
to purchase all (but not less than all) of the Affected Shareholder's Shares
being exercised, at the then principal office of the Company, or at such other
time and place as the parties shall mutually agree. At the closing, the Affected
Shareholder (or his personal representative) shall deliver to the purchasers
certificates for the Affected Shareholder's Shares, duly endorsed for transfer,
and the purchasers shall pay the Purchase Price to the Selling Shareholder in
accordance with the Payment Terms.
3.7 Right to Transfer. If the Triggering Event is the event described in
Section 2.1(i) and all of the Affected Shareholder's Shares are not purchased
pursuant to Sections 3.1, 3.2, and 3.3 hereof, as the case may be, the Affected
Shareholder may, for a period of ninety (90) days following the final date for
acceptance under Section 3.1, 3.2 or 3.3 thereof, as the case may be, sell all
such Shares related to such Offer to the Offeror; provided, however, that no
such Shares shall be sold to the Offeror upon any terms or conditions more
favorable to Offeror than the Offer Terms; and provided further that such
Offeror shall agree in writing to be bound by the terms and conditions of this
Agreement as if the Offeror were the Shareholder who sold such Shares. If the
Affected Shareholder wishes to sell such Shares on terms and conditions more
favorable to the Offeror than the Offer Terms or has not sold such Shares on the
Offer Terms within such ninety (90) day period, the Affected Shareholder shall
be obligated to make new offers and re-offers to Numerex, the Company and the
Remaining Shareholders in accordance with this Section 3 before the Affected
Shareholder shall be permitted to Transfer such Affected Shareholder's Shares,
or any part thereof, to any Person.
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3.8 Right to Participate in Sales. In the event an Affected Shareholder
shall be permitted to sell its Shares to an Offeror pursuant to Section 3.7
hereof, the Affected Shareholder shall give the Non-Affected Shareholders
written notice at least twenty (20) days prior to the consummation of any and
all such sales. Except as modified hereunder, each Non-Affected Shareholder
shall have the right, as a condition of such sale by the Affected Shareholder,
to sell to the Offeror, on the same terms and conditions as the Affected
Shareholder, that proportion, rounded to the nearest whole number to eliminate
fractional shares, of the Shares proposed to be sold by the Affected Shareholder
which the number of Shares owned by such Non-Affected Shareholder bears to the
number of Shares owned by all Shareholders (including the Affected Shareholder),
and the number of Shares that the Affected Shareholder may sell pursuant to such
Offer shall be correspondingly reduced. Each Non-Affected Shareholder desiring
to participate in any such sale shall notify the Affected Shareholder of such
intention within ten (10) days after notice is given in accordance with the
first sentence of this Section 3.8.
3.9 Requirement to Participate in Sales. If the Triggering Event that
occurs is described in Section 2.1(i), (i) Numerex is permitted to sell its
Shares pursuant to Section 3.7 and (ii) the Offeror requires, as a condition of
the sale, that the Offeror acquire all of the Shares of the Non-Affected
Shareholders, then the Non-Affected Shareholders shall sell all of their Shares
to the Offeror for not less than the same price terms and other terms and
conditions as those offered to Numerex.
SECTION 4: CALL OPTIONS OF NUMEREX
4.1 Call Options in Years Two, Three, and Four. At any time and from time
to time during the thirty (30) days following the second, third and fourth
anniversary of the date hereof, Numerex shall have the right to purchase ("First
Call"):
(a) all or any portion of the Shares held by Non-Management
Shareholders at the First Call Price (as hereinafter defined in Section 5.3).
Numerex may exercise this right by giving written notice ("Call Notice") to the
Non-Management Shareholders, the Management Shareholders and the Company at any
time prior to the termination of this right. In the event that Numerex elects to
exercise the First Call for less than all of the then outstanding Shares held by
Non-Management Shareholders, each Non-Management Shareholder shall sell that
proportion, rounded to the nearest whole number to eliminate fractional shares,
of the Shares owned by such Non-Management Shareholder divided by the number of
Shares owned by all of the Non-Management Shareholders at the time the Call
Notice is given pursuant to this Section 4.1.
(b) up to twenty-five percent (25%) of the Shares held by each
Management Shareholder at the First Call Price. Numerex may exercise this right
by giving Call Notice to the Management Shareholders ("Management Shareholder
Call Notice"), the Non-Management Shareholders and the Company at any time prior
to the termination of this right. In the event that Numerex elects to exercise
the First Call for less than twenty-five percent (25%) of the then outstanding
Shares held by Management Shareholders, each Management Shareholder shall sell
that proportion, rounded to the nearest whole number to eliminate fractional
shares, of the Shares owned by such Management Shareholder divided by the number
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of Shares owned by all of the Management Shareholders at the time the Call
Notice is given pursuant to this Section 4.1. Notwithstanding anything herein to
the contrary, in the event that a Management Shareholder objects to the
Management Shareholder Call Notice, for any reason whatsoever, in writing and
within ten (10) days after receipt of the Management Shareholder Call Notice
("Objection"), with respect to any Management Shareholder that files an
Objection with Numerex, the Management Shareholder Call Notice shall not be
effective and such Management Shareholder(s) shall not be obligated to sell his
or their Shares or any portion thereof.
4.2 Call Option After Termination of First Call. For a period of thirty
(30) days after the termination of the First Call following the fourth
anniversary of the date hereof, Numerex shall have the right to purchase
("Second Call") all, but not less than all of the Shares at the Second Call
Price (as hereinafter defined in Section 5.4). Numerex may exercise this right
by giving Call Notice to the Other Shareholders and the Company at any time
prior to the termination of this right.
4.3 Demand Registration Rights. For a period of ninety (90) days following
the termination of the Second Call, the Other Shareholders shall have demand
registration rights ("Demand Rights") with respect to their Shares in accordance
with the Shareholder Registration Rights Agreement, attached hereto as Exhibit
4.3, provided that the Company has completed the initial offer and sale of its
capital stock pursuant to an effective registration statement.
4.4 Forced Sale Option. In the event that Numerex does not exercise the
Second Call and the Other Shareholders do not exercise their Demand Rights
pursuant to Section 4.3, both Numerex and the Other Shareholders shall have the
option at any time after the termination of the Demand Rights to cause a Forced
Sale (as defined below) of the Company. A Forced Sale shall occur when either
Numerex or a majority of the Other Shareholders consent in writing to such
Forced Sale and deliver such consent to the Company ("Forced Sale Notice"). A
"Forced Sale" shall mean an obligation of the Company to use its best efforts,
including, but not limited to the engagement of a broker, to sell all of the
Shares to a third-party purchaser. The Forced Sale shall be made at the Forced
Sale price ("Forced Sale Price"), as such value is agreed to by Numerex on the
one hand and a majority of the Other Shareholders on the other hand. In the
event that Numerex and the Other Shareholders cannot agree in writing upon a
Forced Sale Price within ten (10) days of the receipt of the Forced Sale Notice
by the Company, then the Forced Sale Price shall be Fair Market Value, as such
term is defined in Section 5.5; provided however, that for purposes of
determining Fair Market Value under this Section 4.4, (i) if Numerex on the one
hand or the Other Shareholders on the other hand shall deliver a Forced Sale
Notice, such party or parties shall be deemed "Affected Shareholder(s)" and the
other party or parties shall be deemed "Non-Affected Shareholder(s)", (ii) the
provisions of Section 5.5(a)(i) shall not be applicable and (iii) the
determination of Fair Market Value shall be made as of the time of the Forced
Sale. Once written consents are obtained by the Company to cause a Forced Sale
as provided hereunder, all of the Shareholders hereto agree to sell their Shares
in the manner and on the terms and conditions described herein.
4.5 Closing of Option Exercise. Upon the giving of any Call Notice, the
parties shall promptly determine either the First Call Price or Second Call
Price, as applicable, pursuant to Section 5. The closing of the purchase and
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sale contemplated by Sections 4.1 and 4.2 shall be held at 10:00 a.m., on a date
within ninety (90) days after the Call Notice is given, provided that in the
event the First Call Price or Second Call Price has not been determined within
ninety (90) days after the Call Notice is given, then the closing shall be held
as soon as reasonably practicable after determination of the First Call Price or
Second Call Price, as applicable. At the closing, any Shareholder selling his
Shares shall deliver to Numerex certificates for the Shares owned by such
Shareholder, duly endorsed for transfer, and Numerex shall pay the First Call
Price or the Second Call Price, as applicable, to such Shareholder by certified
check or wire transfer in accordance with the terms set forth in Section 6.
SECTION 5: PURCHASE AND CALL PRICE
5.1 Third Party Offers. In the event that a Triggering Event described in
Section 2.1(i) takes place, the Purchase Price, for purposes of Section 3, shall
be (i) the Offer Price in writing to the Affected Shareholder by such third
party, in the event that Numerex is the Affected Shareholder or (ii) in the
event that the Affected Shareholder is an Other Shareholder, seventy-five
percent (75%) of the per share price paid under the Securities Purchase
Agreement ("Per Share Price").
5.2 Other Triggering Events. In the event that a Triggering Event takes
place other than that described in Section 2.1(i), the Purchase Price shall be:
(a) one hundred percent (100%) of the Per Share Price upon the
occurrence of the Triggering Event described in either Section 2.1(ii) or
Section 2.1(iii).
(b) seventy-five percent (75%) of the Per Share Price upon the
occurrence of the Triggering Event described in Section 2.1(iv).
5.3 First Call. The price of the Shares to be sold upon the exercise of the
First Call ("First Call Price") shall be determined in accordance with the
formula set forth below.
In the event that the First Call is exercised during:
(a) the ninety (90) days following the second anniversary of the date
hereof, the First Call Price shall be one hundred twenty-five percent (125%) of
the Per Share Price;
(b) the ninety (90) days following the third anniversary of the date
hereof, the First Call Price shall be one hundred fifty percent (150%) of the
Per Share Price; and
(c) the ninety (90) days following the fourth anniversary of the date
hereof, the First Call Price shall be one hundred seventy percent (170%) of the
Per Share Price.
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5.4 Second Call. The price of the Shares to be sold upon the exercise of
the Second Call ("Second Call Price") shall be one-hundred percent (100%) of the
Fair Market Value as determined through the appraisal process described in
Section 5.5, hereof.
5.5 Appraisal For Fair Market Value.
(a) Fair Market Value. "Fair Market Value" shall mean the fair market
value of the Company as a going concern, assuming that the Company is sold
pursuant to a sale of capital stock.
(i) Fair Market Value shall be determined by the agreement of the
Non-Affected Shareholders and the Affected Shareholder(s), through a majority
vote the Shares of each of the Affected Shareholders and the Non-Affected
Shareholder(s), in each case acting as an independent class, within ten (10)
days of the date on which any party notifies all Shareholders that this
Agreement then requires that "Fair Market Value" be determined, specifically
referring to the paragraph and subparagraphs of this Agreement that require such
determination.
(ii) If the Affected Shareholders and the Non-Affected
Shareholders(s) shall not so agree on the amount of the Fair Market Value within
such ten-day period, then within ten (10) days after such initial ten-day
period, each of the Non-Affected Shareholders and the Affected Shareholder(s),
acting in each case as an independent class, by a majority vote of the Shares
each of the Affected Shareholders and the Non-Affected Shareholder(s), will
appoint a qualified investment banking firm to make the determination, within
thirty (30) days of such appointment, of the proposed fair market value of the
Company as a going concern and the average of the determinations by such
investment banking firms of the proposed fair market value of the Company as a
going concern (the "Proposed Value") will be the Fair Market Value; provided,
however, that if the difference between such Proposed Values is more than 15% of
the amount of the lower Proposed Value, then the two investment banking firms
will appoint a third investment banking firm to determine, within thirty (30)
days of its appointment, a Proposed Value and the Fair Market Value shall be
equal to the average of all three Proposed Values; provided, further, that if
the Proposed Value of the investment banking firms appointed by either the
Non-Affected Shareholders or the Affected Shareholder(s) shall vary by more than
15% from the Proposed Value determined by the third investment banking firm,
such varying Proposed Value shall not be included in such average in determining
Fair Market Value. If only two investment banking firms are appointed, each of
the Non-Affected Shareholder and the Affected Shareholder(s), in each case, as
an independent class, shall pay the cost of their respectively appointed
investment banking firm and if a third investment firm is appointed, each of the
Non-Affected Shareholders (pro rata based on their respective ownership of
Shares owned by Non-Affected Stockholders), in each case, as an independent
class, shall pay one-half the cost of the third investment banking firm. In
connection with any determination of Fair Market Value, (A) a majority vote of
the Shares of the Non-Affected Shareholders (or in the case of a Forced Sale,
either Numerex or a majority of the Other Shareholders) shall have the right to
request an audit of the financial statements for the Company's applicable "stub"
period (the "Stub Audit"), at the Company's expense, if such determination of
Fair Market Value shall be made more than ninety (90) days after the end of the
Company's fiscal year, and (B) any revenues or costs associated with business
transactions between the Company and the Affected Shareholder(s) or any
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affiliates of the Affected Shareholder(s) shall be restated by the investment
banking firm(s), to the extent necessary, to reflect the revenues or costs which
would have recognized had such transactions been on an arm's length basis (the
"Revenue Restatement"). Notwithstanding anything contained herein to the
contrary, any required periods for the determination of Fair Market Value shall
be extended to the extent necessary to permit the completion of any Stub Audit
requested to be made under the terms of this Agreement and any Stub Audit and/or
Revenue Restatement shall be considered by the parties and the relevant
investment banking firm(s) in determining Fair Market Value. If Fair Market
Value is required, under the terms of this Agreement, to be stated on a per
Share basis, the calculation thereof shall be based on the total number of
shares of Common Stock outstanding, assuming exercise of all the outstanding
options and receipt of the aggregate maximum number of shares of Common Stock
issued, delivered or exchanged therefore or thereunder.
(b) Qualified Appraisal Firm. "Qualified Appraisal Firm" means any firm
engaged in business valuation services, but excluding any firm which received
more than $15,000 in fees during the preceding 24 calendar months from any party
hereto.
(c) Inspection. The investment banking firms engaged for the purpose of
providing an appraisal under Section 5.5(a) hereof ("Appraisers") shall have the
right, during normal business hours, to (i) inspect and make copies of all
documents and other information relating to the Company or its business,
including accountants' work papers, (ii) inspect all properties and assets used
by the Company in its business, and (iii) consult with the officers, employees,
accountants, counsel and advisors of the Company, for the purpose of rendering
their appraisals, provided such Appraisers shall have entered into a
confidentiality agreement with the Company pursuant to which the Appraisers
agree to maintain the confidentiality of all confidential and proprietary
information obtained by the appraisers in performing their appraisals.
(d) Disclosure. Whenever the Fair Market Value must be determined under
this Agreement, the Company and the Shareholder or Shareholders selling his or
their Shares shall disclose in writing to the purchaser or purchasers of those
Shares and the appraisers referred to in Section 5.5 all facts of which it, he
or they have knowledge and which may affect the determination of Fair Market
Value.
SECTION 6: PAYMENT TERMS
As used in this Agreement, "Payment Terms" means, except as otherwise
agreed to by the selling and purchasing Shareholders, the Purchase Price, First
Call Price and Second Call Price, as the case may be, that shall be paid on the
Closing Date via certified check or wire transfer of funds.
SECTION 7: OTHER PROVISIONS
7.1 Board of Directors. The Shareholders agree to vote all Shares now owned
or hereafter acquired or controlled by them, and otherwise use their best
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efforts as Shareholders of the Company, (i) to set the number of directors of
the Company at five, and (ii) to elect as directors those persons that are
nominated by Numerex on the one hand, and the Other Shareholders on the other
hand, in a proportion equal to, or as near as equal as possible, to the number
of Shares held by (x) Numerex and (y) all of the other Shareholders, each of (x)
and (y) being compared to the total number of Shares outstanding, assuming the
exercise of all then outstanding options and receipt of the aggregate maximum
number of shares of Common Stock issued, delivered or exchanged therefore or
thereunder, at the time of such election; provided however, that the proportion
of directors elected to the board of directors and nominated by Numerex shall be
no less than the percentage of Shares held by Numerex to the total number of
Shares outstanding, assuming the exercise of all then outstanding options and
receipt of the aggregate maximum number of shares of Common Stock issued,
delivered or exchanged therefore or thereunder, at the time of such election.
The Other Shareholders' initial representative on the Board of Directors shall
be Robert Beaury.
7.2 Failure to Transfer Shares. If any Shareholder whose Shares are subject
to purchase hereunder does not assign and transfer such Shares to a purchaser as
required hereunder, such Shares shall be deemed assigned and transferred to the
purchaser. The Company, upon receipt of written notice, shall mark its records
to indicate that the certificates have been canceled and shall, if necessary,
issue new certificates to the purchaser. Each Shareholder hereby gives the
Secretary of the Company an irrevocable power of attorney to make assignments
and transfers on the Company's books on behalf of such Shareholder in accordance
with the foregoing.
7.3 Endorsement Upon Share Certificate. Each Shareholder acknowledges that
all certificates for Shares shall bear the following legend in addition to any
other legend that may be required by law or agreement:
"The shares represented by this certificate may not be
transferred, hypothecated, pledged or otherwise
disposed of, except in compliance with the Agreement,
dated February ___, 1997 between the Company and its
Shareholders, copies of which are on file in the office
of the Secretary of the Company."
7.4 Further Assurances. Each Shareholder agrees that he shall promptly
execute and deliver all such further agreements, certificates, instruments and
documents, and perform such further actions, as the Company or any other
Shareholder may reasonably request in order to fully carry out the purposes and
intent of this Agreement.
7.5 Joinder of Spouse. Each Shareholder who is a natural person shall cause
such Shareholder's spouse to execute and deliver the Joinder of Spouse attached
hereto as Exhibit C, approving this Agreement and waiving any and all rights
such spouse may have relating to this Agreement or such Shareholder's Shares.
7.6 Inconsistent Agreements. No Shareholder shall enter into any agreement
or arrangement that conflicts with, or is inconsistent with, any of the terms or
conditions of this Agreement.
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7.7 Notices. All notices and other communications under or in connection
with this Agreement shall be in writing and shall be deemed given (a) if
delivered personally (including by overnight express or messenger), upon
delivery, (b) if delivered by registered or certified mail (return receipt
requested), upon the earlier of actual delivery or three days after being
mailed, or (c) if given by telecopy, upon confirmation of transmission by
telecopy, in each case to the parties at the following addresses:
(a) If to Numerex, addressed to:
Numerex Corp.
Rose Tree Corporate Center II
1400 North Providence Road
Suite 5500
Media, PA 19063
Attention: John J. Reis
Telecopy: (610) 892-0725
With a copy to:
Blank Rome Comisky & McCauley
1200 Four Penn Center Plaza
Philadelphia, PA 19103
Attention: Barry H. Genkin, Esquire
Telecopy: (215) 569-5555
(b) If to the Company, address to:
Broadband Networks, Inc.
2820 East College Avenue, Suite B
State College, PA 16801
Attention: Robert Beaury, President
Telecopy: (814) 234-2841
With a copy to:
Hutchins, Wheeler & Dittmar
A Professional Corporation
101 Federal Street
Boston, MA 02110
Attention: Francis J. Feeney, Jr., Esquire
Telecopy: (617) 951-1295
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(c) If to any Shareholder, to the
address set forth below such
Shareholder's name on Exhibit A,
attached hereto.
7.8 Settlement of Disputes. Other than for claims in equity, any claims,
controversies, demands, disputes, or differences between or among the parties
hereto or any persons bound hereby shall be submitted to and settled by
arbitration in the City of Philadelphia, Pennsylvania, before a single
arbitrator chose by mutual agreement of the disputing parties who shall be
knowledgeable in the field of business law and such arbitration shall be before
and in accordance with the rules then obtaining of the American Arbitration
Association. The parties agree to bear joint and equal responsibility for all
fees, abide by any decision rendered as final and binding and waive the right to
submit the dispute to a jury trial. Judgment upon any award may be entered in
any court of competent jurisdiction. Notwithstanding any of the foregoing,
nothing herein contained shall preclude a party hereto from resort to judicial
process if such party, in its or his sole discretion, chooses to seek any form
of equitable or injunctive relief.
7.9 Amendment. This Agreement may be amended, modified or supplemented by
the parties hereto, provided that any such amendment, modification or supplement
shall be in writing and signed by the parties hereto and in a form consistent
with Exhibit D attached hereto.
7.10 Waiver. No waiver with respect to this Agreement shall be enforceable
unless in writing and signed by the party against whom enforcement is sought.
Except as otherwise expressly provided herein, no failure to exercise, delay in
exercising, or single or partial exercise of any right, power or remedy by any
party, and no course of dealing between or among any of the parties, shall
constitute a waiver of, or shall preclude any other or further exercise of, any
right, power or remedy.
7.11 Termination of Prior Agreements. The parties hereby terminate,
effective immediately, any and all existing buy-sell, shareholders' or similar
agreements to which any or all of them are parties to the extent any such
agreement governs any Shares.
7.12 Entire Understanding. This Agreement states the entire understanding
among the parties with respect to the subject matter hereof, and supersedes all
prior oral and written communications and agreements, and all contemporaneous
oral communications and agreements, with respect to the subject matter hereof.
7.13 Parties In Interest. This Agreement shall bind, benefit and be
enforceable by and against each party hereto and its successors, assigns, heirs
and legal and personal representatives. No party shall in any manner assign any
of its or his rights or obligations under this Agreement, except as permitted by
this Agreement, without the express prior written consent of the other parties.
7.14 Severability. If any provision of this Agreement is construed to be
invalid, illegal or unenforceable, then the remaining provisions hereof shall
not be affected thereby and shall be enforceable without regard thereto.
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7.15 Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall constitute an
original hereof, and it shall not be necessary in making proof of this Agreement
to produce or account for more than one original counterpart hereof.
7.16 No Third Party Beneficiaries. No provision of this Agreement is
intended to or shall be construed to grant or confer any right to enforce this
Agreement, or any remedy for breach of this Agreement, to or upon any Person
other than the parties hereto.
7.17 Section Headings. Section and subsection headings in this Agreement
are for convenience of reference only, do not constitute a part of this
Agreement, and shall not affect its interpretation.
7.18 References. All words used in this Agreement shall be construed to be
of such number and gender as the context requires or permits. Unless a
particular context clearly provides otherwise, the words "hereof" and
"hereunder" and similar references refer to this Agreement in its entirety and
not to any specific Section or subsection hereof. For the purpose of this
Agreement, "including" means including without limitation.
7.19 Controlling Law. This Agreement is made under, and shall be construed
and enforced in accordance with, the laws of the Commonwealth of Pennsylvania
applicable to agreements made and to be performed solely therein, without giving
effect to principles of conflicts of law.
7.20 Jurisdiction and Process. Each of the parties (a) irrevocably consents
to the exclusive jurisdiction of the Courts of Common Pleas of Philadelphia
County, Pennsylvania, or the United States District Court for the Eastern
District of Pennsylvania, in any and all actions between or among any of the
parties, whether arising hereunder or otherwise, and (b) irrevocably consents to
service of process by first class certified mail, return receipt requested,
postage prepaid, to the address as which such party is to receive notice in
accordance with Section 7.7.
7.21 Certain Definitions.
(a) "Person" means any individual, sole proprietorship, joint venture,
partnership, corporation, association, cooperative, trust, estate, government
body, administrative agency, regulatory authority, or other entity of any
nature.
(b) "Shareholder" shall be deemed to include any and all Option
Holders.
(c) "Transfer" means any sale, exchange, gift, bequest, pledge,
hypothecation, encumbrance, descent or distribution pursuant to any intestacy
laws or other operation of law, or any other direct or indirect disposition of
Shares which would change the legal or beneficial ownership thereof, including,
without limitation, any transaction that creates any form of joint or common
ownership in Shares between a Shareholder and one or more Persons (whether or
not that other Person is the spouse of such Shareholder).
-15-
<PAGE>
(d) The terms "affiliate," "Closing Date," "Legal Requirement,"
"Option Holders" and "Permits" shall have the meanings given to those terms in
the Securities Purchase Agreement.
* * *
-16-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement or have caused
this Agreement to be executed on their behalf by their duly authorized officers
as of the date first stated above.
BROADBAND NETWORKS, INC. NUMEREX CORP.
By: /s/ Robert J. Beaury By: /s/ John J. Reis
----------------------- ----------------
Name: Name:
Title: Title:
MANAGEMENT SHAREHOLDERS:
(OPTION HOLDERS)
/s/ Robert J. Beaury
---------------------------------
Robert J. Beaury
/s/ Thomas Donahue
---------------------------------
Thomas Donahue
/s/ Dennis Coslo
---------------------------------
Dennis Coslo
/s/ Steven Moyer
---------------------------------
Steven Moyer
NON-MANAGEMENT SHAREHOLDERS:
(OPTION HOLDERS)
/s/ Corey Kyle
---------------------------------
Corey Kyle
/s/ Daniel Kolivoski
---------------------------------
Daniel Kolivoski
(SIGNATURES CONTINUED ON NEXT PAGE)
-17-
<PAGE>
/s/ Karen Smith
---------------------------------
Karen Smith
/s/ James Gardner
---------------------------------
James Gardner
/s/ Sandra Howe
---------------------------------
Sandra Howe
/s/ Ronald Eichenlaub
---------------------------------
Ronald Eichenlaub
/s/ Michael Wagner
---------------------------------
Michael Wagner
/s/ Steven Barner
---------------------------------
Steven Barner
/s/ Michael Cosgrove
---------------------------------
Michael Cosgrove
/s/ Mariel Supenia
---------------------------------
Mariel Supenia
/s/ Dale Josephson
---------------------------------
Dale Josephson
/s/ Darlene Toner
---------------------------------
Darlene Toner
/s/ Sharon Yecina
---------------------------------
Sharon Yecina
(SIGNATURES CONTINUED ON NEXT PAGE)
-18-
<PAGE>
/s/ Debra Cowher
---------------------------------
Debra Cowher
/s/ Karen Barner
---------------------------------
Karen Barner
/s/ John Coder
---------------------------------
John Coder
/s/ Kathi Falls
---------------------------------
Kathi Falls
/s/ Elaine Kern
---------------------------------
Elaine Kern
/s/ Mary Wise
---------------------------------
Mary Wise
/s/ Melissa Young
---------------------------------
Melissa Young
/s/ Gregory Hood
---------------------------------
Gregory Hood
/s/ Scott Neff
---------------------------------
Scott Neff
/s/ Steve M. Rojik
---------------------------------
Steve Rojik
(SIGNATUES CONTINUED ON NEXT PAGE)
-19-
<PAGE>
/s/ Carol Zollweg
---------------------------------
Carol Zollweg
WARRANT HOLDER:
/s/ Robert J. Beaury
---------------------------------
Robert J. Beaury
-20-
EXHIBIT 2.8
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT, dated as of May 7, 1997 (herein, together with
the Schedules and Exhibits attached hereto, referred to as the "Agreement"),
among Detection Systems, Inc., a New York corporation (the "Buyer" or "DSI"),
and Numerex Corp., a Pennsylvania corporation (the "Seller"). Capitalized terms
used in this Agreement which are not defined in context shall have the meanings
ascribed to them in Section 8.1 hereof.
WHEREAS, the Seller owns all of the issued and outstanding capital stock of
Digital Audio Limited, a company incorporated in England and Wales with limited
liability having registered number 2865840 and having its registered office at
Cranleigh Gardens, Southall Middlesex England (the "Company"); and
WHEREAS, upon the terms and conditions set forth herein, the Buyer and the
Seller desire that, at the Closing (as defined in Section 2.1), the Buyer
purchase all of the issued and outstanding shares of the Company in exchange for
shares of common stock, par value $.05 per share, of the Buyer ("DSI Stock");
NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants, agreements and conditions contained herein, the parties hereto,
intending to be legally bound, hereby agree as follows:
1. The Stock Purchase.
1.1 Sale and Purchase of Common Stock of the Company. Subject to the terms
and conditions of this Agreement, at the Closing, the Seller shall sell,
transfer and deliver to the Buyer or its agent a certificate or certificates
representing 100 ordinary shares of (pound)1 per share of the Company owned by
the Seller (the "Company Stock"), accompanied by stock transfer forms and a
power of attorney authorizing the Buyer to vote the Company Stock, each duly
executed by the Seller, and the Buyer shall purchase and accept such shares of
Company Stock.
1.2 Purchase Price. In consideration for the sale, transfer and delivery of
the Company Stock to the Buyer by the Seller pursuant to Section 1.1, the Buyer
shall pay to the Seller, in the manner provided in Section 1.4, an amount equal
to the net capital employed in the Company as of the Closing Date less
(pound)350,000 (the "Final Purchase Price"). The net capital employed in the
Company means the assets of the Company, excluding any cash distributed or
otherwise paid to the Seller or its Affiliates immediately prior to the Closing,
less the liabilities of the Company (the "Net Capital Employed"), as set forth
on Schedule 1.2 hereto.
<PAGE>
1.3 Determination of Purchase Price.
(a) Attached hereto as Exhibit 1.3(a) is an unaudited Balance Sheet of
the Company as of April 30, 1997 (the "Preliminary Balance Sheet"). A
preliminary Purchase Price shall be calculated which shall be equal to the Net
Capital Employed as set forth on the Preliminary Balance Sheet less
(pound)350,000 (the "Preliminary Purchase Price"), and the number of shares of
DSI Stock issued by the Buyer to the Seller at the Closing shall be based on the
Preliminary Purchase Price.
(b) As soon as practicable after the Closing Date as defined in Section
1.4 hereof, but in no event later than forty-five (45) calendar days after the
Closing Date, the Seller shall prepare an audited Balance Sheet of the Company
as at the Closing Date, after taking into account any cash distributed or
otherwise paid to the Seller or its Affiliates immediately prior to the Closing
(the "Final Balance Sheet"), and shall deliver it to the Buyer with an audit
report thereon. The Final Purchase Price shall be computed based on the Final
Balance Sheet. The Final Balance Sheet shall be prepared in accordance with all
relevant financial reporting standards and/or Statements of Standard Accounting
Practice or, where there are none, in accordance with UK generally accepted
accounting principles, and shall be prepared on a consistent basis and in
accordance with the same accounting policies as have been used for the
corresponding accounts for the last three (3) years. In connection with the
preparation of the Final Balance Sheet, no adjustments to write-off any
inventory or other assets during or with respect to any prior accounting period
may be reversed. The Final Balance Sheet shall be audited by Deloitte & Touche
LLP (the "Auditor"), and the audit report delivered by the Auditor shall be
addressed to the Seller and the Buyer. The expense of the Auditor in preparing
or auditing the Final Balance Sheet shall be borne by the Seller; provided,
however, the Buyer shall reimburse the Seller for one-half of such costs up to a
maximum reimbursement by the Buyer of (pound)7,000. If requested by the Buyer,
the Seller and the Auditor shall afford the Buyer's accountants access to the
information and accounting procedure involved in preparation of the Final
Balance Sheet.
1.4 Payment of the Purchase Price.
(a) On the Closing Date, the Preliminary Purchase Price shall be
converted from British pounds sterling to United States dollars by using the
United States dollar equivalent exchange rate relating to British pounds
sterling published in the Wall Street Journal for the most recent date for which
such a rate has been so published prior to the Closing Date. The Preliminary
Purchase Price stated in United States dollars shall be divided by $17 to
determine the number of shares of DSI Stock to be delivered by the Buyer to the
Seller at the Closing (the "Preliminary Share Amount"). On the Closing Date, the
Buyer shall deliver to the Seller a stock certificate registered in the Seller's
name representing a number of shares of DSI Stock equal to the Preliminary Share
Amount.
(b) After the Final Balance Sheet is delivered, the difference between
the Final Purchase Price and the Preliminary Purchase Price (the "Price
Adjustment") shall be determined and the Price Adjustment shall be converted
from British pounds sterling to United States dollars by using the United States
dollar equivalent exchange rate relating to British pounds sterling published in
the Wall Street Journal for the most recent date for which such a
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<PAGE>
rate has been so published on or prior to the date on which the Final Balance
Sheet is delivered to the Buyer (the "Determination Date"). The Price Adjustment
as stated in U.S. Dollars shall be divided by $17 to determine the number of
shares of DSI Stock by which the Preliminary Share Amount should be increased or
decreased (the "Share Adjustment"). If the Final Purchase Price is greater than
the Preliminary Purchase Price, the Buyer shall deliver to the Seller a stock
certificate registered in the Seller's name representing a number of shares of
DSI Stock equal to the Share Adjustment. If the Final Purchase Price is less
than the Preliminary Purchase Price, the Seller shall deliver to the Buyer a
stock certificate representing the shares of DSI Stock delivered by the Buyer to
the Seller at the Closing together with a stock power, duly executed in blank
with the signature of the Seller guaranteed by a financial institution
reasonably acceptable to the Buyer, which conveys to the Buyer the number of
shares of DSI Stock equal to the Share Adjustment. The deliveries required by
this Section 1.4(b) shall be made within ten (10) days following the
Determination Date.
(c) No fractional shares of DSI Stock shall be issued in connection
with this Agreement. In connection with all calculations hereunder, all
fractional numbers equal to or greater than .5 shall be rounded up to the next
highest whole number and all fractional numbers below .5 shall be rounded down
to the next lowest whole number.
1.5 Repurchase of DSI Stock.
(a) Until June 30, 1998, the Buyer shall have the right to buy, and the
Seller shall be obligated to sell, any or all shares of DSI Stock acquired
pursuant to this Agreement (the "Acquired Shares"). The purchase price per share
for any Acquired Shares purchased by the Buyer pursuant to this Section 1.5
shall be equal to $17 plus interest thereon at the rate of 8.25% per annum from
the Closing Date through the date on which such Acquired Shares are purchased
based on the actual number of days elapsed during such period (the "Call/Put
Price"). The Buyer may exercise its right under this Section 1.5(a) from time to
time with respect to any or all of the Acquired Shares by notifying the Seller
in writing, on or prior to June 30, 1998, that it is exercising such right. The
purchase price for any Acquired Shares pursuant to this Section 1.5(a) shall be
paid in cash, and the parties shall close any transaction contemplated by this
Section 1.5(a) within fifteen (15) days after the date on which the Buyer
notifies the Seller it is exercising its right.
(b) If, on or prior to June 30, 1998, the Seller sells Acquired Shares
at a sale price per share before deducting any applicable sales commissions (the
"Gross Sale Price") greater than the Call/Put Price computed as of the date of
sale divided by .93 (the "Maximum Price"), the Seller shall refund consideration
to the Buyer in an amount equal to the Gross Sale Price minus the Maximum Price
and then multiplied by the number of Acquired Shares sold for such Gross Sale
Price.
(c) For a period of thirty (30) days commencing on July 1, 1998, the
Seller shall have the right to require the Buyer to buy any or all of the
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<PAGE>
Acquired Shares then owned by the Seller for cash in the amount equal to the
number of Acquired Shares purchased multiplied by the Call/Put Price. To
exercise such right, the Seller shall notify the Buyer in writing, on or prior
to July 30, 1998, that it is exercising such right. The parties shall close any
transaction contemplated by this Section 1.5(c) within fifteen (15) days after
the date on which the Seller notifies the Buyer it is exercising its right.
Notwithstanding the foregoing, the Buyer shall not be required to buy any
Acquired Shares which, prior to June 30, 1998, the Seller could have sold, but
decided not to sell, in a registered public offering or private placement at a
sale price per share (after deducting any sales commissions) equal to or greater
than the Call/Put Price as of the date of such public offering or private
placement.
(d) Until June 30, 1998 and to the extent that the Seller then owns
Acquired Shares, if the Buyer conducts or participates in a public offering or
private placement the Buyer shall purchase, upon the same terms and conditions
as set forth in Section 1.5(a), the whole number of Acquired Shares which the
Buyer can purchase from the Seller with (i) twenty-five percent (25%) of the
aggregate net proceeds received by the Buyer, its Affiliates and the Seller from
such public offering or private placement, minus (ii) the amount of net
proceeds, if any, received by the Seller from participating in such public
offering or private placement.
(e) To the extent that the Buyer has not exercised its right to
purchase any Acquired Shares by June 30, 1998 and the Seller has not exercised
its right to require the Buyer to purchase any Acquired Shares by July 30, 1998,
the Buyer shall not have the right to, and shall not be obligated to, purchase
any such Acquired Shares. The Seller shall be entitled to any and all proceeds
in connection with any sale of the Acquired Shares after June 30, 1998.
Following such date, the Buyer will remain subject to its obligations to
register the Acquired Shares pursuant to the terms of the Registration Rights
Agreement between the Buyer and the Seller entered into pursuant to this
Agreement.
2. Closing; Termination of Agreement.
2.1 Closing. The closing of the transactions contemplated by this Agreement
(the "Closing") shall take place at the offices of Nixon, Hargrave, Devans &
Doyle LLP, Clinton Square, Rochester, New York 14604 (or at such other place as
the parties may jointly designate in writing) on May 7, 1997 (the "Closing
Date"), or on such other date as the parties may jointly designate in writing
(and for all purposes shall be effective as of the close of business on such
date).
2.2 Termination of Agreement. This Agreement may be terminated prior to the
Closing as follows:
(a) at the election of either the Buyer or the Seller if the Closing
shall not have occurred by June 30, 1997;
(b) by mutual written consent of the Buyer and the Seller;
4
<PAGE>
(c) by either the Buyer or the Seller if there shall be in effect a
final nonappealable Order of a Governmental Body of competent jurisdiction
restraining, enjoining or otherwise prohibiting the consummation of the
transactions contemplated hereby; it being agreed that the parties hereto shall
promptly appeal, and shall diligently pursue, any adverse determination which is
not nonappealable;
(d) by the Buyer if any of the conditions set forth in Section 6.1
hereof becomes incapable of fulfillment and is not waived by the Buyer; or
(e) by the Seller if any of the conditions set forth in Section 6.2
hereof becomes incapable of fulfillment and is not waived by the Seller.
2.3 Survival After Termination. If this Agreement is terminated in
accordance with Section 2.2 and the transactions contemplated hereby are not
consummated, this Agreement shall become null and void and of no further force
and effect, except (i) for this Section 2.3, (ii) for the provisions of Section
5.1(c) and (iii) that the termination of this Agreement for any reason shall not
relieve any party hereto from any liability the benefit of which at the time of
termination had already accrued to any other party hereto or which thereafter
may accrue in respect of any act or omission of such party prior to such
termination.
3. Representations and Warranties of the Seller. The Seller represents and
warrants to the Buyer that:
3.1 Organization and Good Standing. The Company is a private limited
company duly incorporated under the laws of England and Wales and has the
requisite corporate power and authority to own, lease and operate its properties
and to carry on its business as now conducted, it being acknowledged that the
Company's present operational facilities are being leased by its subsidiary
Systemcredit Trading Limited (the "Subsidiary"). The Company is not and is not
required to be qualified or authorized to do business as a foreign corporation
under the laws of any other jurisdiction. The Subsidiary is a private limited
company duly incorporated under the laws of England and Wales, having registered
number 1287937 and its registered office at Cranleigh Gardens, Southall
Middlesex England, and has the requisite corporate power and authority to own,
lease and operate its properties but has been dormant since December 31, 1993.
The Seller is a corporation duly organized, validly existing and in good
standing under the laws of the Commonwealth of Pennsylvania and has the
requisite power and authority to own, lease and operate its properties and to
carry on its business as now conducted.
3.2 Authorization of Agreement. The Seller has all requisite power and
authority to execute and deliver this Agreement and each other Contract,
document or certificate contemplated by this Agreement to be executed by the
Seller in connection with the consummation of the transactions contemplated by
this Agreement (collectively, the "Seller Documents") and to perform duly its
obligations hereunder and thereunder. The execution, delivery and performance by
the Seller of this Agreement and the Seller Documents to which it is a party
have been duly authorized by all necessary corporate, including stockholder,
5
<PAGE>
action on the part of the Seller. This Agreement has been, and each of the
Seller Documents will be at or prior to the Closing, duly and validly executed
and delivered by the Seller and this Agreement constitutes, and each of the
Seller Documents when so executed and delivered, and assuming due authorization,
execution and delivery by DSI, will constitute, legal, valid and binding
obligations of the Seller, enforceable against the Seller in accordance with
their respective terms, subject to applicable bankruptcy, insolvency,
reorganization, fraudulent transfer, moratorium and similar laws affecting
creditors' rights and remedies generally and subject, as to enforceability, to
general principles of equity.
3.3 Subsidiaries. Except as set forth on Schedule 3.3, the Company does not
(i) own beneficially or of record any shares of capital stock or any other
security or other proprietary or equity interest of or in any other Person or
(ii) have any other investment in any other Person.
3.4 Corporate Records.
(a) The copies of the Certificate of Incorporation and Memorandum and
Articles of Association of the Company previously delivered to the Buyer are
complete, correct and up to date.
(b) The minute books of the Company previously delivered or made
available to the Buyer contain complete and accurate records of all meetings and
accurately reflect all other corporate action of the Stockholders and Board of
Directors (including committees thereof) of the Company. All stock transfer
taxes levied or payable with respect to all transfers of shares of capital stock
of the Company prior to the date hereof have been paid and appropriate transfer
tax stamps affixed.
3.5 Consents of Third Parties. The execution and delivery by the Seller of
this Agreement and the Seller Documents, the consummation of the transactions
contemplated hereby or thereby, and compliance by the Seller with the provisions
hereof and thereof will not (i) conflict with, or result in the breach of, any
provision of the articles of incorporation or by-laws of the Seller or the
Memorandum and Articles of Association of the Company; (ii) except as set forth
on Schedule 3.5 conflict with, violate, result in the breach or termination of,
or constitute a default or give rise to any right of termination or acceleration
or right to increase the obligations or otherwise modify the terms thereof under
any Contract, Permit or Order to which the Seller or the Company is a party or
by which either of them or any of their respective properties or assets is
bound; (iii) constitute a violation of any Law applicable to the Seller or the
Company; or (iv) result in the creation of any Lien upon the properties or
assets of the Seller or the Company. Except as set forth on Schedule 3.5, no
consent, waiver, approval, Order, Permit or authorization of, or declaration or
filing with, or notification to, any Person or Governmental Body is required on
the part of the Seller or the Company in connection with the execution and
delivery of this Agreement or the Seller Documents, or the compliance by the
Seller or the Company, as the case may be, with any of the provisions hereof or
thereof.
6
<PAGE>
3.6 Capitalization. The authorized share capital of the Company consists of
1,000 ordinary shares of (pound)1 per share, and the Company Stock constitutes
all of the issued or outstanding shares or stock of the Company. All outstanding
shares of the Company Stock are duly authorized, validly issued, fully paid and
nonassessable. Except for the Company Stock, there are no issued or outstanding
proprietary or equity interests in the Company. There are no outstanding
options, warrants or other rights of any kind to acquire any additional shares
or stock of the Company or other proprietary or equity interests in the Company
or securities convertible into or exchangeable for, or which otherwise confer on
the holder thereof any right to directly or indirectly acquire, any shares or
stock of the Company or other proprietary or equity interests in the Company,
nor is the Company committed to issue any such option, warrant, right or
security.
3.7 Ownership of Shares. The Seller is the registered holder and beneficial
owner of the Company Stock free and clear of any and all Liens, except for Liens
set forth in Schedule 3.7 which shall be satisfied or otherwise released on or
before the Closing Date. The Company is the registered holder and beneficial
owner of all of the issued and outstanding shares or stock of the Subsidiary,
free and clear of any and all Liens, except as set forth in Schedule 3.7. The
Seller sells the Company Stock with full title guarantee.
3.8 Financial Statements. The Seller has delivered to the Buyer copies of
(i) the audited balance sheets of the Company as at October 31, 1995 and 1996
and the related audited statements of income and retained earnings, and cash
flows of the Company for the years then ended and the unaudited balance sheet of
the Company as at April 30, 1997 and the related unaudited statements of income
and retained earnings, and cash flows of the Company for the period then ended
(such audited and unaudited financial statements of the Company, including the
related notes and schedules thereto, are referred to herein as the "Financial
Statements"). Each of the Financial Statements: (i) fairly represents the
financial position and of the state of affairs of the Company as at their date
and have not been affected by any unusual, extraordinary, exceptional or
non-recurring event; (ii) complies with all relevant statutory requirements;
(iii) were prepared in accordance with all relevant financial reporting
standards and/or Statements of Standard Accounting Practice or, where there are
none, in accordance with UK generally accepted accounting principles, and (iv)
were prepared on a consistent basis and in accordance with the same accounting
policies as have been used for the corresponding accounts for the last three (3)
years, except that the audited balance sheet and the statements of income and
retained earnings and cash flows for the year ended October 31, 1996 will be
adjusted by (pound)350,000 to reflect a decrease in royalty expense and
inter-company debt.
For the purposes hereof, the audited balance sheet of the Company as at
October 31, 1996 is referred to as the "Balance Sheet" and October 31, 1996 is
referred to as the "Balance Sheet Date."
3.9 No Undisclosed Liabilities. The audited accounts of the Company for the
period ending on the Balance Sheet Date disclose or contain proper provisions
and/or reserves for all material liabilities (actual, contingent or otherwise
7
<PAGE>
including, without limitation, deferred taxation) of the Company as at the
Balance Sheet Date, and since the Balance Sheet Date the Company has not
incurred or entered into any material debt, obligation or liability of any kind
other than those incurred in the ordinary course of business consistent with
past practice or otherwise expressly disclosed herein or in a schedule hereto.
The Seller and the Company know of no facts (other than facts of a general
economic or political nature or facts generally known within the industry) which
have caused or in the future are reasonably likely to cause a Material Adverse
Change to the Company which have not been set forth in the Financial Statements
or expressly disclosed herein or in a schedule hereto. Where not otherwise
stated in the audited accounts of the Company, the Seller has disclosed in
Schedule 3.9 full details of all deferred taxation liability. There are no
conditions or circumstances existing as of the Closing Date which could give
rise to liabilities which are not reflected as liabilities in the Financial
Statements.
3.10 Absence of Certain Developments. Except as set forth on Schedule 3.10
or as expressly contemplated by this Agreement, since the Balance Sheet Date:
(i) there has not been any Material Adverse Change to the Company nor,
to the knowledge of the Seller or the Company has any event occurred which
is reasonably likely to result in any Material Adverse Change to the
Company;
(ii) there has not been any material damage, destruction or loss,
whether or not covered by insurance, with respect to the property and
assets of the Company;
(iii) there has not been any declaration, setting aside or payment of
any dividend or other distribution in respect of any shares of capital
stock of the Company or any repurchase, redemption or other acquisition by
the Company of any outstanding shares of capital stock, or other securities
of, or other proprietary or equity interest in, the Company;
(iv) there has not been any transfer, issue, sale or other disposition
by the Seller or the Company of any shares of capital stock, proprietary or
equity interests or other securities of the Company or any grant of
options, warrants, rights or other securities to purchase or otherwise
acquire shares of such capital stock, proprietary or equity interests or
such other securities;
(v) the Company has not awarded or paid any bonuses to employees of
the Company except in the ordinary course of business consistent with past
practice or to the extent accrued on the Balance Sheet, or entered into any
employment, deferred compensation, severance or similar agreement (nor
amended any such agreement) or agreed to increase the compensation payable
or to become payable by it to the Company's directors, officers, employees,
agents or representatives or agreed to increase the coverage or benefits
available under any severance pay, termination pay, vacation pay, company
8
<PAGE>
awards, salary continuation for disability, sick leave, deferred
compensation, bonus or other incentive compensation, insurance, pension or
other employee benefit plan, payment or arrangement made to, for or with
such directors, officers, employees, agents or representatives;
(vi) there has not been any change by the Company in its accounting
principles, methods or policies;
(vii) the Company has not entered into any transaction or Contract or
conducted its business other than in the ordinary course of its business
consistent with past practice;
(viii) other than in the ordinary course of business consistent with
past practice, the Company has not failed to promptly pay and discharge
current liabilities of the Company except where disputed in good faith by
appropriate proceedings;
(ix) the Company has not made any loans, advances or capital
contributions to, or investments in, any Person or paid any fees or
expenses to the Seller or any Affiliate of the Seller (other than the
Company);
(x) the Company has not mortgaged, pledged or subjected to any Lien
any of its assets, or acquired any assets or sold, assigned, transferred,
conveyed, leased or otherwise disposed of any assets of the Company except
for assets of the Company acquired or sold, assigned, transferred,
conveyed, leased or otherwise disposed of in the ordinary course of
business consistent with past practice;
(xi) the Company has not discharged or satisfied any Lien, or paid any
obligation or liability (fixed or contingent) of the Company, except in the
ordinary course of business consistent with past practice and which, in the
aggregate, would not be material to the Company taken as a whole;
(xii) the Company has not cancelled or compromised any debt or claim
of the Company or amended, cancelled, terminated, relinquished, waived or
released any Contract or right of the Company except in the ordinary course
of business consistent with past practice and which, in the aggregate,
would not be material to the Company taken as a whole;
(xiii) neither the Seller nor the Company has transferred or granted
any rights under any concessions, leases, licenses or agreements of the
Company or Intangible Property used by the Company in its business;
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<PAGE>
(xiv) the Company has not made or committed to make any capital
expenditures or capital additions or betterments in excess of $5,000
individually or $25,000 in the aggregate;
(xv) the Company has not instituted or settled any material Legal
Proceeding to which the Company is a party; and
(xvi) the Company has agreed to do anything set forth in this
Section 3.10 and the Seller has not agreed to cause the Company to do
anything set forth in this Section 3.10.
3.11 Taxes.
(a) Except as provided on Schedule 3.11, the Company has timely filed
with the appropriate Governmental Bodies all Tax Returns required to be filed by
or with respect to the Company, its operations and assets, and all such Tax
Returns are true, complete and correct and are not being disputed by any
Governmental Body.
(b) Except as provided on Schedule 3.11, the Company has timely paid
(and until the Closing Date will timely pay) all Taxes that are due and payable
on or before the Closing Date with respect to the Company, its operations and
assets, except for Taxes that are being contested in good faith by appropriate
proceedings disclosed on Schedule 3.11 and as to which adequate reserves have
been or will be, as applicable, reflected on the Balance Sheet, the Preliminary
Balance Sheet or the Final Balance Sheet.
(c) Except as provided on Schedule 3.11, the Company has complied (and
through and including the Closing Date will comply) with all applicable Laws
relating to the payment and withholding of Taxes, and has timely deducted from
employee wages and paid over (and through and including the Closing Date will
timely deduct and pay over) to the Inland Revenue of England or other proper
Governmental Bodies all amounts required to be so deducted and paid over for all
periods under all applicable Laws.
(d) Except as provided on Schedule 3.11, neither the Company nor the
Seller has requested any extension of time within which to file any Tax Return
covering any Tax for which the Company would be liable, which Tax Return has not
since been filed.
(e) The income Tax Returns of the Company have been examined by the
appropriate Governmental Bodies, or the period covered by such Tax Returns has
been closed by an applicable statute of limitations, for all periods through
October 31, 1993. All deficiencies asserted as a result of such examinations or
otherwise have been paid, fully settled or adequately provided for in the
Balance Sheet, and no issue has been raised by a Governmental Body in any such
examination which, by application of the same or similar principles, could
reasonably be expected to result in a proposed deficiency for any subsequent
taxable period.
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(f) Except as provided on Schedule 3.11, the Company has not executed
or filed (and prior to the close of business on the Closing Date will not
execute or file) with any Governmental Body any agreement or other document
extending or having the effect of extending the period for assessment or
collection of any Taxes for which the Company would be liable.
(g) Except as described on Schedule 3.11, no audit, examination or
other administrative proceeding or court proceeding is presently pending or been
conducted since January 1, 1994 or, to the knowledge of the Seller or the
Company, threatened with regard to any Taxes for which the Company would be
liable.
(h) Except as described on Schedule 3.11, the Company (i) has not
agreed to and is not required to make any adjustment by reason of a change in
accounting method initiated by the Company, (ii) has no knowledge that a
Governmental Body has proposed any such adjustment or change in accounting
method and (iii) has no application pending with any Governmental Body
requesting permission for any change in accounting methods that relates to the
business and operations of the Company.
(i) The Seller is not a "foreign person" within the meaning of Section
1445 of the Code.
3.12 Real Property.
(a) Neither the Company nor the Subsidiary owns any freehold real
property. Schedule 3.12 contains a correct and complete schedule of the
documents under which the Company or the Subsidiary uses or occupies or has the
right to use or occupy, now or in the future, any real property (the "Real
Property Leases"). Neither the Company nor the Subsidiary is a party to any
lease, sublease, license or other agreement for the use or occupancy of any real
property other than the Real Property Leases. There exists no reciprocal
easement or operating agreements relating to the Real Property Leases between
the Company or the Subsidiary and any third party and, to the knowledge of the
Seller and the Company, between the lessors under the Real Property Leases and
any third party. The Subsidiary is the sole lessee under the Real Property
Leases and the Subsidiary has not assigned, sublet, mortgaged or otherwise
encumbered in any respect whatsoever its respective leasehold estate under the
Real Property Leases. Neither the Company nor the Subsidiary owns or holds, or
is obligated under or a party to, any option, right of first refusal or other
contractual right to purchase, acquire, sell, assign or dispose of any real
estate or any portion thereof or interest therein.
(b) Each of the Real Property Leases is a valid and binding obligation
enforceable by and against the Subsidiary in accordance with its terms, and
there is no default under any of the Real Property Leases by the Company or the
Subsidiary or, to the knowledge of the Seller and the Company, by any other
party thereto and, to the knowledge of the Seller and the Company, no event has
occurred that with the lapse of time or the giving of notice or both would
constitute a default thereunder. No previous or current party to the Real
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Property Leases has given written notice of or made a Claim against the Company
or the Subsidiary with respect to any breach or default thereunder which remains
uncured or otherwise in existence as of the date hereof. All rent and other sums
and charges payable by the Subsidiary under or in respect of the Real Property
Leases have been paid. Each of the Real Property Leases covers the entire estate
it purports to cover and, upon the consummation of the transactions contemplated
by this Agreement, will continue to entitle the Company and/or the Subsidiary to
the use, occupancy and possession of the real property specified in the Real
Property Leases (the "Leased Property") and for the purposes such property is
now being or is contemplated to be used by the Company or the Subsidiary.
Complete and correct copies of the Real Property Leases, together with all
amendments, modifications, supplements or side letters affecting the obligations
of any party thereunder, have been delivered to the Buyer. None of the rights of
the Company or the Subsidiary under any of the Real Property Leases will be
subject to termination or modification as a result of the transactions
contemplated by this Agreement. The Leased Property complies in all material
respects with all applicable Laws and no notice of violation of any such Law has
been received by any of the Seller, the Company or the Subsidiary or, to the
knowledge of the Seller, the Company or the Subsidiary, no such notice has been
issued by any Governmental Body with respect to such property. To the knowledge
of the Seller, the Company and the Subsidiary, no part of the Leased Property is
subject to any conditional limitation imposed by virtue of any permission,
notice or order under the Town & Country Planning Act 1990 and preceding
Planning and Town & Country Planning Acts (collectively, the "Planning Acts")
that would restrict or prevent the present use and operation of such property,
that no development has been undertaken on or at any part of the Leased Property
otherwise than in accordance with the provisions of the Planning Acts, the
current use of the Leased Property is lawful for the purposes of the Planning
Acts and there is no proposal or dispute that could negatively impact on the use
and operation of a Leased Property. Except as set forth on Schedule 3.12, no
labor has been performed or material furnished for any portion of the Leased
Property for which any Lien having a value in excess of $5,000 in the aggregate
can be claimed.
(c) No portion of the Leased Property is dependent for its access,
operation or utility on any land, building or other improvement not part of the
Leased Property. The Leased Property has direct, unobstructed access, both
pedestrian and vehicular, to public rights of way. All utility systems required
in connection with use, occupancy and operation of the Leased Property are
supplied directly to the Leased Property by facilities of public utilities, are
sufficient for their present purposes, are fully operational and in working
order, and are benefitted by customary utility easements providing for the
continued use and maintenance of such systems.
3.13 Tangible Personal Property.
(a) The Company owns or leases all tangible personal property necessary
for or used in the conduct of its business as now conducted. The Subsidiary does
not own or lease any tangible personal property except to the extent that
fixtures covered by the Real Property Leases may constitute tangible personal
property.
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(b) Schedule 3.13 sets forth all leases of personal property involving
annual payments in excess of $5,000 relating to personal property used in the
business of the Company or to which the Company is a party or by which the
Company or any of its properties or assets is bound ("Personal Property
Leases"), as well as a brief description of each such Personal Property Lease
(including the date and substance of any amendments or modifications thereto),
the parties thereto, the amount of annual payments in respect thereof and the
termination date and the conditions of renewal thereof. Complete and correct
copies of the Personal Property Leases, together with all amendments,
modifications, supplements or side letters affecting the obligations of any
party thereunder, have been delivered or otherwise made available to the Buyer.
(c) Each of the Personal Property Leases is valid and enforceable
against the Company and the other party or parties thereto in accordance with
its terms, and there is no default under any Personal Property Lease either by
the Company or, to the knowledge of the Seller and the Company, by any other
party thereto, and to the knowledge of the Seller and the Company, no event has
occurred that with the lapse of time or the giving of notice or both would
constitute a default thereunder. To the knowledge of the Seller and the Company,
no previous or current party to any such Personal Property Lease has given
notice of or made a claim with respect to any breach or default thereunder. With
respect to those Personal Property Leases that were assigned or subleased to the
Company by a third party, all necessary consents to such assignments or
subleases have been obtained. Except as set forth on Schedule 3.13, none of the
rights of the Company under any of the Personal Property Leases will be subject
to termination or modification as a result of the transactions contemplated by
this Agreement.
(d) The Company has good title to all of the items of tangible personal
property reflected in the Balance Sheet (except as sold or disposed of
subsequent to the date thereof in the ordinary course of business consistent
with past practice), free and clear of any and all Liens. All such items of
tangible personal property which, individually or in the aggregate, are material
to the operation of the business of the Company are in good condition and in a
state of good maintenance and repair (ordinary wear and tear excepted) and are
suitable for the purposes used for the operation of the business of the Company.
All of the items of tangible personal property used by the Company under the
Personal Property Leases are in good condition and in a state of good
maintenance and repair (ordinary wear and tear excepted) and are suitable for
the purposes used.
3.14 Intangible Property.
(a) Schedule 3.14 sets forth a complete and correct list of each
material patent, trademark, trade name, service mark, brand mark, brand name,
invention, industrial design, computer software developed by or specifically for
the Company and copyright owned or, if material, used in the business of the
Company as well as all registrations thereof and pending applications therefor,
and each material license or other material Contract relating thereto
(collectively, the "Intangible Property") and indicates, with respect to each
item of Intangible Property, the owner thereof and, if applicable, the name of
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the licensor and licensee thereof and the basic material terms of such license
or other Contract relating thereto. Except as set forth on Schedule 3.14, each
of the foregoing is owned by the party shown on such Schedule as owning the same
free and clear of any and all Liens and is in good standing, no other Person or
entity has any claim of ownership with respect thereto and, where applicable,
all registrations or other required filings have been timely made. To the
knowledge of the Seller and the Company, the use of the Intangible Property by
the Company does not conflict with, infringe upon, violate or interfere with or
constitute an appropriation of any right, title, interest or goodwill,
including, without limitation, any intellectual property right, patent,
trademark, trade name, service mark, brand mark, brand name, invention,
industrial design, computer software, copyright or any pending application
therefor of any other Person. Except as set forth on Schedule 3.14, there have
been no Legal Proceedings initiated to which the Company is a party or of which
the Seller or the Company is aware, and neither the Seller nor the Company has
received any notice or otherwise knows that any of the Intangible Property is
invalid or conflicts with the asserted rights of other Persons or have failed to
be used or enforced in a manner that would result in the abandonment,
cancellation or unenforceability of the Intangible Property.
(b) The Company owns or licenses all Intangible Property, trade
secrets, know-how, formulae and other proprietary and trade rights necessary for
the conduct of its business as now conducted or relating to products or
processes under development. Except as set forth on Schedule 3.14, the Company
has not forfeited or otherwise relinquished any such Intangible Property, trade
secrets, know-how, formulae or other proprietary right used in and necessary for
the conduct of its business as now conducted or relating to products or
processes under development.
(c) Each of the licenses or other Contracts relating to the Intangible
Property ("Intangible Property Licenses") is valid and enforceable by or against
the Company in accordance with its terms, and there is no default under any
Intangible Property License by the Company or, to the knowledge of the Seller
and the Company, by any other party thereto, and no event has occurred that with
the lapse of time or the giving of notice or both would constitute a default
thereunder. Complete and correct copies of the Intangible Property Licenses,
together with all amendments, modifications, supplements or side letters
affecting the obligations of any party thereunder have been delivered or
otherwise made available to the Buyer. Except as set forth on Schedule 3.14, no
previous or current party to any such Intangible Property License has given
notice of or initiated a Legal Proceeding with respect to any breach or default
thereunder. With respect to those Intangible Property Licenses that were
assigned or sublicensed to the Company by a third party, all necessary consents
to such assignments or sublicenses have been obtained. Except as set forth on
Schedule 3.14, none of the rights of the Company under any of the Intangible
Property Licenses will be subject to termination or modification as a result of
the transactions contemplated by this Agreement.
(d) To the Seller's and Company's knowledge, except as set forth in
Schedule 3.14, no third party is infringing upon any rights of the Company to
the Intangible Property. Neither the Seller nor the Company is aware that any of
Company's employees is obligated under any Contract or covenants or commitments
of any nature, or subject to any judgment, decree or order of any court or
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administrative agency, that would interfere with the use of his best efforts to
promote the interests of the Company or that would conflict with the Company's
business as presently conducted. Neither the execution nor delivery of this
Agreement, nor the carrying on of the Company's business by the employees of the
Company, nor the conduct of the Company's business as presently conducted, will,
to the Seller's or the Company's knowledge, conflict with or result in a breach
of the terms, conditions or provisions of, or constitute a default under any
Contract, covenant or commitment under which any of such employees is now
obligated. Neither the Seller nor the Company believes that it is or will be
necessary to utilize any inventions of any of its employees (or people it
currently intends to hire) made prior to their employment by the Company.
3.15 Material Contracts.
(a) Except as set forth on Schedules 3.12, 3.13 and 3.14 or as set
forth on Schedule 3.15, neither the Company nor any of its properties or assets
is a party to, bound by or subject to any (i) Contract not made in the ordinary
course of business, the performance of which will extend over a period greater
than thirty (30) days; (ii) Contract, whether or not made in the ordinary course
of business, which as of or after the Closing Date will obligate the Company to
sell or deliver any product or service, taken as a whole, at a price which does
not cover the aggregate cost (including labor, materials and production
overhead) thereof plus the customary profit margin associated with such product
or service, which is not terminable by the Company within thirty (30) days after
written notice thereof and without liability to the Company; (iii) employment,
consulting, non-competition, severance, golden parachute or indemnification
Contract (including, without limitation, in each case any Contract to which the
Company is a party involving employees of the Company), which is not terminable
by the Company, as the case may be, within thirty (30) days after written notice
thereof and without liability to the Company; (iv) advertising, public
relations, franchise, distributorship, sales representative or sales agency
Contract, which is not terminable by the Company, as the case may be, within
thirty (30) days after written notice thereof and without liability to the
Company; (v) Contract (including, without limitation, purchase orders issued by
customers or to suppliers of the Company which remain open as of the date of
this Agreement) involving the commitment or payment in excess of $10,000 for the
future purchase of services or equipment; (vi) Contract among stockholders or
granting a right of first refusal or for a partnership or a joint venture or for
the acquisition, sale or lease of any assets, partnership interests or capital
stock of the Company or any other Person or involving a sharing of profits;
(vii) mortgage, pledge, conditional sales contract, security agreement,
factoring agreement or other similar Contract with respect to any real or
tangible personal property of the Company involving an amount in excess of
$10,000; (viii) loan agreement, credit agreement, promissory note, guarantee,
subordination agreement, letter of credit or any other similar type of Contract
involving an amount in excess of $10,000; (ix) confidentiality agreement,
non-solicitation agreement, non-competition agreement or other similar Contract
restricting in any way the scope or nature of business which may be conducted by
the Company or any of its affiliates; (x) Contract with any Governmental Body
except standard purchase orders with any Governmental Body in the ordinary
course of business; (xi) Contract with respect to the discharge, storage or
removal of Hazardous Materials; (xii) retainer Contract with attorneys,
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accountants, actuaries, appraisers, investment bankers or other professional
advisers; or (xiii) commitment or agreement to enter into any of the foregoing.
Except as set forth on Schedule 3.15, the Company is not a party to or bound by
any distributorship, sales representative or sales agency Contract with any
Person in respect of products and/or services manufactured, sold or marketed by
the Company. There has been delivered or otherwise made available to the Buyer
complete and correct copies of the Contracts listed on Schedule 3.15, together
with all amendments, modifications, supplements or side letters affecting the
obligations of any party thereunder. With respect to (x) certain Contracts of
the type described in clause (v) above and (y) Contracts which are not in
writing, Schedule 3.15 contains a description of the material terms thereof
(including, without limitation, the parties thereto, the amount of consideration
thereunder and any termination provisions contained therein or pertaining
thereto).
(b) Each of the Contracts listed on Schedule 3.15 is valid and binding
obligation enforceable by and against the Company in accordance with its terms,
and there is no material or known default under any Contract listed or described
on Schedule 3.15 either by the Company or, to the knowledge of the Seller and
the Company, by any other party thereto, and no event has occurred that with the
lapse of time or the giving of notice or both would constitute a default
thereunder. No party to any Contract set forth on Schedule 3.15 has given notice
of or initiated a Legal Proceeding with respect to any breach or default
thereunder.
(c) With respect to any Contract listed or described on Schedule 3.15
that was assigned or subleased to the Company by a third party, all necessary
consents to such assignments or subleases have been obtained. Except as set
forth on Schedule 3.15, none of the rights of the Company under any of the
Contracts listed or described on Schedule 3.15 will be subject to termination or
modification as a result of the transactions contemplated by this Agreement.
3.16 Employees; Employee Benefits.
(a) Schedule 3.16(a) sets forth a complete and correct list of all
employees of the Company, together with their job descriptions and rates of pay.
(b) Other than under or in respect to the Digital Audio Group Personal
Pension Scheme and the Digital Audio Rothchild Group Personal Pension Scheme
(collectively, the "GPPs"), no obligations, liabilities or promises have been
created or made by the Company to pay any gratuity, or to provide retirement,
death, disability, sickness, accident, termination of employment, or other like
benefit, or to contribute to or participate in any scheme or any arrangement
providing any such benefits for or in respect of any past or present employee of
the Company. There is no contribution due but unpaid in respect of the GPPs
which has not been accrued for in the Financial Statements. The GPPs are group
personal pension plans and no assurance, promise or guarantee (either written or
oral) has been made or given to any member of the GPPs of any particular level
or amount of benefits (other than insured lump sum death in service benefits) to
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be provided for or in respect of him under the GPPs on retirement death or
leaving service.
3.17 Labor.
(a) The Company is not a party to any labor or collective bargaining
agreement and there are no labor or collective bargaining agreements which
pertain to employees of the Company.
(b) No employees of the Company are represented by any labor
organization. No labor organization or group of employees of the Company has
made a pending demand for recognition, and there are no representation
proceedings or petitions seeking a representation proceeding presently pending
or, to the knowledge of the Seller or the Company, threatened to be brought or
filed, with any Governmental Body. There is no organizing activity involving the
Company pending or, to the knowledge of the Seller or the Company, threatened by
any labor organization or group of employees of the Company.
(c) Neither the Seller nor the Company has any knowledge of any (i)
strikes, work stoppages, slowdowns, lockouts or arbitrations or (ii) grievances
or other labor disputes pending or, to the knowledge of the Seller or the
Company, threatened against or involving the Company. Except as set forth on
Schedule 3.17, there are no unfair labor practice charges, grievances or
complaints pending or, to the knowledge of the Seller or the Company, threatened
by or on behalf of any employee or group of employees of the Company nor are the
Seller or the Company aware of any circumstances which might give rise to such
charges, grievances or complaints.
(d) Except as set forth on Schedule 3.17, there are no complaints,
charges or claims of any kind against the Company pending or, to the knowledge
of the Seller or the Company, threatened to be brought or filed, with any
Governmental Body based on, arising out of, in connection with, or otherwise
relating to the employment or engagement by the Company of any individual as an
employee or independent contractor. Hours worked by and payments made to
employees of the Company have not been in violation of any Law dealing with such
matters. The Company is in compliance with all Laws and Orders relating to
employment, including all such Laws and Orders relating to wages, hours, pay
practices, benefits, collective bargaining, discrimination, retaliations, civil
rights, sexual and other types of unlawful harassment, safety and health, leaves
of absence, accommodation of individuals with disabilities, pay equity and the
collection and payment of PAYE and National Insurance.
(e) Except as set forth on Schedule 3.17, all employees of the Company
are employed on an at-will basis and are terminable upon giving notice without
any liability or obligation to them except as provided by Law.
3.18 Litigation. There are no Legal Proceedings pending or, to the
knowledge of the Seller or the Company, threatened (or any basis therefor known
to the Seller or the Company) that question the validity of this Agreement or
the Seller Documents or any action taken or to be taken by the Seller or the
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Company in connection with the consummation of the transactions contemplated
hereby or thereby. Schedule 3.18 sets forth a list of all Legal Proceedings
pending or, to the knowledge of the Seller or the Company, threatened against
(or any basis therefor known to the Seller or the Company) or involving the
Company or any properties or assets of the Company, at law or in equity. There
is no outstanding or, to the knowledge of the Seller or the Company, threatened
(or any basis therefor known to the Seller or the Company) Order of any
Governmental Body against, involving or naming the Company or involving any of
its properties or assets. Schedule 3.18 sets forth a list of all Legal
Proceedings pending or contemplated in which the Company is the plaintiff.
3.19 Compliance with Laws; Permits.
(a) Except as set forth on Schedule 3.19, the Company is and at all
times has been in compliance with all Laws and Orders promulgated by any
Governmental Body applicable to the Company or to the conduct of the business or
operations of Company or the use of any of its properties (including the Leased
Properties) and assets. Except as set forth on Schedule 3.19, neither the Seller
nor the Company has received, or knows of the issuance of, any notices of any
violation or alleged violation of any such Law or Order of any Governmental
Body. Except as set forth on Schedule 3.19, any products manufactured, sold,
marketed, distributed or delivered by the Company ("Products") are and at all
times have been in compliance with all Laws and Orders promulgated by any
Governmental Body applicable to the Products, there are no product recalls by
any Governmental Body pending or, to the knowledge of the Seller and the
Company, contemplated or threatened, with respect to any of the Products and, to
the knowledge of the Seller and the Company, there are no pending or threatened
investigations by any Governmental Body with respect to any of the Products.
(b) Schedule 3.19 lists all Permits of the Company issued or granted by
all Governmental Bodies, indicating, in each case, the expiration date thereof.
The Company has all Permits that are required to be obtained by the Company to
permit the operations of its business in the manner in which such operations are
currently conducted. To the knowledge of the Seller and the Company, such
Permits have been validly issued to the Company by the appropriate Governmental
Bodies in compliance, in all material respects, with all applicable Laws, and
the Company has complied with all conditions of such Permits applicable to it.
No default or violation, or event that with the lapse of time or giving of
notice or both would become a default or violation, has occurred in the due
observance of any such Permit. All such Permits are in full force and effect
without further consent or approval of any Person. Schedule 3.19 also lists all
Permits applied for or expected to be applied for by the Company.
3.20 Environmental Matters. (i) The operations of the Company have been
and, as of the Closing Date, will be in compliance with all Environmental Laws;
(ii) the Company has obtained, currently maintains and, as of the Closing Date,
will have all Environmental Permits required for its operations; all such
Environmental Permits are and, as of the Closing Date, will be, in full force
and effect and in good standing; there are no Legal Proceedings pending or, to
the knowledge of the Seller or the Company, threatened with respect to any such
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Environmental Permit; the Company is, and as of the Closing Date will be, in
material compliance with such Environmental Permits; and neither the Seller nor
the Company has received any notice from any source, or has otherwise obtained
knowledge, to the effect that there is lacking any Environmental Permit required
in connection with the current operations of the Company or the current use or
operation of the Leased Property or any real property previously leased or owned
by the Company; (iii) the Company and all of their past and current Facilities
and operations are not (x) subject to any outstanding written Order or Contract,
including Environmental Liens, with or in favor of any Regulatory Authority or
(y) to the knowledge of the Seller or the Company, subject to any investigation
respecting (A) Environmental Laws, (B) any Remedial Action or (C) any
Environmental Claim; (iv) the Company is not subject to any Legal Proceeding
alleging the violation of any Environmental Law or Environmental Permit; (v)
neither the Seller nor the Company has received (nor, to the knowledge of the
Seller or the Company, has there been issued) any written communication that
alleges that the Company is not in compliance with any Environmental Law or
Environmental Permit; (vi) the Company has not caused or permitted any Hazardous
Materials to remain or be disposed of, either on or under real property legally
or beneficially owned or operated by the Company or on any real property not
permitted to accept, store or dispose of such Hazardous Materials other than in
compliance with Environmental Laws and Permits; (vii) the Company has no
liabilities (other than those related to its disposal obligations) with respect
to Hazardous Materials; (viii) none of the operations of the Company involve the
generation, transportation, treatment, storage or disposal of hazardous waste or
controlled waste other than in compliance with Environmental Laws and Permits;
and (ix) to the knowledge of the Seller and the Company, there is not now on or
in the Leased Property, nor have there been, (A) any underground storage tanks
or surface tanks, dikes or impoundments; (B) any asbestos-containing materials
or (C) any polychlorinated biphenyls.
3.21 Investment Company Act. The Seller is not, and is not directly or
indirectly controlled by or acting on behalf of any Person that is, an
investment company within the meaning of the Investment Company Act of 1940, as
amended (an "Investment Company"), and, immediately following the consummation
of the transactions contemplated by this Agreement, the Seller will not be, and
will not be directly or indirectly controlled by or acting on behalf of any
Person that will be, an Investment Company.
3.22 Insurance. Schedule 3.22 sets forth a list of all policies of
insurance of any kind or nature covering the Company or any of its employees,
properties or assets, including, without limitation, policies of life,
disability, fire, theft, workers compensation, employee fidelity and other
casualty and liability insurance. All such policies are in full force and
effect. The Seller or the Company have delivered or otherwise made available to
the Buyer complete and correct copies of each such policy, together with all
amendments, modifications, supplements or side letters affecting the obligations
of any party thereunder.
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3.23 Receivables; Payables. Subject to the Final Balance Sheet:
(a) All accounts receivable of the Company have arisen from bona fide
transactions in the ordinary course of business consistent with past practice
and are legally binding. All accounts receivable of the Company reflected on the
Financial Statements or arising after the date thereof are good and collectible
at the aggregate recorded amounts thereof, net of any applicable reserve for
returns or doubtful accounts reflected thereon, which reserves are adequate and
were calculated in a manner consistent with past practice and in accordance with
generally accepted accounting principles consistently applied.
(b) All accounts payable of the Company reflected on the Balance Sheet,
or arising after the date thereof, are the result of bona fide transactions in
the ordinary course of business and have been paid or, in the ordinary course of
business consistent with the Company's past practices, have not yet been paid.
(c) Except for customer pre-payments in the ordinary course of business
which are or will be reflected on the Balance Sheet, the Preliminary Balance
Sheet or the Final Balance Sheet, the Company has not received any advance
payments, deposits or similar payments in respect of any goods sold or to be
sold or services performed or to be performed after the Closing Date.
3.24 Customers and Suppliers. Schedule 3.24 lists (on a dollar amount
basis) the fifteen (15) largest customers in terms of sales and the twenty (20)
largest suppliers in terms of purchases of the Company taken as a whole during
the year ended October 31, 1996 and the approximate amount of sales to each such
customer and purchases from each such supplier during such year. Except as
expressly set forth on Schedule 3.24, (i) the relationships of the Company taken
as a whole with its customers and suppliers have been entered into and are
conducted pursuant to arms' length transactions, and (ii) since January 1, 1996
no customer or supplier of the Company set forth on Schedule 3.24 or other
material customer or supplier of the Company has cancelled, otherwise
terminated, materially altered, or threatened in writing to cancel, otherwise
terminate or materially alter, its relationship with the Company or withheld or
materially delayed payment for, or shipment of, any products or threatened in
writing to do so.
3.25 Related Party Transactions. Except as set forth on Schedule 3.25,
since the Balance Sheet Date and as of the date hereof, neither the Seller nor
any of its Affiliates has entered into any transaction with or is a party to any
Contract with the Company. Except as set forth on Schedule 3.25, neither the
Seller nor any of its Affiliates owns any direct or indirect interest of any
kind in, or controls or is a director, officer, employee or partner of, or
consultant to, or lender to or borrower from or has the right to participate in
the profits of, any Person which is a competitor, supplier, customer, landlord,
tenant, creditor or debtor of the Company.
3.26 Banks; Powers of Attorney and Proxies. Schedule 3.26 sets forth a
complete and correct list of the names and locations of all banks in which the
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Company has accounts or safe deposit boxes, the account numbers of all such
accounts and the names of all Persons authorized to draw thereon or to have
access thereto. Except as set forth on Schedule 3.26, no Person holds a power of
attorney, proxy or similar instrument to act on behalf of the Company.
3.27 Special Terms; Product Warranties. Except as set forth on Schedule
3.27, the Company has not provided any customer with any special credit,
discount or other terms outside the ordinary course of business consistent with
past practice. Except in the ordinary course of business consistent with past
practices and within industry norms, no express product or service warranties or
guarantees have been given by the Company.
3.28 Entire Business. The assets, properties and rights which will be owned
or leased by the Company or the Subsidiary as of the Closing Date will
constitute all of the tangible and intangible property used by and necessary to
the Company in connection with the conduct of its businesses as now conducted.
3.29 Investment in DSI Stock.
(a) The Seller has (i) received and reviewed this Agreement, including
all schedules and exhibits hereto, the Buyer Disclosure Documents (as defined in
Section 4.5), the Certificate of Incorporation, as amended, of the Buyer, and
the By-laws of the Buyer, as amended, and (ii) had, during the course of the
transactions contemplated hereby and prior to the Seller's receipt of DSI Stock,
the opportunity to ask questions of, and has received answers from, the Buyer
concerning the transactions contemplated hereby and to obtain any additional
information which the Buyer possesses or could acquire without unreasonable
effort or expense; provided, however, that no such investigation by the Seller
shall limit or modify any representation or warranty made under this Agreement
by the Buyer or rights which the Seller may have with respect thereto.
(b) The Seller is acquiring DSI Stock for its own account, for
investment, and not with a view to any resale or "distribution" thereof within
the meaning of the Securities Act of 1933, as amended (the "Securities Act").
(c) The Seller understands that because DSI Stock to be received by it
pursuant to this Agreement has not been registered under the Securities Act, the
Seller cannot dispose of any of such DSI Stock until such DSI Stock is
subsequently registered under the Securities Act or an exemption from such
registration is available. The Seller understands that each certificate
representing such DSI Stock will bear the following legend or one substantially
similar thereto:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), OR ANY APPLICABLE
STATE OR FOREIGN SECURITIES LAWS. THESE SECURITIES
HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A
VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE
SOLD, MORTGAGED, PLEDGED, HYPOTHECATED OR OTHERWISE
TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT FOR SUCH SECURITIES UNDER THE ACT AND ANY
APPLICABLE STATE AND FOREIGN SECURITIES LAWS OR THE
AVAILABILITY OF AN EXEMPTION FROM SUCH REGISTRATION
REQUIREMENTS.
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(d) The Seller is sufficiently knowledgeable and experienced in
financial matters so as to be able to evaluate the risks and merits of its
investment in DSI Stock and is able to bear the economic risk of loss of its
entire investment in DSI Stock. The Seller is an "accredited investor" as such
term is defined in Rules 215 and 501 promulgated under the Securities Act.
(e) If the Seller desires to dispose of DSI Stock pursuant to Rule 144A
under the Securities Act, the Seller will re-offer and resell DSI Stock only to
persons whom such Stockholder reasonably believes to be "qualified institutional
buyers" as defined in Rule 144A under the Securities Act in reliance on the
exemption from the registration requirements of the Securities Act provided by
Rule 144A, and each of whom, in purchasing such DSI Stock will be deemed to have
represented and agreed that (i) it is purchasing DSI Stock for its own account
or an account with respect to which it exercises sole investment discretion and
it or such accounts are "qualified institutional buyers", (ii) such DSI Stock
will not have been registered under the Securities Act and may be resold,
pledged or otherwise transferred, only (A)(1) inside the United States to a
person who the Stockholder reasonably believes is a "qualified institutional
buyer" within the meaning of Rule 144A under the Securities Act in a transaction
meeting the requirements of Rule 144A, or in accordance with Rule 144 under the
Securities Act, or pursuant to another exemption from the registration
requirements of the Securities Act (and based upon an opinion of counsel if the
Buyer so requests), (2) to the Buyer, (3) outside the United States to a foreign
person in a transaction meeting the requirements of Rule 904 under the
Securities Act, or (4) pursuant to an effective registration statement under the
Securities Act and (B) in each case, in accordance with any applicable
securities laws of any State of the United States or any other applicable
jurisdiction, and (iii) the holder will, and each subsequent holder is required
to, notify any purchaser from it of the DSI Stock of the resale restrictions set
forth in (ii) above.
(f) The Seller has been advised that the DSI Stock to be received by it
pursuant to the transactions contemplated by this Agreement has not been
registered under the Securities Act or under the "blue sky" laws of any
jurisdiction and that the Buyer in issuing DSI Stock to such Stockholder
pursuant to this Agreement in reliance upon, among other things, the
representations and warranties of the Seller contained in this Section 3.29.
3.30 Financial Advisors. Except as set forth on Schedule 3.30, no Person
has acted directly or indirectly as a broker, finder or financial advisor for
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the Seller or the Company in connection with the negotiations relating to or the
transactions contemplated by this Agreement and no Person is entitled to any fee
or commission or like payment in respect thereof based in any way on agreements,
arrangements or understandings made by or on behalf of the Seller or the
Company. The Seller shall be solely responsible for the obligations described in
Schedule 3.30.
3.31 Disclosure. No representation or warranty made by the Seller in this
Agreement, or in the Seller Documents or other instruments or certificates
delivered pursuant to this Agreement, contains at the time made and of the
respective dates or will contain as of the Closing Date any untrue statement of
a material fact, or omits or will omit to state a material fact necessary to
make the statements or facts contained herein or therein, in light of the
circumstances under which they were made, taken as a whole, not misleading
except as the accuracy and/or completeness thereof may be affected by this
Agreement and the transactions contemplated hereby.
4. Representations and Warranties of the Buyer. The Buyer hereby represents
and warrants to the Seller that:
4.1 Organization and Good Standing. The Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the State of
New York and has full corporate power and authority to own, lease and operate
its properties and to carry on its business as now conducted. Each of the Buyer
and each Subsidiary of the Buyer is duly qualified or authorized to do business
as a foreign corporation, and is in good standing under the laws of (i) each
jurisdiction in which it owns or leases real property and (ii) each other
jurisdiction in which the conduct of its business or the ownership of its
properties requires such qualification or authorization, other than in such
jurisdictions where the failure to be so qualified or licensed would not cause a
Material Adverse Change to the Buyer.
4.2 Authorization of Agreement. The Buyer has all requisite corporate power
and authority to execute and deliver this Agreement and each other Contract,
document or certificate contemplated by this Agreement to be executed by it in
connection with the consummation of the transactions contemplated hereby and
thereby (collectively, the "Buyer Documents") and to perform fully its
obligations hereunder and thereunder. The execution, delivery and performance by
the Buyer of this Agreement and the Buyer Documents have been duly authorized by
all necessary corporate, including stockholder, action on the part of the Buyer.
This Agreement has been, and each of the Buyer Documents will be at or prior to
the Closing, duly executed and delivered by the Buyer, and this Agreement
constitutes, and each of the Buyer Documents when so executed and delivered will
constitute, legal, valid and binding obligations of the Buyer, enforceable
against it in accordance with their respective terms, subject to applicable
bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium and
similar laws affecting creditors' rights and remedies generally and subject, as
to enforceability, to general principles of equity.
4.3 Consents of Third Parties. The execution and delivery by the Buyer of
this Agreement and the Buyer Documents, the consummation of the transactions
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contemplated hereby or thereby, and compliance by the Buyer with the provisions
hereof and thereof will not (i) conflict with, or result in the breach of, any
provision of the certificate of incorporation or Bylaws of the Buyer; (ii)
conflict with, violate, result in the breach of, or constitute a default or give
rise to a right of termination or acceleration under any Contract or Order to
which the Buyer is a party or by which it or any its properties or assets is
bound, which, either individually or in the aggregate, could result in a
Material Adverse Change to the Buyer; (iii) constitute a violation of any Law
applicable to the Buyer; or (iv) result in the creation of any Lien upon the
properties or assets of the Buyer. Except as set forth on Schedule 4.3, no
consent, waiver, approval, Order, Permit or authorization of, or declaration or
filing with, or notification to, any Person or Governmental Body is required on
the part of the Buyer in connection with the execution and delivery of this
Agreement or the Buyer Documents or the compliance by the Buyer with any of the
provisions hereof or thereof.
4.4 Litigation. There are no Legal Proceedings pending or, to the knowledge
of the Buyer, threatened that question the validity of this Agreement or any of
the Buyer Documents or any action taken or to be taken by the Buyer in
connection with the consummation of the transactions contemplated hereby or
thereby.
4.5 The Buyer Disclosure Documents. The Buyer has previously delivered to
the Seller, and the Seller hereby acknowledges receipt of, complete and correct
copies of (i) the Buyer's Annual Report on Form 10-K for the year ended March
31, 1996, (ii) the Buyer's Quarterly Reports on Form 10-Q for the quarters ended
June 30, 1996, September 30, 1996, and December 31, 1996, (iii) the Buyer's
Certificate of Incorporation, as amended, (iv) the Buyer's By-laws, as amended
(collectively with the documents referred to in clauses (i), (ii), (iii) and
(iv) of this Section 4.5 and the additional documents referred to in Section
5.8(b), the "Buyer Disclosure Documents"). The Buyer Disclosure Documents are
incorporated herein by reference and made a part hereof. No representation or
warranty of the Buyer contained in this Agreement or any of the Buyer Documents
and no statement contained in any document, certificate or schedule furnished or
to be furnished on or prior to the Closing Date by or on behalf of the Buyer
contains or will contain as of the Closing Date, and none of the Buyer
Disclosure Documents as of the respective dates thereof contained, any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements contained therein, in light of the circumstances under which
they were made, taken as a whole, not misleading except as the accuracy and/or
completeness thereof may be affected by this Agreement and the transactions
contemplated hereby.
4.6 Capitalization.
(a) The authorized capital stock of the Buyer consists of 12,000,000
shares of Common Stock, par value $.05 per share, of which 4,473,820 shares are
issued and outstanding. All of the issued and outstanding shares of capital
stock of the Buyer are duly authorized, validly issued, fully paid and
nonassessable, except as provided in Section 630 of the New York Business
Corporation Law, and none of such shares is subject to any preemptive or
subscription rights.
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(b) On the Closing Date, the shares of DSI Stock delivered to the
Seller will be duly authorized, validly issued, fully paid and nonassessable,
except as provided in Section 630 of the New York Business Corporation Law, not
subject to any Lien.
4.7 Absence of Certain Developments. Since March 31, 1997, there has not
been any Material Adverse Change to the Buyer nor has any event occurred which
is reasonably likely to result in a Material Adverse Change to the Buyer.
4.8 SEC Reports. The Buyer is subject to the reporting requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and has filed on a timely basis all reports required to be filed
by it under Section 13 or 15(d) at all times since the Buyer has been subject to
such reporting requirements.
4.9 Financial Advisors. No Person has acted directly or indirectly as a
broker, finder or financial advisor for the Buyer in connection with the
negotiations relating to or the transactions contemplated by this Agreement and
no Person is entitled to any fee or commission or like payment in respect
thereof based in any way on agreements, arrangements or understandings made by
or on behalf of the Buyer.
4.10 Exempt Status. Subject to the accuracy of the Seller's representations
and warranties in Section 3.29, the shares of DSI's common stock issuable to the
Seller pursuant to this Agreement will be exempt from registration under
applicable federal and state securities laws.
4.11 Corporate Records. The copies of the Certificate of Incorporation and
Bylaws of the Buyer previously delivered to the Seller are complete, correct and
up to date.
4.12 No Undisclosed Liabilities. The financial statements of the Buyer
included in the Buyer Disclosure Documents disclose or contain proper provisions
and/or reserves for all material liabilities (actual, contingent or otherwise
including, without limitation, deferred taxation) of the Buyer as at the dates
presented, and since December 31, 1996 the Buyer has not incurred or entered
into any material debt, obligation or liability of any kind other than those
incurred in the ordinary course of business consistent with past practice or
otherwise expressly disclosed herein or in a schedule hereto. The Buyer knows of
no facts (other than facts of a general economic or political nature or facts
generally known within the industry) which have caused or in the future are
reasonably likely to cause a Material Adverse Change to the Buyer which have not
been set forth in the Buyer Disclosure Documents or expressly disclosed herein
or in a schedule hereto. There are no conditions or circumstances existing as of
the Closing Date which could give rise to liabilities which are not reflected as
liabilities in the Buyer Disclosure Documents.
4.13 Compliance with Laws; Permits.
(a) The Buyer is and at all times has been in compliance with all Laws
and Orders promulgated by any Governmental Body applicable to the Buyer or to
the conduct of the business or operations of Buyer or the use of any of its
properties and assets. The Buyer has not received, and does not know of the
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<PAGE>
issuance of, any notices of any violation or alleged violation of any such Law
or Order of any Governmental Body. Except as set forth on Schedule 4.13, any
products manufactured, sold, marketed, distributed or delivered by the Buyer
("Buyer Products") are and at all times have been in compliance with all Laws
and Orders promulgated by any Governmental Body applicable to the Buyer
Products, there are no product recalls by any Governmental Body pending or, to
the knowledge of the Buyer, contemplated or threatened, with respect to any of
the Buyer Products and, to the knowledge of the Buyer, there are no pending or
threatened investigations by any Governmental Body with respect to any of the
Buyer Products.
(b) The Buyer has all Permits that are required to be obtained by the
Buyer to permit the operations of its business in the manner in which such
operations are currently conducted. To the knowledge of the Buyer, such Permits
have been validly issued to the Buyer by the appropriate Governmental Bodies in
compliance, in all material respects, with all applicable Laws, and the Buyer
has complied with all conditions of such Permits applicable to it. No default or
violation, or event that with the lapse of time or giving of notice or both
would become a default or violation, has occurred in the due observance of any
such Permit. All such Permits are in full force and effect without further
consent or approval of any Person.
4.14 Environmental Matters. (i) The operations of the Buyer have been and,
as of the Closing Date, will be in compliance with all Environmental Laws; (ii)
the Buyer has obtained, currently maintains and, as of the Closing Date, will
have all Environmental Permits required for its operations; all such
Environmental Permits are and, as of the Closing Date, will be, in full force
and effect and in good standing; there are no Legal Proceedings pending or, to
the knowledge of the Buyer, threatened with respect to any such Environmental
Permit; the Buyer is, and as of the Closing Date will be, in material compliance
with such Environmental Permits; and the Buyer has not received any notice from
any source, or has otherwise obtained knowledge, to the effect that there is
lacking any Environmental Permit required in connection with the current
operations of the Buyer or any real property presently or previously leased or
owned by the Buyer; (iii) the Buyer and all of its past and current properties
and operations are not (x) subject to any outstanding written Order or Contract,
including Environmental Liens, with or in favor of any Governmental Body or (y)
to the knowledge of the Buyer, subject to any investigation respecting (A) U.S.
Environmental Laws, (B) any Remedial Action or (C) any Environmental Claim; (iv)
the Buyer is not subject to any Legal Proceeding alleging the violation of any
U.S. Environmental Law or Environmental Permit; (v) the Buyer has not received
(and to the knowledge of the Buyer, there has not been issued) any written
communication that alleges that the Buyer is not in compliance with any U.S.
Environmental Law or Environmental Permit; (vi) the Buyer has not caused or
permitted any Hazardous Materials to remain or be disposed of, either on or
under real property legally or beneficially owned or operated by the Buyer or on
any real property not permitted to accept, store or dispose of such Hazardous
Materials other than in compliance with U.S. Environmental Laws and Permits;
(vii) the Buyer has no liabilities (other than those related to its disposal
obligations) with respect to Hazardous Materials; (viii) none of the operations
of the Buyer involve the generation, transportation, treatment, storage or
disposal of hazardous waste or controlled waste other than in compliance with
U.S. Environmental Laws and Permits; and (ix) to the knowledge of the Seller and
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the Buyer, there is not now on or in the property owned or leased by the Buyer,
nor have there been, (A) any underground storage tanks or surface tanks, dikes
or impoundments; (B) any asbestos-containing materials or (C) any
polychlorinated biphenyls.
4.15 Investment in Company Stock.
(a) The Buyer has (i) received and reviewed this Agreement, including all
schedules and exhibits hereto, certain documents relating to the Company as have
been requested by the Seller, the Certificate of Incorporation, as amended, of
the Company, and the Memorandum and Articles of Association of the Company, and
(ii) had, during the course of the transactions contemplated hereby and prior to
the Buyer's receipt of Company Stock, the opportunity to ask questions of, and
has received answers from, the Seller and the Company concerning the
transactions contemplated hereby and to obtain any additional information which
the Seller or the Company possesses or could acquire without unreasonable effort
or expense; provided, however, that no such investigation by the Buyer shall
limit or modify any representation or warranty made under this Agreement by the
Seller or rights which the Buyer may have with respect thereto.
(b) The Buyer is acquiring the Company Stock for its own account, for
investment, and not with a view to any resale or "distribution" thereof within
the meaning of the Securities Act.
5. Further Agreements of the Parties.
5.1 Access to Information; Confidentiality.
(a) The Seller agrees that, prior to the Closing Date, the Buyer shall
be entitled, through its officers, employees and representatives (including,
without limitation, its legal advisors and accountants), to make such
investigation of the properties, businesses and operations of the Company and
such examination of the books, records and financial condition of the Company as
it reasonably requests and to make extracts and copies of such books and
records. Any such investigation and examination shall be conducted during
regular business hours and under reasonable circumstances, and the Seller shall
cooperate, and shall cause the Company to cooperate, fully therein. No
investigation by the Buyer prior to or after the date of this Agreement shall
diminish or obviate any of the representations, warranties, covenants or
agreements of the Seller or the Company contained in this Agreement or the
Seller Documents. In order that the Buyer may have full opportunity to make such
physical, business, accounting and legal review, examination or investigation as
it may reasonably request of the affairs of the Company, the Seller shall, and
shall cause the Company to, use reasonable efforts to cause the officers,
employees, consultants, agents, accountants, attorneys and other representatives
of the Seller or the Company to cooperate fully with the Buyer and its
representatives in connection with such review and examination. In addition, the
Buyer and its officers, employees and representatives with the consent of the
Seller, which shall not be unreasonably withheld, may contact and communicate
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with the customers and suppliers of the Company so long as such communications
do not interfere with the business or operations of the Company and so long as
the information obtained from such communications is only used in connection
with the transactions contemplated by this Agreement.
(b) The Buyer agrees that, prior to the Closing Date, the Seller shall
be entitled, through its officers, employees and representatives (including,
without limitation, its legal advisors and accountants), to make such
investigation of the properties, businesses and operations of the Buyer and such
examination of the books, records and financial condition of the Buyer as it
reasonably requests and to make extracts and copies of such books and records.
Any such investigation and examination shall be conducted during regular
business hours and under reasonable circumstances, and the Buyer shall
cooperate, and shall cause its officers, employees, consultants, agents,
accountants, attorneys and other representatives to cooperate, fully therein. No
investigation by the Seller shall diminish or obviate any of the
representations, warranties, covenants or agreements of the Buyer contained in
this Agreement or the Buyer Documents.
(c) Any information provided to the Buyer, the Seller or their
respective officers, employees or representatives pursuant to this Agreement
shall be held by the Buyer, the Seller and such officers, employees or
representatives in strict confidence, and used by them only for purposes of the
transactions contemplated by this Agreement. If the Closing does not occur, all
copies of such information in whatever form shall be returned to the party
providing the information, and all copies of documents prepared by the Buyer,
the Seller or their officers, employees or representatives incorporating any
such information, in whatever form, shall be destroyed.
5.2 Conduct of the Business Pending the Closing. Except as otherwise
expressly contemplated by this Agreement or with the prior written consent of
the Buyer, which shall not be unreasonably withheld, conditioned or delayed, the
Seller shall and shall cause the Company to:
(i) conduct the business of the Company only in the ordinary course
consistent with past practice;
(ii) not (A) declare, set aside, make or pay any dividend or other
distribution in respect of the capital stock of the Company (other than to
distribute as a dividend or repayment of inter-company advances cash of the
Company as of the Closing Date to the extent that the amount of such cash
does not exceed (pound)1,008,000); (B) repurchase, redeem or otherwise
acquire any outstanding shares of the capital stock or other securities of,
or other proprietary or equity interests in, the Company; (C) transfer,
issue, sell or dispose of any shares of capital stock, or other proprietary
or equity interests in, or other securities of the Company or grant
options, warrants, calls or other rights to directly or indirectly purchase
or otherwise acquire shares of capital stock or other securities of, or
other proprietary or equity interests in, the Company;
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(iii) not issue or agree to issue any more shares or stock nor effect
any recapitalization, reclassification, division, consolidation or like
change in the capitalization of the Company;
(iv) not amend the Memorandum and Articles of Association of the
Company;
(v) use its best efforts to (A) preserve its present business
operations, organization (including, without limitation, management other
than Peter Pritchett) and goodwill of the Company and (B) preserve its
present relationship with Persons having business dealings with the
Company;
(vi) maintain insurance upon all of the properties and assets of the
Company in such amounts and of such kinds comparable to that in effect on
the date of this Agreement (with insurers of substantially the same or
better financial condition);
(vii) (A) maintain the books, accounts and records of the Company in
the ordinary course of business consistent with past practices, (B)
continue to collect accounts receivable and pay accounts payable utilizing
normal procedures and without discounting or accelerating payment of such
accounts, and (C) comply in all material respects with all contractual and
other obligations applicable to the operations of the Company;
(viii) not, other than in the ordinary course of business consistent
with past practice and without materially increasing the benefits or the
costs thereof, (A) increase the compensation payable or to become payable
by the Company to any of their respective directors, officers, employees,
agents or representatives, (B) increase the coverage or benefits available
under any (or create any new) severance pay, termination pay, vacation pay,
company awards, salary continuation for disability, sick leave, deferred
compensation, bonus or other incentive compensation, insurance, pension or
other employee benefit plan, payment or arrangement made to, for, or with
any of the directors, officers, employees, agents or representatives of the
Company or (C) enter into any employment, deferred compensation, severance,
consulting, non-competition or similar agreement (or amend any such
agreement) to which the Company is a party or involving a director, officer
or employee of the Company in his or her capacity as a director, officer or
employee of the Company, except as provided under Section 5.14;
(ix) except for trade payables incurred in the ordinary course of
business consistent with past practice and for indebtedness for borrowed
money incurred in the ordinary course of business from the existing
revolving credit facility of the Company and consistent with past practice,
not create, incur, acquire or assume or become subject to, or agree to
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incur or become subject to, any debt, obligation or liability (contingent
or otherwise) on behalf of the Company;
(x) not acquire any material properties or assets and not sell,
assign, transfer, convey, lease or otherwise dispose of any of the material
properties or assets of the Company (except for fair consideration in the
ordinary course of business consistent with past practice);
(xi) not cancel or compromise any debt or claim or waive or release
any material right of the Company except in the ordinary course of business
consistent with past practice;
(xii) not enter into any commitment for capital expenditures of the
Company in excess of $5,000 for any individual commitment and $25,000 for
all commitments in the aggregate;
(xiii) not enter into, modify or terminate any labor or collective
bargaining agreement of the Company or, through negotiation or otherwise,
make any commitment or incur any liability to any labor organization with
respect to the Company;
(xiv) not introduce any material change with respect to the operations
of the Company;
(xv) not permit the Company to enter into any transaction or to make
or enter into any Contract which by reason of its size, subject matter or
otherwise is not in the ordinary course of business consistent with past
practice;
(xvi) promptly notify the Buyer of (A) any Extraordinary Loss or
Extraordinary Losses suffered by the Company, (B) any casualty losses or
damages suffered by the Company with respect to property and assets having
an individual replacement cost of more than $10,000 or aggregate
replacement cost of more than $50,000 or which could cause a Material
Adverse Change, whether or not such losses or damages are covered by
insurance, and (C)(i) any Legal Proceeding commenced or threatened by or
against the Company or (ii) any Legal Proceeding commenced or threatened
against the Seller relating to the transactions contemplated by this
Agreement;
(xvii) not permit the Company to enter into or agree to enter into any
merger or consolidation with, any corporation or other entity, and not
engage in any new area of business or invest in, make a loan, advance or
capital contribution to, or otherwise acquire the securities of any other
Person;
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(xviii) not permit the Company to make any investments in or loans to,
or pay any fees or expenses to, or enter into or modify any Contract with,
the Seller or any of its Affiliates (other than the Company);
(xix) promptly and accurately record in the appropriate records and
books of account and minute books of the Company, all material corporate
action taken on or after the date hereof by the Company or the Board of
Directors (including committees thereof) of the Company and promptly
following such recordation deliver true, correct and complete copies
thereof to the Buyer;
(xx) unless the Buyer has given written notice to the Company that it
is abandoning the transactions contemplated by this Agreement, not permit
any of their respective directors, officers, employees, Affiliates,
representatives or agents to, directly or indirectly, (A) discuss,
negotiate, undertake, authorize, recommend, propose or enter into any
transaction involving a merger, consolidation, business combination,
purchase or disposition of any amount of the assets, or capital stock or
securities of, or other proprietary or equity interest in, the Company
other than the transactions contemplated by this Agreement (an "Acquisition
Transaction"), (B) facilitate, encourage, solicit or initiate discussions,
negotiations or submissions of proposals or offers in respect of an
Acquisition Transaction, (C) furnish or cause to be furnished, to any
Person any information, other than any information furnished prior to April
25, 1997, the date of the letter of intent among the Seller and the Buyer,
concerning the business, operations, properties or assets of the Company in
connection with an Acquisition Transaction, or (D) otherwise cooperate in
any way with, or assist or participate in, facilitate or encourage, any
effort or attempt by any other Person to do or seek any of the foregoing;
and
(xxi) not agree to do anything prohibited by this Section 5.2 or
anything which would make any of the representations and warranties of the
Seller in this Agreement or the Seller Documents untrue or incorrect in any
material respect.
5.3 Records of the Company. The originals or complete and correct copies of
all of the books, records, accounts, files, logs, ledgers, journals, advertising
material, Contracts and other documents (including such of the foregoing as are
stored electronically in computer data bases) held by the Seller and used by the
Company in connection with the conduct of its business as of the Closing Date
and any stock records it is obligated to hold shall be delivered or made
available to the Buyer at the Closing in form and format reasonably satisfactory
to the Buyer.
5.4 Consents. Each of the Seller and the Buyer shall, and the Seller shall
cause the Company to, use its best efforts to obtain at the earliest practicable
date all consents and approvals required to consummate the transactions
contemplated by this Agreement, including, without limitation, the consents and
approvals referred to in Section 3.5 hereof; provided, however, that none of the
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Company, the Seller or the Buyer shall be obligated to pay any consideration
therefor to any third party from whom consent or approval is requested.
5.5 Other Actions. Each of the Seller and the Buyer shall, and the Seller
shall cause the Company to, use its best efforts to (i) take all actions
necessary or appropriate to consummate the transactions contemplated by this
Agreement, (ii) cause the fulfillment at the earliest practicable date of all of
the conditions to their respective obligations to consummate the transactions
contemplated by this Agreement set forth in Section 6, and (iii) provide the
necessary time for the accounting staff of the Company to assist the independent
auditors in connection with the preparation of the Final Balance Sheet.
5.6 Preservation of Records. The Seller and the Buyer agree that each of
them shall preserve and keep the records held by it relating to the business of
the Company for a period of seven years from the Closing Date and shall make
such records and personnel available to the other as may be reasonably required
by such party in connection with, among other things, any insurance claims by,
Legal Proceedings against or governmental investigations of the Seller, the
Company or the Buyer or any of their Affiliates or in order to enable the
Seller, the Company or the Buyer to comply with their respective obligations
under this Agreement and each other agreement, document or instrument
contemplated hereby.
5.7 Publicity. None of the Seller, the Company, the Buyer or their
respective Affiliates shall issue any press release or public announcement
concerning this Agreement or the transactions contemplated hereby without
obtaining the prior written approval of the other party hereto, which approval
will not be unreasonably withheld, conditioned or delayed, unless otherwise
required by applicable Law or by the applicable rules, regulations and policies
of the Nasdaq Stock Market.
5.8 Updating of Information.
(a) The Seller shall, or shall cause the Company to, promptly deliver
to the Buyer any information concerning events subsequent to the date of this
Agreement which is necessary to supplement the information contained in or made
a part of the representations and warranties contained herein, including the
schedules hereto, or delivered by the Seller or the Company pursuant to any of
the covenants contained herein in order that the information contained herein or
so delivered be complete and accurate in all material respects; it being
understood and agreed that the delivery of such information shall not in any
manner constitute a waiver by the Buyer of any of the conditions precedent to
the Closing hereunder.
(b) The Buyer shall promptly deliver to the Seller copies of any
reports that the Buyer files prior to the Closing Date with the Securities and
Exchange Commission (the "SEC") under the Exchange Act and, upon such delivery,
for purposes of this Agreement, such documents shall thereafter be deemed to
constitute "Buyer Disclosure Documents."
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5.9 Certain Tax Matters.
(a) For all federal, state, local and foreign Tax purposes, each of the
parties hereto agrees to treat the purchase of the Company Stock to be
consummated pursuant to the terms and conditions of this Agreement as a tax-free
reorganization described in Section 368(a) of the Code. Neither the Seller nor
the Buyer makes any representations or warranties to the other as to whether the
transaction contemplated by this Agreement will in fact qualify as such tax-free
reorganization. Neither the Seller nor the Buyer shall take any action, or
permit the Company to take any action, that could reasonably be expected to
prevent such purchase of the Company Stock from qualifying as such tax-free
reorganization.
(b) The Buyer shall prepare and file or cause to be prepared and filed
all Tax Returns for the Company that are due on or after the Closing Date.
(c) The Buyer shall promptly notify the Seller in writing upon receipt
by the Buyer or any Affiliate of the Buyer of notice of (i) any pending or
threatened federal, state, local or foreign Tax audits or assessments of the
Company, so long as any Pre-Closing Period remains open, and (ii) any pending
or threatened federal, state, local or foreign Tax audits or assessments of the
Buyer or any Affiliate of the Buyer which may affect the Tax liabilities of the
Company for any Pre-Closing Period. The Seller shall promptly notify the Buyer
in writing upon receipt by the Seller of notice hereinafter received of any
pending or threatened federal, state, local or foreign Tax audits or assessments
relating, in whole or in part, to the income, properties or operations of the
Company.
(d) After the Closing Date, the Buyer and the Seller shall provide each
other, and the Buyer shall cause the Company to provide the Seller, with such
cooperation and information relating to the Company as either party reasonably
may request in filing any Tax Return (or amended Tax Return) or refund claim,
determining any Tax liability or a right to a refund, conducting or defending
any audit or other proceeding in respect of Taxes or effectuating the terms of
this Agreement. The parties shall retain, and the Buyer shall cause the Company
to retain, all Returns, schedules, work papers and other material documents
relating thereto, until the expiration of any relevant statute of limitations
(and, to the extent notified by any party, any extensions thereof) and, unless
such Returns and other documents are offered and delivered to the Seller or the
Buyer, as applicable, until the final determination of any Tax in respect of
such years. Any information obtained under this Section 5.9 shall be kept
confidential, except as may be otherwise necessary in connection with filing any
Tax Return (or amended Tax Return) or refund claim, determining any Tax
liability or a right to a refund, conducting or defending any audit or other
proceeding in respect of Taxes or otherwise effectuating the terms of this
Agreement. Notwithstanding the foregoing, neither the Seller nor the Buyer, nor
any of their Affiliates, shall be required unreasonably to prepare any document,
or determine any information not then in its possession, in response to a
request under this Section 5.9(d); provided, however, no request shall be deemed
unreasonable if made in response to the request of a taxing authority for
information or documents not in the possession of the requested party nor
otherwise reasonably available to it.
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(e) All registration, stamp, value-added or other similar taxes that
are payable by reason of the transactions contemplated by this Agreement or
attributable to the sale, transfer or delivery of the Company Stock hereunder
shall be borne by the Seller, except that the stamp tax shall be borne equally
by the Buyer and the Seller, and all such taxes payable or attributable to the
sale, transfer or delivery of the DSI Stock hereunder shall be borne by the
Buyer. The Seller and the Buyer, as the case may be, shall file, or shall
prepare and the Buyer shall cause the Company to file, all necessary Tax Returns
and other documentation with respect to the Taxes described in this Section
5.9(e).
5.10 Preparation of Certain Financial Statements. After the Closing, at the
request of the Buyer, the Seller shall reasonably cooperate with and assist the
Buyer and its independent public accountants, in the compilation and preparation
of all financial statements and financial statement schedules of the Company
(prepared in accordance with generally accepted accounting principles) and
reports and consents of the Company's auditors prior to the Closing, as may be
necessary for the Buyer to comply in a timely manner with SEC reporting
requirements. If requested by the Buyer, the Seller shall deliver to the
independent public accountants of the Buyer and the Company all engagement
letters and management representation letters, as may be reasonably requested by
the Buyer or such accountants, which shall cover the periods set forth above and
such other periods from the year ended October 31, 1994 through the Closing Date
as the Buyer may reasonably request. In connection with the foregoing, the
Seller shall use its best efforts to cause the Company's auditors to cooperate
with and assist the Buyer and its independent public accountant in the
preparation of the audited and unaudited financial statements contemplated by
this Section 5.10; provided, however, that the Seller shall not be obligated to
pay any consideration in connection with the foregoing undertaking.
5.11 Continuity of Business Enterprise. Following the Closing and in
connection with the business of the Company, the Buyer will conduct its business
in a manner that satisfies the continuity of business enterprise requirement in
Treasury Regulation 1.368-1(d).
5.12 No Transfer. Following the Closing, the Seller agrees that no shares
of DSI Stock received by it pursuant to this Agreement will be transferred
except (a) in an offering in which the Seller is entitled to participate
pursuant to the Registration Rights Agreement described in Section 6.1(i) or (b)
the first anniversary of the Closing Date; provided, however, that the foregoing
provision shall not prohibit a pledge of such shares of DSI Stock prior to such
dates. The Buyer agrees that it will use all reasonable diligence to continue to
file with the SEC on a timely basis all reports required to be filed by it under
the Exchange Act.
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5.13 Intercompany Debt. Prior to the Closing, the Seller shall cause each
of its Affiliates to assign or otherwise transfer to the Seller any intercompany
debt owed by the Company to such Affiliates (the "Affiliate Intercompany Debt")
and shall contribute to the capital of the Company the entire principal balance,
plus all unpaid interest accrued thereon, of the Affiliate Intercompany Debt and
any other intercompany debt owed by the Company to the Seller through the
Closing Date to the extent that such amounts exceed the amount of cash, if any,
permitted to be paid to the Seller by the Company pursuant to Section
5.2(ii)(a).
5.14 Employee Severance Expenses.
The Seller shall cause the Company to terminate Peter Pritchett's
employment and other relationships with the Company on or before the Closing
Date. The Seller shall bear all costs associated with the termination of such
relationships and shall satisfy any and all other obligations the Company may
have to Mr. Pritchett, all out of assets other than those of the Company, and
shall indemnify and hold harmless the Company from and against such costs and
other obligations. Except as provided in this Section 5.14, the Company will
bear any and all employee separation costs incurred after the Closing,
satisfying any and all other obligations the Company may have to its employees,
and shall indemnify and hold harmless the Seller from and against such costs and
other obligations.
5.15 Covenants Against Competition. The Seller acknowledges that (i) the
Company has developed trade secrets and confidential information concerning the
intrusion alarm business (the "Business"); (ii) the Company conducts the
Business in the United Kingdom, Ireland, Russia and Western Europe (the
"Territory") and (iii) the agreements and covenants contained in this Section
5.15 are essential to protect the Business following the consummation of the
transactions contemplated hereby. Accordingly, the Seller covenants and agrees
as follows:
(a) Non-Compete. For a period of one (1) year following the Closing,
the Seller (or any other entity 25% or more of the beneficial ownership of which
is held by the Seller alone or together with any of its Affiliates (a
"Controlled Entity")) shall not anywhere in the Territory thereto (i) engage in
the Business for its own account, or (ii) become a partner, owner, principal,
employee, consultant or agent of any Person engaged in the Business. Nothing in
this Section 5.15(a) shall be construed to prevent Versus Technology Ltd. from
engaging in the subscriber terminal units business.
(b) Confidential Information. The Seller and any Controlled Entity
shall keep secret and retain in strictest confidence, and shall not use, in
competition with or in a manner otherwise detrimental to the interests of the
Company, for the benefit of itself or others other than the Company any
confidential information, including without limitation any confidential
"know-how," trade secrets, customer lists, details of client or consultant
contracts, pricing policies, operational methods, marketing plans or strategies,
product development techniques or plans, business acquisition plans and new
personnel acquisition plans related to the Business ("Confidential
Information"). The term "Confidential Information" does not include, and there
shall be no obligation hereunder with respect to, (i) information that becomes
generally available to the public other than as a result of a disclosure by the
Seller or a Controlled Entity or any agent or other representative thereof and
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(ii) general business methods applicable to the Business. Neither the Seller nor
any Controlled Entity shall have any obligation hereunder to keep confidential
any of the Confidential Information to the extent disclosure of any thereof is
required by law, or determined in good faith by the Seller to be necessary or
appropriate to comply with any legal or regulatory order, regulation or
requirement; provided, however, that in the event disclosure is required by law
the Seller or the Controlled Entity concerned shall provide the Buyer with
prompt notice of such requirement so that the Buyer may seek an appropriate
protective order.
(c) Non-Solicitation. For a period of two (2) years following the
Closing, the Seller and any Controlled Entity shall not, directly or indirectly,
(i) hire or solicit any employee of the Buyer or the Company or encourage any
such employee to leave such employment who is engaged in the alarm business or
the subscriber terminal units business, or (ii) solicit, induce or influence any
customer, supplier, lender, lessor or any other person or entity which has a
business relationship with the Buyer or the Company to discontinue or reduce the
extent of such relationship with the Buyer or the Company. Notwithstanding the
above, this Section 5.15(c) shall not apply to any employee of the Company who
ceases to be employed as a result of being terminated by the Company.
(d) Rights and Remedies Upon Breach. In the event the Seller or any
Controlled Entity breaches, or threatens to commit a breach of, any of the
provisions of this Section 5.15 (the "Restrictive Covenants"), the Buyer shall
have the following rights and remedies, which shall be independent of any others
and severally enforceable, and shall be in addition to, and not in lieu of, any
other rights and remedies available to the Buyer at law or in equity:
(i) the right and remedy to enjoin the breaching party from
violating or threatening to violate the Restrictive Covenants and to
have the Restrictive Covenants specifically enforced by any court of
competent jurisdiction, it being agreed that any breach or threatened
breach of the Restrictive Covenants would cause irreparable injury to
the Buyer and that money damages would not provide an adequate remedy
to the Buyer; and
(ii) the right and remedy to require the breaching party to
account for and pay over to the Buyer all compensation, profits,
monies, accruals, increments or other benefits derived or received by
such party as the result of any transactions constituting a breach of
the Restrictive Covenants.
(e) Severability of Covenants. The Seller acknowledges and agrees that
the Restrictive Covenants are reasonable in geographical scope and duration and
in all other respects. If any court determines that any of the Restrictive
Covenants, or any part thereof, are invalid or unenforceable, the remainder of
the Restrictive Covenants shall not thereby be affected and shall be given full
effect, without regard to the invalid portions.
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(f) Blue-Pencilling. If any court determines that any of the
Restrictive Covenants, or any part thereof, are unenforceable because of the
duration or geographic scope of such provision, such court shall have the power
to reduce the duration or scope of such provision, as the case may be, and, in
its reduced form, such provision shall then be enforceable.
(g) Enforceability in Jurisdictions. The parties hereto intend to and
hereby confer jurisdiction to enforce the Restrictive Covenants upon the courts
of any jurisdiction within the geographical scope of such Restrictive Covenants.
If the courts of any one or more of such jurisdictions hold the Restrictive
Covenants unenforceable by reason of the breadth of such scope or otherwise, it
is the intention of the parties hereto that such determination not bar or in any
way affect the Buyer's right to the relief provided above in the courts of any
other jurisdiction within the geographical scope of such Restrictive Covenants,
as to breaches of such Restrictive Covenants in such other respective
jurisdictions, such Restrictive Covenants as they relate to each jurisdiction
being, for this purpose, severable into diverse and independent covenants.
5.16 Reservation and Listing. The Buyer agrees to promptly apply for and
diligently pursue registration of the DSI Stock on the Nasdaq Stock Market. The
Buyer agrees to reserve for issuance shares sufficient to cover the Final Share
Amount and any additional shares issued to the Seller pursuant to Section 1.5 of
this Agreement.
5.17 Insurance. The Buyer will use reasonable efforts to maintain insurance
coverage as described in Section 7.2(a)(iii).
5.18 Certain Contracts. On or prior to the Closing Date, the Seller shall
cause the Company to terminate any contract or negotiations with Hans Einhell
AG, Isar, Germany, Transmit Security Ltd., London England and its managing
director, Peter Goddard. The Seller shall indemnify and hold harmless the Buyer
and the Company from and against any and all Losses or Expenses, as such terms
are defined in Sections 7.2(a)(i) and 7.2(a)(iv), resulting from such
termination, such contracts or such negotiations including, but not limited to,
any commissions or other amounts payable to Mr. Tony Creese, Surrey England as a
result thereof. The Buyer shall not be entitled to any indemnification under
this Section 5.18 if it enters into a transaction with one or more of Hans
Einhell AG, Transmit Security Ltd., or Peter Goddard within twelve (12) months
following the Closing Date.
5.19 Director Resignation. The Seller shall be responsible for, and shall
indemnify the Company against, any Losses and Expenses related to the board of
director resignations of Ash Sacranie, Paul King, Martin Bone and Geoff Girdler,
from the board of directors of the Company, based solely upon a claim that such
resignation, as a board director, was an unfair dismissal.
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6. Conditions to Closing.
6.1 Conditions Precedent to Obligations of the Buyer. The obligations of
the Buyer to consummate the transactions contemplated by this Agreement are
subject to the fulfillment, on or prior to the Closing Date, of each of the
following conditions (any or all of which may be waived by the Buyer in whole or
in part to the extent permitted by applicable Law):
(a) The Seller shall have executed and delivered this Agreement and
such other instruments, documents and certificates as are required to be
executed and delivered by the Seller or the Company pursuant to this Agreement;
(b) all representations and warranties of the Seller to the Buyer
contained herein shall be true and correct in all material respects at and as of
the Closing Date with the same effect as though those representations and
warranties had been made again at and as of that time;
(c) the Seller and the Company shall have performed and complied in all
material respects with all obligations and covenants required by this Agreement
to be performed or complied with them on or prior to the Closing Date;
(d) the Buyer shall have been furnished with certificates (dated the
Closing Date and in form and substance reasonably satisfactory to the Buyer)
executed by the Seller certifying as to the fulfillment of the conditions
specified in Sections 6.1(b) and 6.1(c) hereof;
(e) the Buyer shall have been furnished with an opinion of Blank Rome
Comisky & McCauley, counsel to the Seller and Clarks Solicitors, counsel to the
Company, substantially in the form of Exhibit 6.1(e) hereto;
(f) there shall not have been or occurred (i) any change, destruction
or loss, whether or not covered by insurance, which would result in the loss of
a material part of the properties or assets of Company, (ii) any Legal
Proceedings instituted or threatened against the Seller or the Company seeking
to restrain or prohibit or to obtain substantial damages with respect to the
consummation of the transactions contemplated hereby, or which might, in the
reasonable opinion of the Buyer, result in a Material Adverse Change to the
Company, (iii) any Order by a Governmental Body of competent jurisdiction
restraining, enjoining or otherwise prohibiting the consummation of the
transactions contemplated hereby, or (iv) any other event or occurrence related
to the Company which could result in a Material Adverse Change to the Company;
(g) the Seller or the Company shall have obtained all consents and
waivers, in a form reasonably satisfactory to the Buyer, described in Section
3.5 or listed on Schedule 3.5;
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(h) the Seller shall have delivered to the Buyer a Registration Rights
Agreement in the form of Exhibit 6.1(h)(i) hereto, duly executed by the Seller
and a Technology Licence in the form of Exhibit 6.1(h)(ii) hereto, duly executed
by the Seller and the Company.
(i) there shall have been delivered to the Buyer (i) resignations of
the members of the board of directors and secretary of the Company as are
reasonably requested by the Buyer, and resolutions of the Company with respect
to the election of new directors and a new secretary effective on the Closing
Date to the extent requested in writing by the Buyer on or prior to the Closing
Date, (ii) documents evidencing the transfer to such persons as the Buyer shall
have requested in writing at least three business days prior to the Closing
Date, of powers of attorney previously granted by the Company, and (iii)
revocations of such proxies and powers of attorney as the Buyer may have
requested in writing at least one business day prior to the Closing Date;
(j) the Seller shall have delivered to the Buyer such evidence,
including appropriate certificates of the Seller's authorized officers, as the
Buyer may reasonably request in order to establish the corporate or other legal
power and authority of the Seller to enter into and consummate the transactions
contemplated by this Agreement;
(k) the Seller shall have delivered to the Buyer such evidence,
including appropriate certificates of the Company's authorized officers, as the
Buyer may reasonably request in order to establish the corporate existence and
authenticity of the governing documents of the Company; and
(l) the Seller shall have delivered to the Buyer such other
instruments, documents and certificates as the Buyer may reasonably request in
connection with the consummation of the transactions contemplated by this
Agreement.
6.2 Conditions Precedent to Obligations of the Seller. The obligations of
the Seller to consummate the transactions contemplated by this Agreement are
subject to the fulfillment, prior to or on the Closing Date, of each of the
following conditions (any or all of which may be waived by the Seller in whole
or in part to the extent permitted by applicable Law):
(a) the Buyer shall have executed and delivered this Agreement and such
other instruments, documents and certificates as are required to be executed and
delivered by the Buyer pursuant to this Agreement;
(b) all representations and warranties of the Buyer contained herein
shall be true and correct in all material respects at and as of the Closing Date
with the same effect as though those representations and warranties had been
made again at and as of that date;
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(c) the Buyer shall have performed and complied in all material
respects with all obligations and covenants required by this Agreement to be
performed or complied with by the Buyer on or prior to the Closing Date;
(d) the Seller shall have been furnished with certificates (dated the
Closing Date and in form and substance reasonably satisfactory to the Seller)
executed by the Buyer certifying as to the fulfillment of the conditions
specified in Sections 6.2(b) and 6.2(c);
(e) the Company and the Stockholders shall have been furnished with an
opinion of Nixon, Hargrave, Devans & Doyle LLP, counsel for the Buyer,
substantially in the form of Exhibit 6.2(e) hereto;
(f) there shall not have been or occurred (i) any change, destruction
or loss, whether or not covered by insurance, which would result in the loss of
a material part of the properties or assets of the Buyer, (ii) any Legal
Proceedings instituted or threatened against the Buyer seeking to restrain or
prohibit or to obtain substantial damages with respect to the consummation of
the transactions contemplated hereby, or which might, in the reasonable opinion
of the Seller, result in a Material Adverse Change to the Buyer, (iii) any Order
by a Governmental Body of competent jurisdiction restraining, enjoining or
otherwise prohibiting the consummation of the transactions contemplated hereby,
or (iv) any other event or occurrence related to the Buyer which could result in
a Material Adverse Change to the Buyer;
(g) the Buyer shall have obtained all consents and waivers, in a form
reasonably satisfactory to the Seller, described in Section 4.3 or listed on
Schedule 4.3;
(h) the Buyer shall have delivered to the Seller a Registration Rights
Agreement in the form of Exhibit 6.1(h) hereto, duly executed by the Buyer;
(i) the Buyer shall have delivered to the Seller such evidence,
including appropriate certificates of the Buyer's authorized officers, as the
Seller may reasonably request in order to establish the corporate power and
authority of the Buyer to consummate the transactions contemplated by this
Agreement and compliance with the conditions of Closing set forth herein; and
(j) the Buyer shall have delivered to the Seller such other
instruments, documents and certificates as the Seller may reasonably request in
connection with the consummation of the transactions contemplated by this
Agreement.
7. Survival and Indemnification.
7.1 Survival of Representations and Warranties. All representations and
warranties, covenants and agreements of the Seller and the Buyer contained in
this Agreement or in any of the Seller Documents or Buyer Documents shall
survive the execution and delivery of this Agreement and, notwithstanding any
investigation by the Buyer or the Seller, shall continue in full force and
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effect for a period of two (2) years after the Closing Date; provided, however,
that (i) the representations and warranties of the Seller contained in Sections
3.6 and 3.7 and the first sentence of Section 3.13(d) shall continue in full
force and effect indefinitely, (ii) the representations and warranties of the
Seller contained in Sections 3.1, 3.2, 3.11 and 3.29 shall continue in full
force and effect until 60 days after any applicable statute of limitations
(taking into account any waiver or tolling thereof) with respect to any Legal
Proceeding which may arise thereunder or relate thereto shall have run, (iii)
the representations and warranties of the Seller contained in Sections 3.8 and
3.23 shall continue in full force and effect until April 30, 1998, (iv) the
representations and warranties of the Buyer contained in Section 4.6 shall
continue in full force and effect indefinitely, (v) the representations and
warranties of the Buyer contained in Sections 4.1, 4.2, 4.5 and 4.9 shall
continue in full force and effect until 60 days after any applicable statute of
limitations (taking into account any waiver or tolling thereof) with respect to
any Legal Proceeding which may arise thereunder or relate thereto shall have
run, and (vi) any covenants or agreements contained herein or made pursuant
hereto by the Buyer or the Seller which by their terms are to be performed after
the Closing Date, shall survive until fully discharged. The obligations of the
parties pursuant to Section 7.2 with respect to claims made pursuant to a
particular representation, warranty or covenant shall expire simultaneously with
such representation, warranty or covenant; provided, however, that such
obligations shall survive with respect to any pending claim until the pending
claim is settled or otherwise satisfied if written notice of such claim,
specifying in reasonable detail the factual basis therefor, is given to the
party from whom indemnification is sought prior to the expiration of the
representation, warranty or covenant upon which it is based. To the extent the
survival periods specified herein exceed an applicable statute of limitations,
the provisions of this Section 7.1 shall constitute a tolling by the Seller or
the Buyer, as applicable, of each such statute of limitations for a period of
time not to extend beyond the termination of such survival periods.
7.2 Indemnification.
(a) Subject to the limitations contained in this Section 7, the Seller
hereby agrees to indemnify and hold the Buyer, the Company and their respective
directors, officers, employees, Affiliates, agents, successors and assigns
(collectively, the "Buyer Indemnified Parties") harmless from and against:
(i) any and all losses, liabilities, obligations, damages,
deficiencies, demands, claims, actions, judgments, causes of action,
assessments, costs or expenses (including, without limitation,
reasonable attorneys' fees and other professionals' fees and
disbursements and costs of enforcing this Section 7) (collectively,
"Losses") based upon, attributable to or resulting from any inaccuracy
in or breach of any representation or warranty on the part of any of
the Seller under this Agreement or any one or more of the Seller
Documents, except Losses relating to inventory or fixed assets
adjustments;
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(ii) any and all Losses based upon, attributable to or
resulting from the breach of any covenant or other agreement of the
Seller under this Agreement or any one or more of the Seller Documents;
(iii) any and all Losses based upon, arising out of or
otherwise in respect of any injury to Persons or property occurring
prior to the Closing Date as a result of the ownership, possession or
use of any product manufactured, sold, marketed, distributed or
delivered by the Company which is shipped by the Company prior to the
Closing Date; provided, however, that, subject to compliance by the
Seller with this Section 7.2(a)(iii), the Buyer will pay over to the
Seller any insurance proceeds received in respect of any such Losses
pursuant to the Company's commercial general liability insurance policy
with St. Paul Insurance Company or any replacement or substitute policy
therefor to the extent such Losses shall have been paid by the Seller
pursuant to this Section 7.2(a)(iii) and such proceeds have not already
been applied by the Buyer Indemnified Parties to offset all or any
portion of such Losses; and provided, further, that, so long as the
Seller is obligated to indemnify the Buyer Indemnified Parties under
this Agreement, the Buyer (x) shall keep such general commercial
liability insurance policy, or an equivalent replacement or substitute
therefor (the "Policy") in effect at all times and (y) immediately
after the Closing and on a regular basis at least annually thereafter,
shall review the Policy in light of the Buyer's current and past
business experience and common industry practices, and (z) if after any
such review the Buyer shall conclude exercising reasonable commercial
judgment that the coverage of the Policy with respect to the types of
risks insured and the dollar amount of the losses or liability insured
per occurrence is inadequate, the Buyer shall use reasonable efforts to
procure, at the Buyer's or the Company's expense, such additional
insurance as the Buyer shall deem necessary to cover any such
inadequacy; and
(iv) any and all notices, actions, suits, proceedings,
demands, assessments, judgments, costs, penalties and expenses,
including reasonable attorneys' and other professionals, fees and
disbursements (collectively, "Expenses") incident to the foregoing.
(b) Subject to the limitations contained in this Section 7, the Buyer
hereby agrees to indemnify and hold the Seller and its employees, Affiliates,
agents, heirs, successors and assigns (collectively, the "Seller Indemnified
Parties") harmless from and against:
(i) any and all Losses based upon, attributable to or
resulting from any inaccuracy in or breach of any representation or
warranty on the part of the Buyer under this Agreement or any one or
more of the Buyer Documents;
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(ii) any and all Losses based upon, attributable to or
resulting from the breach of any covenant or other agreement on the
part of the Buyer under this Agreement or any one or more of the Buyer
Documents; and
(iii) any and all Expenses incident to the foregoing.
(c) Neither the Seller nor the Buyer shall have any liability under
Section 7.2(a)(i), (iii) or (iv) or Section 7.2(b)(i) or (iii) unless and until
the aggregate amount of Losses incurred by the respective indemnified parties
and related Expenses finally determined to arise thereunder exceeds in the
aggregate U.S. $300,000 (the "Basket") and, in such event, the indemnifying
party shall be required to pay to the indemnified parties the entire amount of
such Losses in excess of the Basket, subject to the following limitation. The
indemnification obligation of the Seller under Section 7.2(a)(i), (iii) or (iv)
and the indemnification obligation of the Buyer under Section 7.2(b)(i) or (iii)
shall be limited, in each case, to forty percent (40%) of the Final Purchase
Price.
(d) The Seller and the Buyer agree that any indemnification payment
made hereunder will be treated by the parties on their respective Tax Returns as
an adjustment to the aggregate consideration for the shares of capital stock of
the Company. If, notwithstanding such treatment by the parties, any such
indemnification payment is determined to be taxable to the indemnified party by
any taxing authority, the indemnifying party shall also indemnify the
indemnified party for any Taxes payable by the indemnified party by reason of
the receipt of such indemnification payment.
(e) In the event that the Buyer Indemnified Parties are entitled to
indemnification pursuant to this Section 7, the sums due hereunder to which the
Buyer Indemnified Parties are entitled shall be paid: (i) first, by the delivery
of shares of DSI Stock from the Seller to the Buyer Indemnified Parties to the
extent that the Seller continues to hold shares of DSI Stock obtained pursuant
to this Agreement, and (ii) then, by the payment of cash by the Seller to the
Buyer Indemnified Parties. For purposes of clause (i) above, shares of DSI Stock
shall be deemed to have a value equal to $17.
(f) The Seller hereby agrees that if any payment by it is made under
the terms of this Agreement or otherwise, it shall have no rights against the
Company or any director, officer, employee or agent thereof, whether by reason
of contribution, indemnification, subrogation or otherwise, in respect of any
such payments, and shall not take any action against the Company with respect
thereto. Any such rights which the Seller may, by operation of law or otherwise,
have against the Company shall, at the Closing Date, be deemed to hereby
expressly and knowingly waived.
(g) No indemnifying party hereunder shall have any liability with
respect to any Losses if and to the extent such Losses are covered by any policy
of insurance by or for the benefit of the party seeking indemnification or would
have been covered by insurance if all of the policies of insurance in force at
the Closing Date had been maintained in force thereafter.
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(h) Each party seeking indemnification hereunder shall be required to
take all reasonable steps to mitigate Losses with respect to any claim
hereunder. If any party seeking indemnification hereunder subsequently recovers
from a third party, or otherwise mitigates its Losses, the party so indemnified
shall repay to the indemnifying party any sums paid to it in connection with
such indemnification hereunder.
7.3 Determination of Losses and Expenses and Related Matters.
(a) In the event that any Legal Proceedings shall be instituted or
asserted by any Person in respect of which payment may be sought under Section
7.2 (regardless of the Basket or the Cap referred to in Section 7.2(c)), the
indemnified party shall reasonably and promptly cause written notice of the
assertion of any Legal Proceeding of which it has knowledge which is covered by
the indemnities under this Section 7 to be forwarded to the indemnifying party.
The indemnifying party shall have the right, at its sole option and expense, to
defend against, negotiate, settle or otherwise deal with any Legal Proceeding
which relates to any Losses and Expenses indemnified against hereunder and to be
represented by counsel of its choice, which must be reasonably satisfactory to
the indemnified party; provided, however, that no settlement shall be made
without the prior written consent of the indemnified party, which consent shall
not be unreasonably withheld, conditioned or delayed. If the indemnifying party
elects to defend against, negotiate, settle or otherwise deal with any Legal
Proceeding which relates to any Losses indemnified against hereunder, it shall
within thirty (30) days (or sooner, if the nature of the Legal Proceeding so
requires) notify the indemnified party of its intent to do so. If the
indemnifying party elects not to defend against, negotiate, settle or otherwise
deal with any Legal Proceeding which relates to any Losses and Expenses
indemnified against hereunder, fails to notify the indemnified party of its
election as herein provided or contests its obligation to indemnify the
indemnified party for such Losses and Expenses under this Agreement, the
indemnified party may defend against, negotiate, settle or otherwise deal with
such Legal Proceeding; provided that the indemnified party may not settle any
Legal Proceeding without the prior written consent of the indemnifying party,
which consent shall not be unreasonably withheld, conditioned or delayed.
Subject to Section 7.2(c), if the indemnified party defends any Legal
Proceeding, then the indemnifying party shall reimburse the indemnified party
for the Expenses of defending such Legal Proceeding upon submission of periodic
bills. If the indemnifying party shall assume the defense of any Legal
Proceeding, the indemnified party may participate, at its own expense, in the
defense of such Legal Proceeding; provided, however, such indemnified party
shall be entitled to participate in any such defense with separate counsel at
the expense of the indemnifying party if (i) so requested by the indemnifying
party to participate or (ii) in the reasonable opinion of counsel to the
indemnified party, a conflict exists between the indemnified party and the
indemnifying party that would make such separate representation advisable; and
provided, further, that the indemnifying party shall not be required to pay for
more than one such counsel for all indemnified parties in connection with any
Legal Proceeding. The parties hereto agree to cooperate fully with each other in
connection with the defense, negotiation or settlement of any such Legal
Proceeding.
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After any final judgment or award shall have been rendered by a court,
arbitration board or administrative agency of competent jurisdiction and the
expiration of the time in which to appeal therefrom, or a settlement shall have
been consummated, or the indemnified party and the indemnifying party shall have
arrived at a mutually binding agreement with respect to a Legal Proceeding
hereunder, the indemnified party shall forward to the indemnifying party written
notice of any sums due and owing by the indemnifying party pursuant to this
Agreement with respect to such matter and the indemnifying party shall be
required to pay all of the sums so due and owing to the indemnified party by
wire transfer of immediately available funds within ten business days after the
date of such notice.
(b) The failure of the indemnified party to give reasonably prompt
notice of any Legal Proceeding shall not release, waive or otherwise affect the
indemnifying party's obligations with respect thereto except to the extent that
the indemnifying party can demonstrate actual loss or prejudice as a result of
such failure. The indemnified parties shall not be deemed to have notice of any
Legal Proceeding by virtue of knowledge acquired on or prior to the Closing Date
by an employee of the Company.
7.4 Sole and Exclusive Remedy.
The indemnification provided under this Article 7 shall constitute the sale
and exclusive remedy of the parties hereto as a result of any and all Losses
based upon, attributable to or resulting from any inaccuracy in or breach of any
representation or warranty.
8. Miscellaneous.
8.1 Certain Definitions. In addition to terms defined elsewhere in this
Agreement, the following terms shall have the meanings set forth below:
"Affiliate" shall have the meaning specified by Rule 12(b) under the
Exchange Act.
"Contract" means any contract, agreement, indenture, note, bond, loan,
instrument, lease, conditional sale contract, mortgage, license, franchise,
insurance policy, commitment or other arrangement or agreement, whether written
or oral.
"Environmental Claim" means any accusation, allegation, notice of breach or
violation, action, claim, Lien, demand, abatement or other order or direction
(conditional or otherwise) by any Regulatory Authority or Governmental Body for
personal injury (including sickness, disease or death), tangible or intangible
property damage, damage to the environment, nuisance, pollution, contamination
or other adverse effects on the environment, or for fines, penalties or
restrictions resulting from or based upon (i) the existence, whether known or
unknown, or the continuation of the existence, of a Release (including, without
limitation, sudden or non-sudden accidental or non-accidental Releases) and/or
threat of a Release of, or exposure to, any Hazardous Material or other
substance, chemical, material, pollutant, contaminant, odor, audible noise, or
other Release in, into or onto the environment (including, without limitation,
the air, soil, surface water or groundwater) at, in, by, from or related to the
Facilities or any activities conducted thereon; (ii) the environmental aspects
45
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of the transportation, storage, treatment or disposal of Hazardous Materials in
connection with the operation of the Facilities; or (iii) the violation, or
alleged violation, of any Environmental Laws, orders or Permits of or from any
Governmental Body arising out of or relating to environmental matters connected
with the Facilities.
"Environmental Law" means any Law concerning Releases into any part of the
natural environment, or activities that might result in damage to the natural
environment, or any Law that is concerned in whole or in part with the natural
environment and with protecting or improving the quality of the natural
environment and protecting public and employee health and safety and includes,
but is not limited to, Part I and Part II of the Control Pollution Act 1974, the
Water Act 1989, the Environmental Protection Act 1990, the Water Resources Act
1991, the Water Industry Act 1991, the Environment Act 1995, the Control of
Industrial Major Accidents Hazards Regulations 1984, the Factories Act 1961, the
Health & Safety at Work etc. Act 1974, the Control of Substances Hazardous to
Health Regulations 1988, the Noise at Work Regulations 1989, the Electricity at
Work Regulations 1990, the Planning Acts and the Public Health Acts, as such
laws have been amended or supplemented, and the regulations, codes of practice,
circulars and guidance notes promulgated pursuant thereto, and any and all
analogous laws and by-laws and the regulations promulgated pursuant thereto.
"Environmental Matters" means any matter arising out of or relating to the
production, storage, keeping, transportation, disposal or Release of any
Hazardous Material or otherwise arising out of or relating to safety, health or
the environment which could give rise to liability or require the expenditure of
money to address, and shall include, without limitation, the costs of
investigating and remediating any of the foregoing matters, any fines and
penalties arising in connection therewith, and any claim in respect thereof for
damages or injunctive relief for alleged personal injury, property damage or
damage to natural resources under common law or other Environmental Law.
"Environmental Permit" means any Permit, approval, authorization, consent,
license, variance, registration, or permission required under any applicable
Environmental Laws and all supporting documents associated therewith.
"Facilities" means real property now or heretofore owned, leased or
operated by the Company, including, without limitation, the Leased Property.
"Governmental Body" means any government or governmental or regulatory body
thereof, or political subdivision thereof, whether federal, state, local or
foreign, or any agency, instrumentality or authority thereof, or any court or
arbitrator (public or private).
"Hazardous Materials" means any substance, material or waste which is
regulated by any Regulatory Authority, Governmental Body or Environmental Law,
including, without limitation, any material or substance which is defined as a
"hazardous waste," "hazardous material," "hazardous substance," "extremely
hazardous waste" or "restricted hazardous waste," "controlled waste," "subject
waste," "contaminant," "toxic waste" or "toxic substance" under any provision of
46
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any Environmental Law, including but not limited to, petroleum products,
asbestos and polychlorinated biphenyls.
"Law" means any federal, state, local or foreign statute, code, ordinance,
rule, regulation, code of practice, circular and guidance note or other
requirement.
"Legal Proceeding" means any judicial, civil, criminal, equitable,
administrative or arbitral actions, or suits, charges, complaints, demands,
investigations, proceedings (public or private) or claims.
"Lien" means any lien, pledge, mortgage, deed of trust, security interest,
claim, lease, charge, option, right of first refusal, easement, servitude,
transfer restriction under any shareholder or similar agreement, obligation
under any voting agreement, voting trust or similar agreement, encumbrance or
any other restriction or limitation whatsoever.
"Material Adverse Change" means any material adverse change in and/or
effect on the business, properties, results of operations, prospects, condition
(financial or otherwise) of the Person to which such term relates and such
Person's subsidiaries, if any, taken as a whole.
"Order" means any order, injunction, judgment, decree, ruling, writ,
assessment or arbitration award.
"Permits" means any approvals, authorizations, consents, licenses, permits,
registrations or certificates.
"Person" means any individual, corporation, partnership, firm, joint
venture, association, joint-stock company, trust, unincorporated organization,
Governmental Body or other entity.
"Pre-Closing Period" means any Tax period ending on or prior to the Closing
Date.
"Release" means any release, spill, emission, leaking, pumping, injection,
deposit, disposal, discharge, dispersal, leaching, or migration into the indoor
or outdoor environment, or into or out of any of the Facilities, including the
movement of any Hazardous Material or other substance through or in the air,
soil, surface water, groundwater, or property.
"Regulatory Authorities" means the Environment Agency, a Unitary, County,
District/Borough Authority and Council, Agencies, Authorities and Bodies with
statutory functions relating to an Environmental Law, The Crown and its
agencies, departments and authorities.
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"Remedial Action" means all actions, including, without limitation, any
capital expenditures, required or voluntarily undertaken to (i) clean up,
remove, treat, or in any other way address any Hazardous Material or other
substance in the indoor or outdoor environment; (ii) prevent the Release or
threat of Release, or minimize the further Release of any Hazardous Material or
other substance so it does not migrate or endanger or threaten to endanger
public health or welfare of the indoor or outdoor environment; (iii) perform
pre-remedial studies and investigations or post-remedial monitoring and care; or
(iv) bring any Facility into compliance with all Environmental Laws and
Environmental Permits.
"Software" means any electronic data processing system, information system,
computer software program (exclusive of off-the-shelf computer software
available in the open market and related applications thereof), program
specification chart, procedure, source code, object code, input data, routine,
database, report layout, format, record file layout, diagram, functional
specification, narrative description, flow chart or other related material.
"Tax Returns" means all returns, declarations, reports, estimates,
information returns and statements required to be filed in respect of any Taxes.
"Tax or Taxes" means all taxes, charges, fees, imposts, levies or other
assessments, including, without limitation, all net income, gross receipts,
capital, sales, use, ad valorem, value added, transfer, franchise, profits,
inventory, capital stock, license, withholding (including its U.K. equivalent),
payroll (including its U.K. equivalent), employment (including its U.K.
equivalent), social security, unemployment, excise, severance, stamp,
occupation, property and estimated taxes, customs duties, fees, assessments and
charges of any kind whatsoever, together with any interest and any penalties,
fines, additions to tax or additional amounts imposed by any taxing authority
(domestic or foreign) and shall include any transferee liability in respect of
Taxes.
"U.S. Environmental Law" means any Law concerning Releases into any part of
the natural environment, or activities that might result in damage to the
natural environment, or any Law that is concerned in whole or in part with the
natural environment and with protecting or improving the quality of the natural
environment and protecting public and employee health and safety and includes,
but is not limited to, the Comprehensive Environmental Response, Compensation,
and Liability Act ("CERCLA") (42 U.S.C. ss.ss. 9601 et seq.), the Hazardous
Materials Transportation Act (49 U.S.C. ss.ss. 1801 et seq.), the Resource
Conservation and Recovery Act (42 U.S.C. ss.ss. 6901 et seq.), the Clean Water
Act (33 U.S.C. ss.ss. 1251 et seq.), the Clean Air Act (33 U.S.C. ss.ss. 7401 et
seq.), the Toxic Substances Control Act (15 U.S.C. ss.ss. 2601 et seq.), the
Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. ss.ss. 136 et
seq.) and the Occupational Safety and Health Act (29 U.S.C. ss.ss. 651 et seq.)
("OSHA"), as such laws have been amended or supplemented, and the regulations
promulgated pursuant thereto, and any and all analogous state or local statutes,
and the regulations promulgated pursuant thereto.
8.2 Expenses. Except as otherwise provided herein, all expenses incurred by
the Buyer in connection with the negotiation, authorization, preparation,
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execution and performance of this Agreement and the transactions contemplated
herein shall be paid by the Buyer. Except as otherwise provided herein, all
expenses incurred by the Seller and the Company in connection with the
negotiation, authorization, preparation, execution and performance of this
Agreement and the transactions contemplated herein shall be paid by the Seller
and shall not be paid from any of the assets of the Company.
8.3 Further Assurances. The Seller and the Buyer each agree to execute and
deliver, and to cause the Company to execute and deliver, such other documents
or agreements as may be necessary or desirable for the implementation of this
Agreement and the consummation of the transactions contemplated hereby.
8.4 Submission to Jurisdiction; Consent to Service of Process.
(a) The parties hereto hereby irrevocably submit to the non-exclusive
jurisdiction of any federal or state court located within the State of New York
over any dispute arising out of or relating to this Agreement or any of the
transactions contemplated hereby and each party hereby irrevocably agrees that
all claims in respect of such dispute or any suit, action proceeding related
thereto may be heard and determined in such courts. The parties hereby
irrevocably waive, to the fullest extent permitted by applicable law, any
objection which they may now or hereafter have to the laying of venue of any
such dispute brought in such court or any defense of inconvenient forum for the
maintenance of such dispute. Each of the parties hereto agrees that a judgment
in any such dispute may be enforced in other jurisdictions by suit on the
judgment or in any other manner provided by law.
(b) Each of the parties hereto hereby consents to process being served
by any party to this Agreement in any suit, action or proceeding by the mailing
of a copy thereof in accordance with the provisions of Section 8.8.
8.5 Entire Agreement; Amendments and Waivers. This Agreement (including the
schedules and exhibits hereto) represents the entire understanding and agreement
between the parties hereto with respect to the subject matter hereof and can be
amended, supplemented or changed, and any provision hereof can be waived, only
by written instrument making specific reference to this Agreement signed by the
party against whom enforcement of any such amendment, supplement, modification
or waiver is sought. No action taken pursuant to this Agreement, including
without limitation, any investigation by or on behalf of any party, shall be
deemed to constitute a waiver by the party taking such action of compliance with
any representation, warranty, covenant or agreement contained herein. The waiver
by any party hereto of a breach of any provision of this Agreement shall not
operate or be construed as a further or continuing waiver of such breach or as a
waiver of any other or subsequent breach. No failure on the part of any party to
exercise, and no delay in exercising, any right, power or remedy hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of such
right, power or remedy by such party preclude any other or further exercise
thereof or the exercise of any other right, power or remedy. All remedies
hereunder are cumulative and are not exclusive of any other remedies provided by
law.
8.6 Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York applicable to
agreements made and to be performed entirely within such State, without regard
to conflicts of law principles.
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8.7 Table of Contents and Headings. The table of contents and section
headings of this Agreement are for reference purposes only and are to be given
no effect in the construction or interpretation of this Agreement.
8.8 Notices. All notices and other communications under this Agreement
shall be in writing and shall be deemed given when delivered personally or
mailed by certified mail, return receipt requested, to the parties (and shall
also be transmitted by facsimile to the Persons receiving copies thereof) at the
following addresses (or to such other address as a party may have specified by
notice given to the other party pursuant to this provision):
If to the Seller, to:
Numerex Corp.
Rose Tree Corporate Center II
1400 North Providence Road
Suite 5500
Media, Pennsylvania 19063
Attention: Mr. John J. Reis
Chief Executive Officer
Facsimile: (610) 892-0725
With a copy to:
Blank Rome Comisky & McCauley
Four Penn Center Plaza
Philadelphia, Pennsylvania 19103-2599
Attention: Barry H. Genkin, Esq.
Facsimile: (215) 569-5555
If to the Buyer, to:
Detection Systems, Inc.
130 Perinton Parkway
Fairport, New York
Attention: Mr. Karl H. Kostusiak
President
Facsimile: (716) 421-4288
With a copy to:
Nixon, Hargrave, Devans & Doyle LLP
Clinton Square
P.O. Box 1051
Rochester, New York 14603
Attention: Justin P. Doyle, Esq.
Facsimile: (716) 263-1600
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8.9 Disclosure Schedules. Items required to be disclosed on Schedules
pursuant to Articles 3 and 4 shall be deemed to be disclosed therein for all
purposes of Articles 3 and 4 irrespective of whether they are disclosed with
reference to all of the subsections to which they relate; provided, however, no
item shall be deemed to be included on any specific Schedule with respect to a
particular subsection if its omission therefrom would make such specific
Schedule misleading if such item is not specifically identified on such
Schedule.
8.10 Severability of Provisions. If any provision or any portion of any
provision of this Agreement, or the application of any such provision or any
portion thereof to any person or circumstance, shall be held invalid or
unenforceable, the remaining portion of such provision and the remaining
provisions of this Agreement, and the application of such provision or portion
of such provision as is held invalid or unenforceable to persons or
circumstances other than those as to which it is held invalid or unenforceable,
shall not be affected thereby.
8.11 Binding Effect; Assignment. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective heirs, successors and
permitted assigns. Nothing in this Agreement shall create or be deemed to create
any third party beneficiary rights in any person or entity not a party to this
Agreement other than the Company. No assignment of this Agreement or of any
rights or obligations hereunder may be made by either the Seller or the Buyer
(by operation of law or otherwise) without the prior written consent of the
other party hereto and any attempted assignment without the required consent
shall be void; provided, however, that the Buyer may assign this Agreement and
any or all rights, but not its obligations, hereunder to any Affiliate of the
Buyer. Upon any such permitted assignment, the references in this Agreement to
the Buyer shall also apply to any such assignee unless the context otherwise
requires.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first written above.
DETECTION SYSTEMS, INC.
By: /s/ Karl H. Kostusiak
---------------------------------------
Karl H. Kostusiak, President
NUMEREX CORP.
By: /s/ John J. Reis
---------------------------------------
John J. Reis, Chief Executive Officer
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EXHIBIT 2.9
STOCK PURCHASE AGREEMENT
among
NUMEREX CORP.,
a Pennsylvania corporation (the "Purchaser");
UPLINK SECURITY, INC. (the "Company"),
a Georgia corporation;
and
certain shareholders of
the Company (the "Management Shareholders")
July 16, 1997
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement") is entered into as of
July 16, 1997 among Numerex Corp., a Pennsylvania corporation (the "Purchaser"),
Uplink Security, Inc., a Georgia corporation (the "Company") and the individuals
listed on the signature pages attached hereto (such individuals are sometimes
referred to herein collectively as the "Management Shareholders" and
individually as a "Management Shareholder"). The Company and the Management
Shareholders may be collectively referred to herein as the "Sellers."
R E C I T A L S
A. The Company will authorize the sale and issuance of 31,405 shares of
Common Stock (the "Company Shares") and will sell such Company Shares to
Purchaser, upon the terms and subject to the conditions hereinafter set forth.
B. The shareholders of the Company, other than Purchaser, after
Closing, as hereinafter defined, (the "Remaining Shareholders") and the
Purchaser wish to enter into a shareholders agreement (the "Shareholders'
Agreement"), which shall be executed on the date hereof.
C. It is also contemplated the Company shall enter into employment
agreements (the "Employment Agreements") with certain executives of the Company
(the "Executives"), which shall be executed as of the Closing Date, as
hereinafter defined.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the respective
representations, warranties, covenants, agreements and conditions hereinafter
set forth, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
ARTICLE I
DEFINITIONS
Unless otherwise defined herein or the context otherwise requires, the
terms defined in this Article 1 shall have the meanings herein specified for all
purposes of this Agreement, applicable to both the singular and plural forms of
any of the terms herein defined. Unless otherwise indicated, any reference
herein to a "Section", "Article", "Exhibit" or "Schedule" shall mean the
applicable section, article, exhibit or schedule of or to this Agreement. All
accounting terms used in this Agreement not defined in this Article 1 shall,
except as otherwise provided for herein, be construed in accordance with
generally accepted accounting principles, consistently applied.
<PAGE>
"Action" shall mean any actual or threatened claim, action, suit,
arbitration, hearing, inquiry, proceeding, complaint, charge or investigation by
or before any Government Entity or arbitrator and any appeal from any of the
foregoing.
"Affiliate" of a Person shall mean any Person that directly or
indirectly controls, is controlled by, or is under common control with, the
indicated Person.
"Agreement" shall mean this Stock Purchase Agreement.
"Balance Sheet" and "Balance Sheet Date", shall have the meaning
assigned to such terms in Section 4.4(a).
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Closing" and "Closing Date" have the respective meanings assigned to
such terms in Section 2.3.
"Common Stock" shall mean the Company's authorized class of common
stock, $.01 par value per share.
"Company Closing Payment" shall have the meaning assigned to such term
in Section 2.2.
"Company Purchase Price" shall have the meaning assigned to such term
in Section 2.2.
"Company Shares" shall have the meaning assigned to such term in
Section 2.1.
"DOL" shall mean the United States Department of Labor.
"Damages" shall mean any and all losses, liabilities, obligations,
costs, expenses, damages or judgments of any kind or nature whatsoever
(including reasonable attorneys', accountants' and experts' fees, disbursements
of counsel, and other costs and expenses incurred pursuing indemnification
claims under Article 10 hereof).
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time.
"ERISA Affiliate" shall mean any Person which is (or at any relevant
time was) a member of a controlled group of corporations within the meaning of
Code Section 414(b), all trades or businesses under common control within the
meaning of Code Section 414(c), and all affiliated service groups within the
meaning of Code Section 414(m), of which the Company is (or at any relevant time
was) a member.
"Environmental Laws" shall mean all Legal Requirements pertaining to
the protection of the environment, the treatment, emission and discharge of
gaseous, particulate and effluent
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Hazardous Materials and the use, handling, storage, treatment, removal,
transport, transloading, cleanup, decontamination, discharge and disposal of
Hazardous Materials, including, without limitation, those statutes, laws, rules
and regulations set forth below in the definition of "Hazardous Material."
"Employment Agreements" shall mean those agreements attached hereto as
Exhibit A.
"Executives" shall mean John Collings, Peter Quinn and David
Tattersall.
"Governmental Entity" shall mean any local, state, federal or foreign
(i) court, (ii) government or (iii) governmental department, commission,
instrumentality, board, agency or authority, including the IRS and other taxing
authorities.
"Hazardous Material" shall mean any flammable, ignitable, corrosive,
reactive, radioactive or explosive substance or material, hazardous waste, toxic
substance or related material and any other substance or material defined or
designated as a hazardous or toxic substance, material or waste by any
Environmental Law currently in effect or as amended or promulgated in the future
and shall include, without limitation:
(a) those substances included within the definitions of "hazardous
substances", "hazardous materials", "toxic substances" or "solid waste", in the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, 42 U.S.C. Sections 9601 et seq., the Resource Conservation and Recovery
Act, 42 U.S.C. Sections 6901 et seq., and the Hazardous Materials Transportation
Act, 49 U.S.C. Sections 1801 et seq., and in the regulations promulgated
pursuant thereto;
(b) those substances defined as "hazardous wastes" in those
jurisdictions where the Company operates;
(c) those substances listed in the United States Department of
Transportation Table (49 CFR 172.101 and amendments thereto) or by the
Environmental Protection Agency (or any successor agency) as hazardous
substances (40 CFR Part 302 and amendments thereto);
(d) such other substances, materials and wastes that are or become
regulated under applicable local, state or Federal laws or regulations, or which
are or become classified as hazardous or toxic under any Legal Requirement; and
(e) any material, waste or substance that is, in whole or in part, (i)
petroleum, asbestos, polychlorinated biphenyls, methylene chloride,
trichloroethylene, 1, 2-transdichloroethylene, dioxins or dibenzofurans, (ii)
designated as an "extremely hazardous substance", pursuant to Section 302 of the
Emergency Planning and Community Right-to-Know Act of 1986, as amended, or (iii)
designated as a "hazardous substance", pursuant to Section 311 of the Clean
Water Act, 33 U.S.C. Sections 1251 et seq. (33 U.S.C. ss. 1321) or listed
pursuant to Section 307 of the Clean Water Act (33 U.S.C. ss. 1317), or Section
112 or other Section of the Clean Air Act, as amended.
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<PAGE>
"IRS" shall mean the United States Internal Revenue Service.
"Indebtedness" shall mean, when used with reference to any Person,
without duplication, (i) any liability of such Person created or assumed by such
Person, or any Subsidiary thereof, (A) for borrowed money, (B) evidenced by a
bond, note, debenture or similar instrument (including a purchase money
obligation, deed of trust or mortgage) given in connection with the acquisition
of, or exchange for, any property or assets (other than inventory or similar
property acquired and consumed in the Ordinary Course), including securities and
other Indebtedness, (C) in respect of letters of credit issued for such Person's
account and "swaps" of interest and currency exchange rates (and other interest
and currency exchange rate hedging agreements) to which such Person is a party
or (D) for the payment of money as lessee under leases that should be, in
accordance with generally accepted accounting principles, recorded as capital
leases for financial reporting purposes; (ii) any liability of others described
in the preceding clause (i) guaranteed as to payment of principal or interest by
such Person or in effect guaranteed by such Person through an agreement,
contingent or otherwise, to purchase, repurchase or pay the related Indebtedness
or to acquire the security therefor; (iii) all liabilities or obligations
secured by a Lien upon property owned by such Person and upon which liabilities
or obligations such Person customarily pays interest or principal, whether or
not such Person has not assumed or become liable for the payment of such
liabilities or obligations; and (iv) any amendment, renewal, extension, revision
or refunding of any such liability or obligation; provided, however, that
Indebtedness shall not include any liability for compensation of such Person's
employees or for inventory or similar property acquired and consumed in the
Ordinary Course or for services.
"Knowledge" shall mean that (i) an individual is actually aware of such
fact or other matter; or (ii) an individual could be expected to discover or
otherwise become aware of such fact or other matter in the course of conducting
a reasonably comprehensive investigation concerning the existence of such fact
or other matter. A Person (other than an individual) will be deemed to have
"knowledge" of a particular fact or other matter if any individual who is
serving, or who has at any time served, as a director, officer, partner,
executor or trustee of such Person (or any similar capacity) has, or at any time
had, "knowledge" of such fact or other matter.
"Leased Real Property" shall mean all real property, including
Structures, leased by the Company.
"Legal Requirement" shall mean any statute, law, ordinance, rule,
regulation, permit, order, writ, judgment, injunction, decree or award issued,
enacted or promulgated by any Governmental Entity or any arbitrator.
"Lien" shall mean all liens (including judgment and mechanics' liens,
regardless of whether liquidated), mortgages, assessments, security interests,
easements, claims, pledges, trusts (constructive or other), deeds of trust,
options or other charges, encumbrances or restrictions.
"Management Shareholders" shall mean John Collings, Peter Quinn and
David Tattersall.
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"Material Adverse Effect" shall mean a material adverse effect on the
business, financial condition, properties, profitability, prospects or
operations of the Company.
"Noncompetition Agreements" shall have the meaning assigned to such
term in Section 8.1(h).
"Ordinary Course" shall mean, when used with reference to the Company,
the ordinary course of the Company's business, consistent with past practices.
"Owned Real Property" shall mean all real property, including
Structures, owned by the Company.
"PBGC" shall mean the Pension Benefit Guaranty Corporation.
"Permit" shall have the meaning assigned to such term in Section 4.16.
"Permitted Liens" shall mean (a) Liens for ad valorem real or personal
property taxes or assessments not at the time due and (b) Liens in respect of
pledges or deposits under workers' compensation laws or similar legislation,
carriers', warehousemen's, mechanics', laborers' and materialmen's and similar
liens, if the obligations secured by such Liens are not then delinquent.
"Person" shall mean all natural persons, corporations, business trusts,
associations, companies, partnerships, joint ventures, Governmental Entities and
any other entities.
"Plan" shall mean any "employee benefit plan" within the meaning of
Section 3(3) of ERISA and any other written or oral employee benefit plan,
arrangement, practice, contract, policy, or program (other than arrangements
merely involving the payment of wages) which are or at any time have been
established, maintained, or to which contributions have been required by the
Company or any ERISA Affiliate for the benefit of current or former employees,
with respect to which the Company or an ERISA Affiliate has or may in the future
have any liability or obligation to contribute or make payments of any kind.
"Real Property" shall mean the Owned Real Property and the Leased Real
Property, collectively.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Shares" shall mean the shares of Common Stock of the Company.
"Shareholders Agreement" shall mean the agreement attached hereto as
Exhibit B.
"Structure" shall mean any facility, building, plant, factory, office,
warehouse structure or other improvement owned or leased by the Company.
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"Subsidiary" of a Person shall mean any corporation, partnership,
limited liability company, association or other business entity at least 50% of
the outstanding voting power of which is at the time owned or controlled
directly or indirectly by such Person or by one or more of such subsidiary
entities, or both.
"Tax" shall mean any Federal, state, local or foreign income, gross
receipts, license, payroll, unemployment, excise, severance, stamp, occupation,
premium, windfall profits, environmental (including, without limitation, taxes
under Code Section 59A), customs duties, capital stock, franchise, profits,
withholding, social security (or similar), employment, disability, real
property, personal property, sales, use, transfer, registration, value added,
alternative or add-on minimum, estimated tax or other tax, assessment or charge
of any kind whatsoever, including, without limitation, any interest, fine
penalty or addition thereto, whether disputed or not.
"Tax Return" shall mean any return, declaration, report, claim for
refund or information, or statement relating to Taxes, and any exhibit,
schedule, attachment or amendment thereto.
ARTICLE 2
PURCHASE AND SALE OF SECURITIES
2. Purchase and Sale of Securities.
2.1 Sale and Delivery by Company. The Company will authorize the
issuance of 31,405 shares of Common Stock (the "Company Shares"), and subject to
the terms and conditions hereof, the Company agrees to sell the Company Shares
and deliver to the Purchaser and Purchaser agrees to purchase and accept from
the Company the Company Shares, free and clear of all Liens, and on the terms
and subject to the conditions set forth in this Agreement, for the purchase
price described in Section 2.2, good and marketable title to the Company Shares.
2.2 Company Purchase Price. The sum of One Million Dollars ($1,000,000)
(the "Company Purchase Price") to be paid in cash shall be delivered to the
Company at the Closing; provided however, that the Purchaser shall be entitled
to deduct from the Company Purchase Price those sums as listed on Exhibit 2.2,
in order to directly pay the debts of the Company to the corresponding creditors
listed on Exhibit 2.2 (the "Company Closing Payment").
2.3 Closing. The purchase and sale of the Shares and the consummation
of the other transactions contemplated by this Agreement (the "Closing") shall
occur at 10:00 a.m., local time, on July 16, 1997 at the offices of Blank Rome
Comisky & McCauley, 1200 Four Penn Center Plaza, Philadelphia, PA 19103 or at
such other time or on such other date as shall be agreed upon among the parties
hereto upon fulfillment of all conditions precedent to the Closing, such hour
and date being herein generally referred to as the "Closing Date." At the
Closing, the Company shall deliver or cause to be delivered to Purchaser,
against payment by Purchaser to Company of the Company Closing Payment.
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(i) a certificate or certificates representing the Company
Shares being issued by the Company hereunder, registered in the name of the
Purchaser, transferring good and marketable title to such Shares, free and clear
of all Liens; and
(ii) all the documents, certificates and instruments required
to be delivered, or cause to be delivered by the Company pursuant to Section 8.2
hereof.
2.4 Purchase from Company. The Shares to be sold and purchased pursuant
to this Agreement as of the Closing described in Section 2.3 hereof shall
constitute 31,405 Shares of 161,050 outstanding Shares of Common Stock of the
Company.
2.5 First Call.
(a) Accelerated First Call.
(i) At any time prior to the third annual anniversary of
the date hereof, Purchaser shall have the right to purchase ("Accelerated
Portion of the First Call") that number of authorized but unissued Shares
("Accelerated Portion Shares") determined by multiplying 14% by the total number
of outstanding Shares as of the date the Accelerated Portion Notice is given (as
defined below) and after giving effect to the exercise of the Accelerated
Portion of the First Call. Purchaser may exercise the Accelerated Portion of the
First Call by giving written notice ("Accelerated Portion Notice") at any time
until the third annual anniversary of the date hereof.
(ii) Upon the giving of the Accelerated Portion Notice,
the parties shall promptly determine the number of Accelerated Portion Shares.
The purchase price ("Accelerated Portion Purchase Price") for the Accelerated
Portion Shares shall be Eight Hundred and Thirty-five Thousand Dollars
($835,000). The closing of the Accelerated Portion of the First Call shall be
held at 10:00 a.m., within ten (10) days after the Accelerated Portion Notice is
given, or as otherwise agreed by the parties. Upon the closing, (i) the Company
and the Management Shareholders shall make representations and warranties to
Numerex that are comparable to the representations and warranties contained in
Article 4 hereof and covenants that are comparable to those contained in
Sections 7.4(a), 7.5, 7.8 and 7.10 hereof; provided however, that such
representations, warranties and covenants shall be deemed to have been given as
of the Accelerated Portion Notice, or if such representations, warranties and
covenants relate to financial matters, such representations, warranties and
covenants shall be deemed to have been given as of the last day of the most
recently completed fiscal quarter. At the closing, the Company shall issue a
certificate to Purchaser for the Accelerated Portion Shares, transferring good
and marketable title to such Accelerated Portion Shares, free and clear of all
Liens, and Purchaser shall pay the Accelerated Portion Purchase Price to the
Company.
(b) First Call.
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(i) If Purchaser owns Shares on the third annual
anniversary hereof, then for a period of two hundred-seventy (270) days
commencing on the third annual anniversary of the date hereof ("First Call
Period") Purchaser shall have the right to purchase ("First Call") that number
of authorized but unissued shares ("First Call Shares") determined by the
following formula:
X = 1 (BY - A)
-----
1 - Y
Where:
<TABLE>
<S> <C> <C>
X = the number of shares to be purchased
Y = cumulative percentage to be allocated to Numerex as set forth on Exhibit
2.5 attached hereto
A = the original number of shares issued to Numerex for $1 million
B = the total number of shares issued when the First Call is exercised
</TABLE>
Exhibit 2.5 shall also include the Company's business plan
and an example of the workings of Section 2.5. Purchaser may exercise the First
Call by giving the Company written notice ("First Call Notice") at any time
during the First Call Period.
(ii) Upon the giving of the First Call Notice, the parties
shall promptly determine the number of First Call Shares. The purchase price
("First Call Purchase Price") for the First Call Shares shall be Five Million
Dollars ($5,000,000). The closing of the First Call shall be held at 10:00 a.m.,
within ten (10) days after the First Call Notice is given, or as otherwise
agreed by the parties. Upon the closing, (i) the Company and the Management
Shareholders shall make representations and warranties to Numerex that are
comparable to the representations and warranties contained in Article 4 hereof
and covenants that are comparable to those contained in Sections 7.4(a), 7.5,
7.8 and 7.10 hereof; provided however, that such representations, warranties and
covenants shall be deemed to have been given as of the First Call Notice, or if
such representations, warranties and covenants relate to financial matters, such
representations, warranties and covenants shall be deemed to have been given as
of the last day of the most recently completed fiscal quarter. At the closing,
the Company shall issue a certificate to Purchaser for the First Call Shares,
transferring good and marketable title to such First Call Shares, free and clear
of all Liens, and Purchaser shall pay the First Call Purchase Price to the
Company.
ARTICLE 3
INTENTIONALLY OMITTED
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
CONCERNING THE COMPANY
The Company and the Management Shareholders hereby jointly and
severally represent and warrant to, and covenant and agree with, Purchaser that:
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4.1 Organization and Good Standing.
(a) The Company has been duly organized and is existing as a
corporation in good standing under the laws of the State of Georgia with full
power and authority (corporate and other) to own and lease its properties and to
conduct its business as currently conducted. The Company has been duly qualified
as a foreign corporation for the transaction of business and is in good standing
under the laws of each jurisdiction set forth on Schedule 4.1(a), such
jurisdictions comprising all jurisdictions in which the Company owns or leases
any property, or conducts any business, so as to require such qualification and
such that the failure to be so qualified could have a Material Adverse Effect on
the Company.
(b) Except as set forth in Schedule 4.1(b), the Company has no
Subsidiary nor owns or controls, or has any other equity investment or other
interest in, directly or indirectly, any corporation, joint venture,
partnership, association or other entity.
4.2 No Conflicts. The execution, delivery and performance of this,
Agreement and the consummation of the transactions contemplated hereby will not
(a) conflict with or result in a breach or violation of any term or provision
of, or constitute a default under (with or without notice or passage of time, or
both), or otherwise give any Person a basis for accelerated or increased rights
or termination or nonperformance under, any indenture, mortgage, deed of trust,
loan or credit agreement, lease, license or other agreement or instrument to
which the Company is a party or by which the Company is bound or affected or to
which any of the property or assets of the Company is bound or affected
including, without limitation, all arrangements in Section 4.19 hereof, (b)
result in the violation of the provisions of the Articles of Incorporation or
Bylaws of the Company or any Legal Requirement applicable to or binding upon it,
(c) result in the creation or imposition of any Lien upon any property or asset
of the Company or (d) otherwise adversely affect the contractual or other legal
rights or privileges of the Company. Schedule 4.2 sets forth a list of all
agreements requiring the consent of any party thereto to any of the transactions
contemplated hereby.
4.3 Capitalization. The authorized capital stock of the Company
consists solely of (i) 1,000,000 shares of Common Stock, of which only the
number of Shares listed on Schedule 4.3 are, and as of the Closing will be,
issued and outstanding and (ii) 1,000,000 of Preferred Stock ("Preferred
Stock"), $.01 par value, of which no shares of Preferred Stock are issued and
outstanding. All of the Common Stock and Preferred Stock have been duly
authorized and the Common Stock is validly issued and is fully paid,
nonassessable and outstanding and is held by the shareholders in the amounts
reflected in Schedule 4.3 hereto. Except as set forth in Schedule 4.3, there are
(i) no existing options, warrants, rights, calls or commitments of any character
relating to the shares of Common Stock or any other capital stock or securities
of the Company, (ii) no outstanding securities or other instruments convertible
into or exchangeable for shares of Common Stock or Preferred Stock or any other
capital stock or securities of the Company and no commitments to issue such
securities or instruments and (iii) no Person has any right of first refusal,
preemptive right, subscription right or similar right with respect to any shares
of Common Stock or Preferred Stock or any other capital stock or securities of
the Company. The offer, issuance and sale of the Shares were (i) exempt from the
registration and prospectus
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<PAGE>
delivery requirements of the Securities Act, (ii) registered or qualified (or
exempt from registration or qualification) under the registration or
qualification requirements of all applicable state securities laws and (iii)
accomplished in conformity with all other Legal Requirements.
4.4 Financial Statements.
(a) Schedule 4.4 hereto contains true and complete copies of
(i) the internally prepared balance sheet of the Company at April 30, 1997, and
the related statements of income, shareholders' equity and cash flows for the
four months then ended and (ii) the internally prepared balance sheet (the
"Balance Sheet") of the Company at December 31, 1996 (the "Balance Sheet Date"),
and the related statements of income, shareholders' equity and cash flows for
the year then ended (the financial statements described in clause (i) and (ii)
above are collectively referred to as the "Financial Statements").
(b) The Financial Statements present fairly the financial
condition of the Company as of the dates indicated therein and the results of
operations and changes in financial position of the Company for the periods
specified therein, have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis during the periods covered
thereby and prior periods, have been derived from the accounting records of the
Company and represent only actual, bona fide transactions. The Company's
Financial Statements are true and correct in all material respects.
4.5 Title to Property; Encumbrances.
(a) The Company owns no Real Property, and immediately prior
to the Closing will have, good and valid title to all personal property
reflected on the Balance Sheet as owned by the Company and all Real Property and
personal property acquired by the Company since the Balance Sheet Date, in each
case free and clear of all Liens except (i) as set forth on Schedule 4.5, (ii)
for sales and other dispositions of inventory in the Ordinary Course since the
Balance Sheet Date which, in the aggregate, have not been materially different
from prior periods, and (iii) Permitted Liens.
(b) Schedule 4.5 contains a list of all tangible personal
property having a cost or fair market value in excess of $10,000 owned by the
Company (other than personal property held by the Company as lessee under a
personal property lease).
(c) Schedule 4.5 contains a list of all real property leases
under which the Company is the lessee together with (i) the location and nature
of each of the leased properties (including a legal description of all Leased
Real Property), (ii) the termination date of each such lease, (iii) the name of
the lessor and (iv) all rental and other payments made or require to be made for
the fiscal year ending December 31, 1997. All leases for real property pursuant
to which the Company leases from others are valid, subsisting in full force and
effect in accordance with their respective terms, and there is not, under any
real property lease, any existing default or event of default (or event that,
with notice or passage of time, or both, would constitute a default, or would
constitute a basis of force majeure or other claim of excusable delay or
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<PAGE>
nonperformance). True and complete copies of all real property leases listed on
Schedule 4.5 have been delivered to Purchaser heretofore, as well as copies of
any title reports, surveys or environmental reports or audits relating to any
Leased Real Property, in the Company's possession. Except as set forth in
Schedule 4.5, no such lease will require the consent of the lessor to or as a
result of the consummation of the transaction contemplated by this Agreement.
For the purposes of this Section 4.5, a "lease" shall include a sublease.
(d) There are no defaults under any lease or sublease by the
Company or, to the knowledge of the Company or the Management Shareholders, by
any other party thereto, which would materially impair the present use of any
Real Property listed on Schedule 4.5. The performance by the Company of this
Agreement will not result in the termination of, or in any increase of any
amounts payable under, any lease listed on Schedule 4.5.
(e) All personal property owned by the Company and all
personal property held by the Company pursuant to personal property leases is in
good operating condition and repair, subject only to ordinary wear and tear, to
the knowledge of the Company, has been operated, serviced and maintained
properly within the recommendations and requirements of the manufacturers
thereof (if any) and is suitable and appropriate for the use thereof made and
proposed to be made by the Company in its business and operations.
4.6 Accounts Receivable. All accounts receivable of the Company
reflected in the Balance Sheet and all accounts receivable of the Company that
have arisen since the Balance Sheet Date (except such accounts receivable as
have been collected since such dates) are valid and to the Management
Shareholders' knowledge enforceable claims, and the goods and services sold and
delivered that gave rise to such accounts were sold and delivered in conformity
with all applicable express and implied warranties, purchase orders, agreements
and specifications. Such accounts receivable of the Company are subject to no
valid defense, offset or counterclaim and to the Company's and the Management
Shareholders' knowledge, are fully collectible, except to the extent of the
allowance for doubtful accounts reflected on the Balance Sheet. Schedule 4.6
contains a true and complete aging of the Company's accounts receivable as of
the Balance Sheet Date.
4.7 Inventories. Except as described in Schedule 4.7, all inventories
of raw materials, work-in-process and finished goods set forth or reflected in
the Balance Sheet or acquired by the Company since the Balance Sheet Date,
consist of a quality and quantity usable and saleable in the Ordinary Course,
except for slow-moving, damaged or obsolete items and materials of below
standard quality, all of which have been written down to net realizable market
value or in respect of which adequate reserves have been provided, in each case
as reflected in the Balance Sheet. The value at which inventories are carried on
the Balance Sheet reflect the normal inventory valuation policy of the Company,
as applicable, in accordance with generally accepted accounting principles and
on a basis consistent with that of preceding periods, of stating inventory at
the lower of cost or market value. There is no reason to believe that the
Company will experience in the foreseeable future any difficulty in obtaining,
in the desired quantity and quality, the inventory necessary to conduct its
business in the manner proposed to be conducted, including, without limitation,
inventory which historically has been imported.
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<PAGE>
4.8 Trademarks, Patents, Etc.
(a) Schedule 4.8(a) contains a true and complete list of all
letters patent, patent applications, trade names, trademarks, service marks,
trademark and service mark registrations and applications, copyrights, copyright
registrations and applications, grants of a license or right to the Company with
respect to the foregoing, both domestic and foreign, claimed by either Company
or used or proposed to be used by the Company in the conduct of its business,
whether registered or not, (collectively herein, "Registered Rights").
(b) Except as described in Schedule 4.8(b), the Company owns
and has the unrestricted right to use the Registered Rights and every trade
secret, know-how, process, discovery, development, design, technique, customer
and supplier list, promotional idea, marketing and purchasing strategy,
invention, process, confidential data and or other information (collectively
herein, "Proprietary Information") required for or incident to the design,
development, manufacture, operation, sale and use of all products and services
sold or rendered or proposed to be sold or rendered by the Company, free and
clear of any right, equity or claim of others. The Company has taken reasonable
security measures to protect the secrecy, confidentiality and value of all
Proprietary Information.
(c) Schedule 4.8(c) contains a true and complete list and
description of all licenses of or rights to Proprietary Information granted to
the Company by others or to others by the Company. Except as described in
Schedule 4.8(c), (i) the Company has not sold, transferred, assigned, licensed
or subjected to any Lien, any Registered Right or Proprietary Information or any
interest therein, and (ii) the Company is not obligated or under any liability
whatever to make any payments by way of royalties, fees or otherwise to any
owner or licensor of, or other claimant to, any Registered Right or Proprietary
Information.
(d) Except as disclosed in Schedule 4.8(b), there is no claim
or demand of any Person pertaining to, or any Action that is pending or, to the
Management Shareholders' knowledge, threatened, which challenges the rights of
the Company in respect of any Registered Right or any Proprietary Information.
4.9 Banking and Insurance.
(a) Schedule 4.9(a) contains a true and complete list of the
names and locations of all financial institutions at which the Company maintains
a checking account, deposit account, securities account, safety deposit box or
other deposit or safekeeping arrangement, the numbers or other identification of
all such accounts and arrangements and the names of all persons authorized to
draw against any funds therein.
(b) Schedule 4.9(b) contains a true and complete list of all
insurance policies and bonds and self insurance arrangements currently in force
that cover or purport to cover risks or losses to or associated with the
Company's business, operations, premises, properties, assets, employees, agents
and directors and sets forth, with respect to each such policy, bond and self
insurance arrangement, a description of the insured loss coverage, the
expiration date and time of coverage, the dollar limitations of coverage, a
general description of each deductible feature and
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<PAGE>
principal exclusion and the premiums paid and to be paid prior to expiration.
The insurance policies, bonds and arrangements described on Schedule 4.9(b) (the
"Policies") provide such coverage against such risk of loss and in such amounts
as are customary for corporations of established reputation engaged in the same
or similar business and similarly situated. The Company has no obligation,
liability or other commitment relating to any contract of insurance containing a
provision for retrospective rating or adjustment of the Company's premium
obligation. To the Management Shareholders' knowledge, no facts or circumstances
exist that would cause the Company to be unable to renew its existing insurance
coverage as and when the same shall expire upon terms at least as favorable as
those currently in effect, other than possible increases in premiums that do not
result from any act or omission of the Company or any Management Shareholder.
4.10 Indebtedness.
(a) The Company has no liability or obligation for
Indebtedness other than as set forth on Schedule 4.10(a), and true and complete
copies of all instruments and documents evidencing, creating, securing or
otherwise relating to such Indebtedness have been delivered to Purchaser
heretofore. Except as described in Schedule 4.10(a), no event has occurred and
no condition has become known to the Company or any Management Shareholder
(including the transactions contemplated hereby) that constitutes or, with
notice or passage of time, or both, would constitute a default or a basis of
force majeure or other claim of accelerated or increased rights, termination,
excusable delay or nonperformance by the Company or any other Person under any
instrument or document relating to or evidencing Indebtedness that would entitle
any Person to require the Company to pay any portion of the principal amount of
such Indebtedness prior to the scheduled maturity thereof. Except as set forth
in Schedule 4.10(a), no instrument or document evidencing, creating, securing or
otherwise relating to Indebtedness will require the consent of any Person to or
as a result of the consummation of the transactions contemplated by this
Agreement.
(b) Schedule 4.10(b) contains a list and brief description of
all agreements or instruments pursuant to which any of the Company's directors,
employees or shareholders have guaranteed any Indebtedness of the Company (the
"Guaranties"). True and complete copies of all Guaranties have been delivered to
Purchaser.
4.11 Judgments; Litigation. Except as set forth on Schedule 4.11, there
is no (A) outstanding judgment, order, decree, award, stipulation, injunction of
any Governmental Entity or arbitrator against or affecting the Company or any
officer, director or employee of the Company relating to the Company or its
properties, assets or business, (B) Action threatened against or affecting the
Company or its properties, assets or business, (C) Action pending or threatened
against the Company's officers, directors or employees relating to the Company
or its business or (D) basis for the institution of any Action against the
Company or any of its officers, directors, employees, properties or assets
which, if decided adversely, would have a Material Adverse Effect.
4.12 Income and Other Taxes. Except as set forth on Schedule 4.12:
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(a) All Tax Returns required to be filed through and including
the date hereof in connection with the operations of the Company are true,
complete and correct in all material respects and have been properly and timely
filed. The Company has not requested any extension of time within which to file
any Tax Return, which Tax Return has not since been filed. Purchaser has
heretofore been furnished by the Company with true, correct and complete copies
of each Tax Return of the Company with respect to the past three taxable years,
and of all reports of, and communications from, any Governmental Entities
relating to such period. The Company has disclosed on its Federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of income Taxes for federal income tax purposes within the
meaning of Code Section 6662.
(b) All Taxes required to be paid or withheld and deposited
through and including the date hereof in connection with the operations of the
Company have been duly and timely paid or deposited by the Company. The Company
has properly withheld or collected all amounts required by law for income Taxes
and employment Taxes relating to its employees, creditors, independent
contractors and other third parties, and for sales Taxes on sales, and has
properly and timely remitted such withheld or collected amounts to the
appropriate Governmental Entity. The Company has no liabilities for any Taxes
for any taxable period ending prior to or coincident with the Closing Date.
(c) The Company has made adequate provision on its book of
account for all Taxes with respect to its business, properties and operations
through the Balance Sheet Date, and the accruals for Taxes in the Balance Sheet
are adequate to cover all liabilities for Taxes of the Company for all periods
ending on or before the Closing Date.
(d) The Company has never (i) had a tax deficiency proposed,
asserted or assessed against it (ii) executed any waiver of any statute of
limitations on the assessment or collection of any Taxes, or (iii) been
delinquent in the payment of any Taxes.
(e) No Tax Return of the Company has been audited or the
subject of other Action by any Governmental Entity. The Company has not received
any notice from any Governmental Entity of any pending examination or any
proposed deficiency, addition, assessment, demand for payment or adjustment
relating to or affecting the Company or its assets or properties and no
Management Shareholder has reason to believe that any Governmental Entity may
assess (or threaten to assess) any Taxes for any periods ending on or prior to
the Closing Date.
(f) The Company (i) has not filed any consent or agreement
pursuant to Code Section 341(f), and no such consent or agreement will be filed
at any time on or before the Closing Date; (ii) has not made any payments, is
not obligated to make any payments and is not a party to any agreement that
under certain circumstances could obligate the Company to make any payments that
will not be deductible under Code Section 280G, (iii) is not a United States
real property holding corporation within the meaning of Code Section 897(c)(2);
(iv) is not a party to a tax allocation or sharing agreement; (v) has never been
(or does not have any liability for unpaid Taxes because it was) a member of an
affiliated group with the meaning of Code Section
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1504(a); (vi) has never applied for a tax ruling from a Governmental Entity and
(vii) has never filed or been the subject of an election under Code Section
338(g) or Code Section 338(h)(10) or caused or been the subject of a deemed
election under Code Section 338(e).
(g) Set forth on Schedule 4.12 is the amount, as of the most
recent practicable date, of any net operating loss, net capital loss, unused
investment or other credit, unused foreign tax or excess charitable
contribution.
4.13 Questionable Payments. Neither the Company nor, to the Management
Shareholders' knowledge, any of its directors, officers, agents, employees or
other Person associated with or acting on behalf of the Company has (a) used any
corporate funds for unlawful contributions, gifts, entertainment or other
unlawful expenses relating to political activity, (b) made any direct or
indirect unlawful payments to government officials or employees, or foreign
government officials or employees, from corporate funds, (c) established or
maintained any unlawful or unrecorded fund of corporate monies or other assets,
(d) made any false or fictitious entries on the books of account of the Company,
(e) made or received any bribe, rebate, payoff, influence payment, kickback or
other unlawful payment, or (f) made any other payment, favor or gift not fully
deductible for federal income tax purposes.
4.14 Employee Benefit Matters.
(a) Schedule 4.14 contains a complete list of all Plans. True
and complete copies of each of the following documents (and any amendments
thereto), where applicable, have been delivered previously to Purchaser: (i) the
Plan documents; (ii) a written description of any Plan which is not in writing;
(iii) if the Plan is funded through a trust or any third-party funding vehicle,
the trust or other funding agreement; (iv) the Plan's most recent financial
statements; (v) the two most recent annual reports (including all schedules and
attachments thereto) required by ERISA; (vi) the most recent actuarial report
and valuation; (vii) the most recent determination letter received from the IRS
with respect to each Plan that is intended to be qualified under Code Section
401 or to be recognized as tax-exempt under Code Section 501(c); (viii) the most
recent summary plan description and each summary of material modifications
required by ERISA; (ix) any agreement providing for the provision of
administrative or investment management services with respect to the Plan; and
(x) all documents and correspondence received from or provided to the DOL, IRS,
and PBGC during the past two years.
(b) Each Plan and related trust, annuity, or other funding
agreement complies and has been maintained and operated in compliance with all
applicable Legal Requirements. No non-exempt prohibited transaction (as defined
in Code Section 4975 and ERISA Sections 406 and 408) has occurred and no
"fiduciary" (as defined in ERISA Section 3(21)) has committed any breach of duty
which could subject the Company, any ERISA Affiliate, or any director, officer,
or employee thereof to liability under Title I of ERISA or to tax under Code
Section 4975. All material obligations required to be performed by the company
and any other Person under the terms of each Plan and applicable Legal
Requirements have been performed.
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[COPY MISSING]
reports (Form 5500), summary annual reports, and summary plan descriptions, have
been filed and distributed timely. With respect to each Plan which is a welfare
plan (as defined in ERISA Section 3(1)), the requirements of Part 6 of Subtitle
B of Title I of ERISA and of Code Sections 162(k) and 4980B have been satisfied.
(d) All contributions, premiums, and other payments,
including, without limitation, employer contributions and employee salary
reduction contributions, have been paid when due or accrued in accordance with
the past custom and practice of the Company and any ERISA Affiliate. No Plan
that is subject to Part 3 of Subtitle B of Title I of ERISA or to Code Section
412 has incurred any accumulated funding deficiency, whether or not waived, and
no other actual or contingent liability for any other expenses or obligations of
any Plan exists.
(e) There are no pending or threatened Actions (other than
routine claims for benefits) asserted or instituted against any Plan or the
assets of any Plan, or against the Company, or any ERISA Affiliate, trustee,
administrator, or fiduciary of such Plan, and the Management Shareholders have
no knowledge of any facts that could form the basis of any such Action. There is
no pending or, to the Management Shareholders, knowledge, threatened or
contemplated Action by any Governmental Entity with respect to any Plan, and the
Management Shareholders have no knowledge of any facts that could reasonably be
expected to cause or trigger such an Action.
(f) The Company (or, if applicable, an ERISA Affiliate,) may
terminate, suspend, or amend each Plan at any time, except to the extent
otherwise required by Code Section 4980B, without the consent of the
participants or employees covered by such Plan. Neither the Company nor any
ERISA Affiliate has announced any intention, made any amendment or binding
commitment, or given any written or oral notice providing that the Company or an
ERISA Affiliate (i) will create additional Plans covering employees of the
Company or any ERISA Affiliate, (ii) will increase benefits promised or provided
pursuant to any Plan, or (iii) will not exercise after the Closing Date any
right or power it may have to terminate, suspend, or amend any Plan.
(g) Neither the Company nor any ERISA Affiliate maintains or
has maintained at any time, or contributes to or has contributed to or is or was
required to contribute to, any (i) Plan subject to Title IV of ERISA, including,
without limitation, any multiemployer plan (as defined in ERISA Section 3(37) or
Section 4001), or (ii) funded or unfunded medical, health, accident, or life
insurance plan or arrangement for current or future retirees or terminated
employees or their spouses or dependents (except to the extent required by Code
Sections 162(k) or 4980B).
(h) Neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby will constitute a
termination of employment or other event entitling any Person to any additional
or other benefits, or that would otherwise modify benefits or the vesting of
benefits, provided under any Plan.
(i) No event has occurred which could subject the Company or
any ERISA
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Affiliate to any material liability (i) under any Legal Requirement relating to
any Plan, or (ii) resulting from any obligation of the Company or an ERISA
Affiliate to indemnify any Person against liability incurred with respect to or
in connection with any Plan.
(j) Each Plan which is intended to be qualified under Code
Section 401 has received, within the last five years, a favorable determination
letter from the IRS. No event has occurred and no facts or circumstances exist
which may cause or result in the loss or revocation of such determination.
4.15 No Undisclosed Liabilities. Except (i) to the extent set forth or
provided for in the Balance Sheet or the notes thereto, (ii) as set forth on
Schedule 4.15, or identified as such on other Schedules to this Agreement or
(iii) for non-material current liabilities incurred since the Balance Sheet Date
in the Ordinary Course, as of the date hereof, to the knowledge of the Company's
and the Management Shareholders' knowledge, the Company has no liabilities,
whether accrued, absolute, contingent or otherwise, whether due or to become due
and whether the amounts thereof are readily ascertainable or not, or any
unrealized or anticipated losses from any commitments of a contractual nature,
including Taxes with respect to or based upon the transactions or events
occurring at or prior to the Closing.
4.16 Permits, Licenses, Etc. The Company possesses, and is operating
in compliance with, all franchises, licenses, permits, certificates,
authorizations, rights and other approvals of Governmental Entities necessary to
(i) occupy, maintain, operate and use the Real Property as it is currently used
and proposed to be used, (ii) conduct its business as currently conducted and as
proposed to be conducted, and (iii) maintain and operate its Plans (the
"Permits"). Schedule 4.16 contains a true and complete list of all Permits. Each
Permit has been lawfully and validly issued, and no proceeding is pending or, to
the Management Shareholders' knowledge, threatened looking toward the
revocation, suspension or limitation of any Permit. The consummation of the
transactions contemplated by this Agreement will not result in the revocation,
suspension or limitation of any Permit and, except as set forth in Schedule
4.16, no Permit will require the consent of its issuing authority to or as a
result of the consummation of the transactions contemplated hereby.
4.17 Regulatory Filings. The Company has made all required
registrations and filings with and submissions to all applicable Governmental
Entities, except where the failure to make such registrations, filings and
submissions would not have a Material Adverse Effect on the Company, relating to
the operations of the Company as currently conducted and as proposed to be
conducted, including, without limitation, all such applicable Governmental
Entities having jurisdiction over any matters pertaining to conservation or
protection of the environment, and the treatment, discharge, use, handling,
storage or production, or disposal of Hazardous Materials. All such
registrations, filings and submissions were in compliance with all Legal
Requirements (including all Environmental Laws) and other requirements when
filed, no material deficiencies have been asserted by any such applicable
Governmental Entities with respect to such registrations, filings or submissions
and, no facts or circumstances exist which would indicate
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that a material deficiency may be asserted by any such authority with respect to
any such registration, filing or submission.
4.18 Consents. All consents, authorizations and approvals of any Person
to or as a result of the consummation of the transactions contemplated hereby,
that are necessary, or for which the failure to obtain the same might have,
individually or in the aggregate, a Material Adverse Effect, have been lawfully
and validly obtained by the Company, except as described in Schedules 4.5(c),
4.10 and 4.16 hereto. All consents, authorizations and approvals described in
Schedules 4.5(c), 4.10 and 4.16 will have been lawfully and validly obtained
prior to the Closing.
4.19 Material Contracts: No Defaults.
(a) Schedule 4.19 (a) contains a true and complete list and
description of each individual outstanding sales order and sales contract of the
Company having an indicated gross value in excess of $10,000 or having a term or
duration in excess of six months. All outstanding sales orders and sales
contracts of the Company have been entered into in the Ordinary Course. Except
as described in Schedule 4.19(a), the Company has not received any advance,
progress payment or deposit in respect of any sales order or sales contract, and
the Company has no sales order or sales contract that will result, upon
completion or performance there of, in gross margins materially lower than those
normally experienced by the Company for the services or products covered by such
sales order or sales contract.
(b) Schedule 4.19(b) contains a true and complete list and
description of all outstanding purchase orders and purchase commitments of the
Company having a gross indicated value in excess of $10,000 in the aggregate
from any single supplier or other vendor. All outstanding purchase orders and
purchase commitments of the Company have been incurred in the Ordinary Course,
and no purchase order or purchase commitment of the Company is in excess of the
normal, ordinary and usual requirements of the business of the Company or at an
excessive price. The principal raw materials used and inventory sold by the
Company are available from several sources at competitive prices and upon
competitive terms and no interruption in production or Material Adverse Effect
will result from the loss of any one of such sources.
(c) Schedule 4.19(c) contains a true and complete list of all
sales agency, sales representative, distributor, wholesaler, dealer and similar
contracts or agreements of the Company, and true and complete copies of the same
have been delivered to Purchaser heretofore. Except as described in Schedule
4.19(c), all of such contracts and agreements are terminable at any time by the
applicable Company without penalty (including, without limitation, any
obligation to repurchase inventories on hand) upon not more than 30 days'
notice.
(d) Schedule 4.19(d) contains a true and complete list and
description of all noncompetition agreements and covenants under which the
Company or any of their respective officers, directors or employees or any
Management Shareholder is obligated, and true and complete copies of the same
have been delivered to Purchaser heretofore. Except as described in Schedule
4.19(d), the Company is not restricted by any agreement from carrying on its
business
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or engaging in any other activity anywhere in the world (including relocating,
closing, or terminating any of its operations or facilities), and no such
officer, director, key employee or Management Shareholder is a party to or
otherwise bound or affected by any agreement, covenant or other arrangement or
understanding that would restrict or impair his ability to perform diligently
his other duties to the Company. Schedule 4.19(d) also contains a true and
complete list and description of all noncompetition agreements or covenants in
favor of the Company, and true and complete copies of the same have been
delivered to Purchaser heretofore.
(e) Schedule 4.19(e) contains a true and complete list and
description of all contracts, agreements, understandings, arrangements and
commitments, written or oral, of the Company with any officer, director,
consultant, employee or Affiliate of the Company or with any associate,
Affiliate or employee of any Affiliate of the Company, other than those
disclosed in Schedule 4.21(a) hereto; in each case a true and complete copy of
such written contract, agreement, understanding, arrangement or commitment or a
true and complete summary of such oral contract, agreement, understanding,
arrangement or commitment has been delivered to Purchaser heretofore.
(f) Schedule 4.19(f) contains a true and complete list and
description of all other material contracts, agreements, understandings,
arrangements and commitments, written or oral, of the Company by which it or its
properties, rights or assets are bound that are not otherwise disclosed in this
Agreement or the Schedules hereto. True and complete copies of such written
contracts, agreements, understandings, arrangements and commitments and true and
complete summaries of such oral contracts, agreements, understandings,
arrangements and commitments have been delivered to Purchaser heretofore. For
the purposes of this subsection (f), "material" means any contract, agreement,
understanding, arrangement or commitment that (i) involves performance by any
party more than 90 days from the date hereof, (ii) involves payments or receipts
by the Company in excess of $10,000, (iii) involves capital expenditures in
excess of $10,000 or (iv) otherwise materially affects the Company.
(g) Except as described in Schedule 4.19(g):
(i) each agreement, contract, arrangement or commitment
described above in this Section 4.19 is, and after the Closing on identical
terms will be, legal, valid, binding, enforceable and in full force and effect;
(ii) no event or condition has occurred or become known to
the Company or any Management Shareholder or is alleged to have occurred that
constitutes or, with notice or the passage of time, or both, would constitute a
default or a basis of force majeure or other claim of excusable delay,
termination, nonperformance or accelerated or increased rights by the Company or
any other Person under any contract, agreement, arrangement, commitment or other
understanding, written or oral, described above in this Section 4.19, or
described or otherwise disclosed pursuant to this Agreement; and
(iii) no person with whom the Company has such a contract,
agreement, arrangement, commitment or other understanding is in default
thereunder or has
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failed to perform fully thereunder by reason of force majeure or other claim of
excusable delay, termination or nonperformance thereunder, the delay,
termination or nonperformance of which, or a default under which, has had or may
have a Material Adverse Effect.
4.20 Absence of Certain Changes. Since December 31, 1996, except as
disclosed in Schedule 4.20, the Company has not: (i) incurred any debts,
obligations or liabilities (absolute, accrued, contingent or otherwise), other
than current liabilities incurred in the Ordinary Course which, individually or
in the aggregate, are not material; (ii) subjected to or permitted a Lien (other
than a Permitted Lien) upon or otherwise encumbered any of its assets, tangible
or intangible; (iii) sold, transferred, licensed or leased any of its assets or
properties except in the Ordinary Course; (iv) discharged or satisfied any Lien
other than a Lien securing, or paid any obligation or liability other than,
current liabilities shown on the Balance Sheet and current liabilities incurred
since the Balance Sheet Date, in each case in the Ordinary Course; (v) canceled
or compromised any debt owed to or by or claim of or against it, or waived or
released any right of material value other than in the Ordinary Course; (vi)
suffered any physical damage, destruction or loss (whether or not covered by
insurance) causing a Material Adverse Effect; (vii) entered into any material
transaction or otherwise committed or obligated itself to any capital
expenditure other than in the Ordinary Course; (viii) made or suffered any
change in, or condition affecting, its condition (financial or otherwise),
properties, profitability, prospects or operations other than changes, events or
conditions in the Ordinary Course, none of which (individually or in the
aggregate) has had or may have a Material Adverse Effect; (ix) made any change
in the accounting principles, methods, records or practices followed by it or
depreciation or amortization policies or rates theretofore adopted; (x) other
than in the Ordinary Course, made or suffered any amendment or termination of
any material contract, agreement, lease or license to which it is a party; (xi)
paid, or made any accrual or arrangement for payment of, any severance or
termination pay to, or entered into any employment or loan or loan guarantee
agreement with, any current or former officer, director or employee or
consultant; (xii) paid, or made any accrual or arrangement for payment of, any
increase in compensation, bonuses or special compensation of any kind to any
employee other than pursuant to an agreement disclosed on Schedule 4.21(a) or
Schedule 4.21(b) or other than in the Ordinary Course, or paid, or made any
accrual or arrangement for payment of, any increase in compensation, bonuses or
special compensation of any kind to any officer or director of the Company or
any consultant to the company; (xiii) made or agreed to make any charitable,
contributions or incurred any nonbusiness expenses; (xiv) changed or suffered
change in any benefit plan or labor agreement affecting any employee of the
Company otherwise than to conform to Legal Requirements; or (xv) entered into
any agreement or otherwise obligated itself to do any of the foregoing.
4.21 Employees and Labor Matters.
(a) Schedule 4.21(a) contains a true and complete list of all
contracts, agreements, plans, arrangements, commitments and understandings
(formal and informal) pertaining to terms of employment, compensation, bonuses,
profit sharing, stock purchases, stock repurchases, stock options, commissions,
incentives, loans or loan guarantees, severance pay or benefits, use of the
Company's property and related matters of the Company with any current or former
officer, director, employee or consultant, and true and complete copies of all
such
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contracts, agreements, plans, arrangements and understandings have been
delivered to Purchaser heretofore.
(b) Schedule 4.21(b) contains a true and complete list of all
labor, collective bargaining, union and similar agreements under or by which the
Company is obligated, and true and complete copies of all such agreements have
been delivered to Purchaser heretofore.
(c) Except as set forth on Schedules 4.21(a) and 4.21(b),
neither Purchaser nor the Company will have any responsibility for continuing
any person in the employ (or retaining any person as a consultant) of the
Company from and after the Closing or have any liability for any severance
payments to or similar arrangements with any such Person who shall cease to be
an employee of the Company at or prior to the Closing.
(d) There is not occurring or, to the Management Shareholders'
knowledge, threatened, any strike, slow down, picket, work stoppage or other
concerted action by any union or other group of employees or other persons
against either Company or its premises or products. Except for activities by the
unions that are parties to any of the agreements listed on Schedule 4.21(b) with
respect to the existing members of such unions, to the Management Shareholders'
knowledge, no union or other labor organization has attempted to organize any of
the employees of the Company.
(e) The Company has complied with all Legal Requirements,
except where the failure to comply with such Legal Requirements would not have a
Material Adverse Effect on the Company, relating to employment and labor, and,
to the Management Shareholders' knowledge, no facts or circumstances exist that
could provide a reasonable basis for a claim of wrongful termination by any
current or former employee of the Company against the Company.
4.22 Affiliations. Except as disclosed on Schedule 4.22, none of the
Management Shareholders, any officer, director or key employee of the Company or
any associate or Affiliate of the Company or any of such Persons has, directly
or indirectly, (i) an interest in any Person that (A) furnishes or sells, or
proposes to furnish or sell, services or products that are furnished or sold by
the Company or (B) purchases from or sells or furnishes to, or proposes to
purchase from or sell or furnish to, the Company any goods or services or (ii) a
beneficial interest in any contract or agreement to which the Company is a party
or by which the Company or any of the assets of the Company are bound or
affected.
4.23 Principal Customers and Suppliers.
(a) Schedule 4.23(a) contains a true and complete list of the
name and address of each customer that purchased in excess of 5% of the
Company's sales of goods or services during the twelve months ended on the
Balance Sheet Date, and since that date no such customer has terminated its
relationship with or adversely curtailed its purchases from the Company or
indicated (for any reason) its intention so to terminate its relationship or
curtail its purchases.
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(b) Schedule 4.23(b) contains a true and complete list of each
supplier from whom the Company purchased in excess of 5% of the Company's
purchases of goods or services during the twelve months ended on the Balance
Sheet Date, and since that date no such supplier has terminated its relationship
with or adversely curtailed its accommodations, sales or services to the Company
or indicated (for any reason) its intention to terminate such relationship or
curtail its accommodations, sales or services.
4.24 Compliance with Law. Except as set forth on Schedule 4.24, through
and including the date hereof, the Company (i) has not violated or conducted its
business or operations in violation of, and has not used or occupied its
properties or assets in violation of, any Legal Requirement, (ii) to the
Management Shareholders' knowledge, has not been alleged to be in violation of
any Legal Requirement, and (iii) has not received any notice of any alleged
violation of, or any citation for noncompliance with, any Legal Requirement.
4.25 Product Returns. Schedule 4.25 contains a true and complete
description of the product return experience of the Company for the last three
years. The Company has not experienced any product returns which have had or may
have a Material Adverse Effect.
4.26 Product Liability and Product Warranty. Schedule 4.26 hereto
contains a true and complete description of (i) all warranties granted or made
with respect to products sold, or services rendered, by the Company and (ii) the
Company's product liability and product warranty experience for the last three
years. The Company has not suffered any product liability or product warranty
claims which have had or may have a Material Adverse Effect.
4.27 Corporate Records. The copies or originals of the Articles of
Incorporation, Bylaws, minute books and stock records of the Company previously
delivered to, or made available for inspection by, Purchaser are true, complete
and correct in all material respects.
4.28 Hazardous Materials. Except as set forth on Schedule 4.28:
(a) No Hazardous Material (i) has been released, placed,
stored, generated, used, manufactured, treated, deposited, spilled, discharged,
released or disposed of on or under any real property currently or previously
owned or leased by the Company or is presently located on or under any Real
Property (or, to the Management Shareholders' knowledge, any property adjoining
any Real Property), (ii) is presently maintained, used, generated, or permitted
to remain in place by the Company in violation of any Environmental Law, (iii)
is required by any Environmental Law to be eliminated, removed, treated or
mitigated by the Company, given the nature of its present condition, location,
nature, material or maintenance, or (iv) is of a type, location, material,
nature or condition which requires special notification to third parties by the
Company under Environmental Law or common law.
(b) No notice, citation, summons or order has been received by
the Company or any Management Shareholder, no notice has been given by the
Company and no complaint has been filed, no penalty has been assessed and no
investigation or review is pending or threatened by any Governmental Entity,
with respect to (i) any alleged violation by the Company
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of any Environmental Law or (ii) any alleged failure by the Company to have any
environmental permit, certificate, license, approval, registration or
authorization required in connection with its business or properties, or (iii)
any use, possession, generation, treatment, storage, recycling, transportation,
release or disposal by or on behalf of the Company of any Hazardous Material.
(c) The Company has not received any request for information,
notice of claim, demand or notification that it is or that indicates that it may
be a "potentially responsible party" with respect to any investigation or
remediation of any threatened or actual release of any Hazardous Material.
(d) No above-ground or underground storage tanks, whether or
not in use, are or have ever been located at any property currently owned or
leased by the Company.
(e) No notice has been received by the Company with respect to
the listing or proposed listing of any property currently or previously owned,
operated or leased by the Company on the National Priorities List promulgated
pursuant to CERCLA, CERCLIS or any similar state list of sites requiring
investigation or cleanup.
(f) There have been no environmental inspections,
investigations, studies, tests, reviews or other analyses conducted in relation
to any Real Property.
(g) The Company has not released, transported, or arranged for
the transportation of any Hazardous Material from any property currently or
previously owned, operated or leased by the Company.
4.29 Brokers' Fees. No broker, finder or similar agent has been
employed by or on behalf of the Company in connection with this Agreement or the
transactions contemplated hereby, and the Company has not entered into any
agreement or understanding of any kind with any person or entity for the payment
of any brokerage commission, finder's fee or any similar compensation in
connection with this Agreement or the transactions contemplated hereby, except
as set forth on Schedule 4.29, which such commission, fee or any similar
compensation associated therewith shall be paid by the Management Shareholders.
4.30 Execution and Delivery. This Agreement has been duly authorized by
all necessary corporate action on the part of the Company, has been duly
executed and delivered by the Company and the Management Shareholders and
constitutes the legal, valid and binding Agreement of the Company and the
Management Shareholders, enforceable against the Company and each of the
Management Shareholders respectively, in accordance with its terms.
4.31 Disclosure. No representation or warranty in this Agreement and no
information contained in any Schedule or other writing delivered pursuant to
this Agreement, or at the Closing contains or will contain any untrue statement
of a material fact or omits or will omit to state a material fact required to
make the statements herein or therein not misleading, except for the Company's
Private Placement Memorandum dated September 11, 1996, which shall be true and
correct as of that date. There is no fact that the Management Shareholders have
not
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disclosed to Purchaser in writing that has had or, insofar as any Management
Shareholder can now foresee, may have a Material Adverse Effect on the ability
of any Management Shareholder to perform fully this Agreement.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to, and covenants and agrees
with, each of the Management Shareholders that:
5.1 Organization and Good Standing. Purchaser has been duly organized
and is existing as a corporation in good standing under the laws of the
Commonwealth of Pennsylvania with full corporate power and authority to enter
into this Agreement and to consummate the transactions contemplated hereby.
5.2 Execution and Delivery. This Agreement has been duly authorized by
all necessary corporate action on the part of Purchaser, has been duly executed
and delivered by Purchaser and constitutes the legal, valid and binding
Agreement of Purchaser enforceable against Purchaser in accordance with its
terms.
5.3 No Conflicts. The execution, delivery and performance of this
Agreement by Purchaser and the consummation by Purchaser of the transactions
contemplated hereby will not conflict with or result in the violation of the
provisions of the Articles of Incorporation or Bylaws of Purchaser.
5.4 Shares Acquired For Investment.
(a) The Purchaser represents, covenants and warrants that it
is acquiring the Shares for its own account for the purpose of investment and
not with a view to or for sale in connection with any distribution thereof. The
Purchaser will not offer to sell or otherwise transfer any of the Shares in
violation of any federal or state securities law. The Purchaser acknowledges
that the sale of the Shares to it has not been registered pursuant to any
federal or state securities laws and that a legend to that effect may be placed
on all certificates representing such Shares unless and until a registration
statement under the Securities Act has become effective with respect to such
Shares.
(b) Purchaser (or Purchaser together with Purchaser's
acquisition representative(s)) possesses such knowledge and experience in
financial and business matters that Purchaser is capable of evaluating the
merits and risk of Purchaser's investment in the Company and is making an
informed investment decision. Purchaser is an "accredited investor," as that
term is defined in Rule 501(a) of Regulation D promulgated under the Securities
Act of 1933, as amended (the "Act").
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(c) Purchaser acknowledges receipt of a copy of that certain
Confidential Private Placement Memorandum dated September 11, 1996, (the
"Offering Memorandum"). The Company has provided Purchaser an opportunity to ask
questions and receive answers concerning the business and affairs of the Company
and to obtain additional information which the Company possesses or can acquire
without unreasonable effort or expense that is necessary to verify the accuracy
of the information provided to Purchaser. All information requested has been
provided by the Company.
(d) The opportunity to acquire the Shares was not made
available to Purchaser by means of any form of general solicitation, or general
advertising, or publicly disseminated advertisement or sales literature,
including, but not limited to, (a) any advertisement, article, notice or
communication published in any newspaper, magazine or similar media, or
broadcast over television or radio and (b) any seminar or meeting whose
attendees have been invited by any general solicitation or general advertising.
5.5 Purchaser Disclosure Documents. The Purchaser has previously
delivered to the Company, and the Company hereby acknowledges receipt of copies
of the Purchaser's Annual Report on Form 10-K for the year ended October 31,
1996 and (ii) the Purchaser's Quarterly Reports on Form 10-Q for the quarters
ended January 31, 1997 and April 30, 1997 (collectively, the "Purchaser
Disclosure Documents"). None of the Purchaser Disclosure Documents as of the
respective dates thereof contained, any untrue statement of a material fact or
omitted to state a material fact necessary to make the statements contained
therein, in light of the circumstances under which they were made, taken as a
whole, not misleading except as the accuracy and/or completeness thereof may be
affected by this Agreement and the transactions contemplated hereby.
ARTICLE 6
CONDUCT OF BUSINESS PENDING CLOSING
During the period commencing on the date hereof and continuing through
the Closing Date, the Company and Management Shareholders jointly and severally
covenant and agree (except as expressly contemplated by this Agreement or to the
extent that Purchaser shall otherwise expressly consent in writing) that:
6.1 Qualification. The Company shall maintain all qualifications to
transact business and remain in good standing in its jurisdiction of
incorporation and in the foreign jurisdictions set forth on Schedule 4.1(a).
6.2 Ordinary Course. The Company shall conduct its business in, and
only in, the Ordinary Course and, to the extent consistent with such business,
shall preserve intact its current business organizations, keep available the
services of its current officers and employees and preserve its relationships
with customers, suppliers and others having business dealings with it to
the end that its goodwill and going business value shall be unimpaired at the
Closing Date. The Company shall maintain its properties and assets in good
condition and repair.
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6.3 Corporate Changes. The Company shall not (a) amend its Articles of
Incorporation or Bylaws (or equivalent documents), (b) acquire by merging or
consolidating with, or agreeing to merge or consolidate with, or purchase
substantially all of the stock or assets of, or otherwise acquire, any business
or any corporation, partnership, association or other business organization or
division thereof, (c) enter any partnership or joint venture (d) declare, set
into aside, make or pay any dividend or other distribution in respect of its
capital stock or purchase or redeem, directly or indirectly any shares of its
capital stock, (e) issue or sell any shares of its capital stock of any class or
any options, warrants, conversion or other rights to purchase any such shares or
any securities convertible into or exchangeable for such shares, or (f)
liquidate or dissolve or obligate itself to do.
6.4 Indebtedness. The Company shall not incur any Indebtedness, sell
any debt securities or lend money to or guarantee the Indebtedness of any
Person. The Company shall not restructure or refinance its existing
Indebtedness.
6.5 Accounting. The Company shall not make any change in the accounting
principles, methods, records or practices followed by it or depreciation or
amortization policies or rates heretofore adopted by it. The Company shall
maintain its books, records and accounts in accordance with generally accepted
accounting principles applied on a basis consistent with that of prior periods.
6.6 Compliance with Legal Requirements. The Company shall comply
promptly with all requirements that applicable law may impose upon it and its
operations and with respect to the transactions contemplated by this Agreement,
and shall cooperate promptly with, and furnish information to, Purchaser in
connection with any such requirements imposed upon Purchaser, or upon any of its
affiliates, in connection therewith or herewith.
6.7 Disposition of Assets. The Company shall not sell, transfer,
license, lease or otherwise dispose of, or suffer or cause the encumbrance by
any Lien upon any of its properties or assets, tangible or intangible, or any
interest therein, except for sales of inventory in the Ordinary Course.
6.8 Compensation. The Company shall not (a) adopt or amend in any
material respect any collective bargaining, bonus, profit-sharing, compensation,
stock option, pension, retirement, deferred compensation, employment or other
plan, agreement, trust, fund or arrangement for the benefit of employees
(whether or not legally binding) other than to comply with any Legal Requirement
or (b) pay, or make any accrual or arrangement for payment of, any increase in
compensation, bonuses or special compensation of any kind, or any severance or
termination pay to, or enter into any employment or loan or loan guarantee
agreement with, any current or former officer, director, employee or consultant
of the Company.
6.9 Modification or Breach of Agreements; New Agreements. The Company
shall not terminate or modify, or commit or cause or suffer to be committed any
act that will result in breach or violation of any term of or (with or without
notice or passage of time, or both) constitute a default under or otherwise give
any person a basis for nonperformance under, any
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indenture, mortgage, deed of trust, loan or credit agreement, lease, license or
other agreement, instrument, arrangement or understanding, written or oral,
disclosed in this Agreement or the Schedules hereto. The Company shall refrain
from becoming a party to any contract or commitment other than in the Ordinary
Course. The Company shall meet all of its contractual obligations in accordance
with their respective terms.
6.10 Capital Expenditures. Except for capital expenditures or
commitments necessary to maintain its properties and assets in good condition
and repair (the amount of which shall not exceed $10,000 in the aggregate), the
Company shall not purchase or enter into any contract to purchase any capital
assets.
6.11 Consents. The Company shall obtain any consent, authorization or
approval of, or exemption by, any Person required to be obtained or made by any
party hereto in connection with the transactions contemplated hereby or the
taking of any action in connection with the consummation thereof.
6.12 Maintain Insurance. The Company shall maintain its Policies in
full force and effect and shall not do, permit or willingly allow to be done any
act by which any of the Policies may be suspended, impaired or canceled.
6.13 Discharge. The Company shall not cancel, compromise, release or
discharge any claim of the Company upon or against any person or waive any right
of the Company of material value, and not discharge any Lien (other than
Permitted Liens) upon any asset of the Company or compromise any debt or other
obligation of the Company to any person other than Liens, debts or obligations
with respect to current liabilities of the Company.
6.14 Actions. The Company shall not institute, settle or agree to
settle any Action before any Governmental Entity.
6.15 Permits. The Company shall maintain in full force and effect, and
comply with, all Permits.
6.16 Tax Assessment and Audits. The Company shall furnish promptly to
Purchaser a copy of all notices of proposed assessment or similar notices or
reports that are received from any taxing authority and which relate to the
Company's operations for periods ending on or prior to the Closing Date. The
shareholders shall cause the Company to promptly inform Purchaser, and permit
the participation in and control by Purchaser, of any investigation, audit or
other proceeding by a Governmental Entity in connection with any Taxes,
assessment, governmental charge or duty and shall not consent to any settlement
or final determination in any proceeding without the prior written consent of
Purchaser.
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ARTICLE 7
ADDITIONAL COVENANTS
7.1 Covenants of the Company. During the period from the date hereof to
the Closing Date, the Company agrees to:
(a) comply promptly with all requirements that applicable
Legal Requirements may impose upon it with respect to the transactions
contemplated by this Agreement, and shall cooperate promptly with, and furnish
information to, the shareholders in connection with any such requirements
imposed upon the shareholders or the Company or upon any of the Company's
affiliates in connection therewith or herewith;
(b) obtain (and to cooperate with Purchaser in obtaining) any
consent, authorization or approval of, or exemption by, any Person required to
be obtained or made by the Company in connection with the transaction
contemplated by this Agreement;
(c) use its reasonable best efforts to bring about the
satisfaction of the conditions precedent to Closing set forth in Section 8.1 of
this Agreement;
(d) promptly advise Purchaser orally and, within three
business days thereafter, in writing of any change in such Company's business or
condition that has had or may have a Material Adverse Effect; and
(e) deliver to Purchaser prior to the Closing a written
statement disclosing any untrue statement in this Agreement or any Schedule
hereto (or supplement thereto) or document furnished pursuant hereto, or any
omission to state any material fact required to make the statements herein or
therein contained complete and not misleading, promptly upon the discovery of
such untrue statement or omission, accompanied by a written supplement to any
Schedule to this Agreement that may be affected thereby; provided, however, that
the disclosure of such untrue statement or omission shall not prevent Purchaser
from terminating this Agreement pursuant to Section 9.1(c) hereof at any time at
or prior to the Closing in respect of any original untrue or misleading
statement.
(f) at Closing the only shares of capital stock outstanding
shall be the Common Stock. All transactions whereby existing securities of the
Company have been converted or exchanged into shares of Common Stock shall have
been in compliance with all applicable laws, including Federal and state
securities laws.
(g) the Company shall provide Purchaser such registration
rights as set forth in Annex I hereto (the "Registration Rights Agreement").
7.2 Covenants of the Management Shareholders. During the period from
the date hereof to the Closing Date, Management Shareholder agrees to:
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(a) comply promptly with all requirements that applicable
Legal Requirements may impose upon it with respect to the transactions
contemplated by this Agreement, and shall cooperate promptly with, and furnish
information to, Purchaser in connection with any such requirements imposed upon
Purchaser or upon any of its affiliates in connection therewith or herewith;
(b) obtain (and to cooperate with Purchaser in obtaining) any
consent, authorization or approval of, or exemption by, any Person required to
be obtained or made by such Management Shareholder in connection with the
transactions contemplated by this Agreement;
(c) use its reasonable best efforts to bring about the
satisfaction of the conditions precedent to closing set forth in Sections 8.1
and 8.2 of this Agreement;
(d) promptly advise Purchaser orally and, within three
business days thereafter, in writing of any change in such Company's business or
condition that has had or may have a Material Adverse Effect; and
(e) deliver to Purchaser prior to the Closing a written
statement disclosing any untrue statement in this Agreement or any Schedule
hereto (or supplement thereto) or document furnished pursuant hereto, or any
omission to state any material fact required to make the statements herein or
therein contained complete and not misleading, promptly upon the discovery of
such untrue statement or omission, accompanied by a written supplement to any
Schedule to this Agreement that may be affected thereby; provided, however, that
the disclosure of such untrue statement or omission shall not prevent Purchaser
from terminating this Agreement pursuant to Section 9.1(c) hereof at any time at
or prior to the Closing in respect of any original untrue or misleading
statement.
7.3 Covenants of Purchaser. During the period from the date hereof to
the Closing Date, Purchaser shall:
(a) comply promptly with all requirements that applicable
Legal Requirements may impose upon it with respect to the transactions
contemplated by this Agreement, and shall cooperate promptly with, and furnish
information to, the Company and the Management Shareholders in connection with
any such requirements imposed upon the Company or the Management Shareholders or
upon any of the Company's affiliates in connection therewith or herewith;
(b) use its reasonable best efforts to obtain any consent,
authorization or approval of, or exemption by, any Person required to be
obtained or made by Purchaser in connection with the transactions contemplated
by this Agreement; and
(c) use its reasonable best efforts to bring about the
satisfaction of the conditions precedent to Closing set forth in Section 8.2 and
8.3 of this Agreement.
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7.4 Access and Information.
(a) During the period commencing on the date hereof and
continuing through the Closing Date, the Company and the Management Shareholders
shall afford to Purchaser and to Purchaser's accountants, counsel, investment
bankers and other representatives, reasonable access to all of its properties,
books, contracts, commitments, records and personnel and, during such period, to
furnish promptly to Purchaser all information concerning its business,
properties and personnel as Purchaser may reasonably request.
(b) Except to the extent permitted by the provisions of
Section 7.6 hereof, Purchaser shall hold in confidence, and shall use reasonable
efforts to ensure that its employees and representatives hold in confidence, all
such information supplied to it by the Management Shareholders or the Company
concerning the Company and shall not disclose such information to any third
party except as may be required by any Legal Requirement and except for
information that (i) is or becomes generally available to the public other than
as a result of disclosure by Purchaser or its representatives, (ii) becomes
available to Purchaser or its representatives from a third party other than the
Management Shareholders or the Company and Purchaser or its representatives have
no reason to believe that such third party is not entitled to disclose such
information, (iii) is known to Purchaser or its representatives on a
non-confidential basis prior to its disclosure by any Management Shareholder or
the Company or (iv) is made available by any Management Shareholder or the
Company to any other Person on a non-restricted basis. Purchaser's obligations
under the foregoing sentence shall expire two years after the date hereof.
7.5 Expenses. All costs and expenses (including, without limitation,
all legal fees and expenses and fees and expenses of any brokers, finders or
similar agents) incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring the same.
7.6 Certain Notifications. At all times from the date hereof to the
Closing Date, each party shall promptly notify the others in writing of the
occurrence of any event that will or may result in the failure to satisfy any of
the conditions specified in Article 8 hereof.
7.7 Publicity; Employee Communications. At all times prior to the
Closing Date, each party shall obtain the consent of all other parties hereto
prior to issuing, or permitting any of its directors, officers, employees or
agents to issue, any press release or other information to the press, employees
of the Company or any third party with respect to this Agreement or the
transactions contemplated hereby; provided, however, that no party shall be
prohibited from supplying any information to any of is representatives, agents,
attorneys, advisors, financing sources and others to the extent necessary to
complete the transactions contemplated hereby so long as such representatives,
agents, attorneys, advisors, financing sources and others are made aware of the
terms of this Section 7.6. Nothing contained in this Agreement shall prevent any
party to this Agreement at any time from furnishing any required information to
any Governmental Entity or authority pursuant to a Legal Requirement or from
complying with its legal or contractual obligations.
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7.8 Further Assurances.
(a) Subject to the terms and conditions of this Agreement,
each of the parties hereto agrees to use all reasonable efforts to take, or
cause to be taken, all action, and to do, or cause to be done, all things
necessary, proper or advisable under applicable Legal Requirements, to
consummate and make effective the transactions contemplated by this Agreement.
(b) If at any time after the Closing any further action is
necessary or desirable to carry out the purposes of this Agreement, the Company,
the Management Shareholders and the Purchaser, as the case may be, shall take or
cause to be taken all such necessary or convenient action and execute, and
deliver and file, or cause to be executed, delivered and filed, all necessary or
convenient documentation.
7.9 Competing Offers; Merger or Liquidation. The Company and the
Management Shareholders agree that they will not, directly or indirectly,
through any officer, director, agent, or otherwise, solicit, initiate or
encourage the submissions of bids, offers or proposals by, any Person with
respect to an acquisition of the Company or its assets or capital stock or a
merger or similar transaction, and the Management Shareholders will not, and
will not permit the Company to, engage any broker, financial adviser or
consultant with an incentive to initiate or encourage proposals or offers from
other parties. Furthermore, the Company and the Management Shareholders shall
not directly or indirectly, through any officer, director, agent or otherwise,
engage in negotiations concerning any such transaction with, or provide
information to, any Person other than Purchaser and its representatives with a
view to engaging, or preparing to engage, that Person with respect to any
matters in this Section. The Management Shareholders shall ensure that the
Company shall not commence any proceeding to merge, consolidate or liquidate or
dissolve or obligate itself to do so.
7.10 Inconsistent Action. Neither the Company nor the Management
Shareholders shall not take or suffer to be taken, and shall not permit the
Company or the Management Shareholders, as the case may be, to take or cause or
suffer to be taken, any action that would cause any of the representations or
warranties of the Company or any of the Management Shareholders in this
Agreement to be untrue, incorrect, incomplete or misleading.
7.11 Termination Statements. The Company shall obtain termination
statements (ucc-3's) with respect to the security interests of the parties
listed on Exhibit 7.11 hereof.
7.12 Bell South Agreement. The Company is party to an agreement with
Bell South Wireless Inc., dated as of November 24, 1995 (the "Bell South
Agreement"), which is presently being renegotiated. The Purchaser shall have the
right to terminate any or all of its future obligations hereunder, if the Bell
South Agreement is not amended to the reasonable satisfaction of Purchaser by
September 1, 1997. Accordingly, Purchaser shall not be permitted to rescind its
purchase pursuant to Section 2.4 hereof, based solely upon the failure to
satisfy the provisions of this Section 7.12.
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ARTICLE 8
CONDITIONS PRECEDENT TO CLOSING
8.1 Conditions of Purchaser. Notwithstanding any other provision of
this Agreement, the obligations of Purchaser to consummate the transactions
contemplated hereby shall be subject to the satisfaction, at or prior to the
Closing Date, of the following conditions:
(a) There shall not be instituted and pending or threatened
any Action before any Governmental Entity (i) challenging the acquisition of the
Shares by Purchaser or otherwise seeking to restrain or prohibit the
consummation of the transactions contemplated hereby or (ii) seeking to prohibit
the direct or indirect ownership or operation by Purchaser of all or a material
portion of the business or assets of the Company, or to compel Purchaser or the
Company to dispose of or hold separate all or a material portion of the business
or assets of the Company or Purchaser;
(b) The representations and warranties of each of the
Management Shareholders in this Agreement shall be true and correct in all
respects on and as of the Closing Date with the same effect as if made on the
Closing Date and each of the Management Shareholders shall have complied with
all covenants and agreements and satisfied all conditions on such Management
Shareholder's part to be performed or satisfied on or prior to the Closing Date;
(c) The representations and warranties of the Company shall be
true and correct in all respects on and as of the Closing Date with the same
effect as if made on the Closing Date and the Company shall have complied with
all covenants and agreements and satisfied all conditions on the Company's part
to be performed or satisfied on or prior to the Closing Date;
(d) Purchaser shall have received from Wagner, Johnston &
Rosenthal, P.C., counsel for the Management Shareholders and the Company, a
written opinion dated the Closing Date and addressed to Purchaser, in
substantially the form attached as Exhibit 8.1(d) hereto;
(e) Purchaser shall have received from the President of the
Company a certificate dated the Closing Date in substantially the form attached
as Exhibit 8.1(e) hereto;
(f) Purchaser shall have received a certificate from the
Management Shareholders dated the Closing Date in substantially the form
attached as Exhibit 8.1(f) hereto;
(g) Purchaser shall have received a certificate of the
Secretary of the Company in substantially the form attached as Exhibit 8.1(g)
hereto;
(h) The Company shall have entered into Employment Agreements
with John K. Collings, III, Peter J. Quinn and David G. Tattersall, in
substantially the form attached as Exhibit 8.1(h) hereto, (collectively, the
"Employment Agreements")
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(i) The Company shall have entered into a Registration Rights
Agreements with Purchaser, in substantially the form attached as Exhibit 8.1(i)
hereto, (collectively, the "Registration Rights Agreement").
(j) Purchaser shall have concluded (through its
representatives, accountants, counsel and other experts) an investigation of the
business, condition (financial and other), properties, assets, prospects,
operations and affairs of the Company and shall be satisfied, in its sole
discretion, with the results thereof;
(k) All corporate and other proceedings and actions taken in
connection with the transactions contemplated hereby and all certificates,
opinions, agreements, instruments, releases and documents referenced herein or
incident to the transactions contemplated hereby shall be in form and substance
satisfactory to Purchaser and its counsel;
(l) Purchaser shall have received reasonable assurances from
those employees, if any, of the Company that may be identified by Purchaser in
its discretion that they will remain in the employ of the Company for a
reasonable period of time after the consummation of the transactions
contemplated hereby;
(m) All consents from third parties, including those from any
Governmental Entity, landlord or other Person, necessary for the consummation of
the transactions contemplated hereby shall have been obtained;
(n) The Board of Directors of Purchaser shall have authorized
and approved this Agreement and the transactions contemplated hereby;
(o) Purchaser shall have received from the Company,
documentation in connection with the Company's leasing arrangement in
substantially the form attached as Exhibit 8.1(o).
(p) Purchaser shall have received evidence from the Company
satisfactory to the Purchaser, that the Company has obtained adequate insurance
for the operation of the Company in which the Purchaser is named as a loss-payee
to such policies.
(q) Purchaser shall have received from the Company an executed
Agreement with the Management Shareholders in substantially the form attached as
Exhibit 8.1(q).
(r) Purchaser shall have received evidence from the Company
satisfactory to the Purchaser that the Promissory Note ("Europlex Note") to and
the Security Agreement with Europlex Technologies [USA], Inc. ("Europlex") and
that other debt to Europlex, related to the purchase of intangible assets,
including a Central Message Processing Center ("CMPC"), from Europlex ("CMPC
Debt"), has been amended to provide for the remaining principal balance under
such debt to be paid as follows: (i) the outstanding principal balance of the
Europlex Note upon Closing Date, (ii) fifty percent (50%) of the CMPC Debt upon
the funding of $950,000 to the Company by Purchaser under that certain Loan and
Security Agreement, of even date
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herewith ("First Loan Funding") and (iii) the remainder of the CMPC Debt on the
date no later than ninety (90) days after First Loan Funding.
(s) No act, event or condition shall have occurred after the
date hereof which Purchaser determines has had or could have a Material Adverse
Effect.
(t) The Bell South Agreement and the License Agreement between
Europlex Research Limited and the Company shall be amended to the satisfaction
of Purchaser.
8.2 Conditions of the Company. Notwithstanding any other provisions of
this Agreement and except as set forth below, the obligations of the Company to
consummate the transactions contemplated hereby shall be subject to the
satisfaction, at or prior to the Closing of the conditions set forth in
subsection (a) of Section 8.1, and the condition that the representations and
warranties of the Purchaser in this Agreement shall be true and correct in all
material respects on and as of the Closing Date with the same effect as if made
on the Closing Date and Purchaser shall have complied with all covenants and
agreements and satisfied all conditions on its part to be performed or satisfied
on or prior to the Closing Date.
8.3 Conditions of the Management Shareholders. Notwithstanding any
other provision of this Agreement, and except as set forth below, the
obligations of the Management Shareholders to consummate the transactions
contemplated hereby shall be subject to the satisfaction, at or prior to the
Closing, of the conditions set forth in subsection (a) of Section 8.1, and the
condition that the representations and warranties of Purchaser in this Agreement
shall be true and correct in all material respects on and as of the Closing Date
with the same effect as if made on the Closing Date and Purchaser shall have
complied with all covenants and agreements and satisfied all conditions on its
part to be performed or satisfied on or prior to the Closing Date.
ARTICLE 9
TERMINATION, AMENDMENT AND WAIVER
9.1 Termination. This Agreement may be terminated at any time prior to
the Closing:
(a) by mutual consent of the Purchaser and the Management
Shareholders;
(b) by the Company, or the Management Shareholders, acting
together, on the one hand, or by Purchaser, on the other hand, by written notice
to the other party or parties hereto if the sale of Shares shall not have been
consummated on or before July 31, 1997 (or such later date as Purchaser, the
Company and the Management Shareholders may agree), provided that in the case of
a termination under this clause (b) , the party or parties terminating this
Agreement shall not then be in material breach of any of its or their
obligations under this Agreement;
(c) by Purchaser if (i) there has been a material
misrepresentation, breach of warranty or breach of covenant by the Company or
any Management Shareholder under this Agreement or (ii) any of the conditions
precedent to Closing set forth in Section 8.1 have not
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been met on the Closing Date, and, in each case, Purchaser is not then in
material default of its obligations hereunder; or
(d) by the Company if (i) there has been a material
representation, breach of warranty or breach of covenant by Purchaser under this
Agreement or (ii) any of the conditions precedent to Closing set forth in
Section 8.2 have not been met on the Closing Date and, in each case, the Company
is not then in material default of his or her obligations hereunder.
(e) by a majority in interest of the Management Shareholders
acting together if (i) there has been a material misrepresentation, breach of
warranty or breach of covenant by Purchaser under this Agreement or (ii) any of
the conditions precedent to Closing set forth in Section 8.3 have not been met
on the Closing Date, and, in each case, no Management Shareholder is then in
material default of his obligations hereunder.
9.2 Effect of Termination.
(a) In the case of any termination of this Agreement, the
provisions of Section 7.3 and 7.4 shall remain in full force and effect.
(b) Upon termination of this Agreement as provided in Section
9.1 (a), except as stated in subsection (a) above, this Agreement shall
forthwith become void and there shall be no liability or obligation on the part
of any party hereto or their respective directors, officers, employees, agents
or other representatives.
(c) In the event of termination of this Agreement as provided
in Section 9.1 (b), (c), (d) or (e) hereof, such termination shall be without
prejudice to any rights that the terminating party or parties may have against
the breaching party or parties or any other person under the terms of this
Agreement or otherwise.
9.3 Amendment. This Agreement may be amended at any time by a written
instrument executed by the Purchaser, the Company and the Management
Shareholders. Any amendment effected pursuant to this Section 9.3 shall be
binding upon all parties hereto.
9.4 Waiver. Any term or provision of this Agreement may be waived in
writing at any time by the party or parties entitled to the benefits thereof.
Any waiver effected pursuant to this Section 9.4 shall be binding upon all
parties hereto. No failure to exercise and no delay in exercising any right,
power or privilege shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, power or privilege preclude the exercise of any
other right, power or privilege. No waiver of any breach of any covenant or
agreement hereunder shall be deemed a waiver of any preceding or subsequent
breach of the same or any other covenant or agreement. The rights and remedies
of each party under this Agreement are in addition to all other rights and
remedies, at law or in equity, that such party may have against the other
parties.
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ARTICLE 10
INDEMNIFICATION
10.1 Survival of Representations and Warranties. The representations
and warranties of the parties hereto contained in this Agreement or in any
writing delivered pursuant hereto or at the Closing shall survive the Closing
and the consummation of the transactions contemplated hereby (and any
examination or investigation by or on behalf of any party hereto) until the
anniversary of the Closing Date; provided, that upon the Closing of either the
First Call hereunder or the Second Call under the Shareholders' Agreement, such
representations and warranties shall be re-made at each closing and, when
re-made shall survive until the first anniversary of the respective closing
dates of each of the First Call and Second Call.
10.2 Indemnification.
(a) The Company, covenants and agrees to defend, indemnify and
hold harmless Purchaser and each Person who controls Purchaser within the
meaning of the Securities Act from and against any Damages arising out of or
resulting from: (i) any inaccuracy in or breach of any representation or
warranty made by the Company in this Agreement or in any writing delivered
pursuant to this Agreement or at Closing; (ii) the failure of the Company to
perform or observe fully any covenant, agreement or provision to be performed or
observed by the Company pursuant to this Agreement; or (iii) any items listed on
Schedule 4.11 hereto.
(b) The Management Shareholders, severally, but not jointly,
covenant and agree to defend, indemnify and hold harmless Purchaser and each
Person who controls Purchaser within the meaning of the Securities Act from and
against any Damages arising out of or resulting from: (i) any inaccuracy in or
breach of any representation or warranty made by any Management Shareholder in
this Agreement or in any writing delivered pursuant to this Agreement or at the
Closing; or (ii) the failure of any Management Shareholder to perform or observe
fully any covenant, agreement or provision to be performed or observed by such
Management Shareholder pursuant to this Agreement.
(c) The Management Shareholders, jointly and severally,
covenant and agree to defend, indemnify and hold harmless Purchaser and each
Person who controls Purchaser within the meaning of the Securities Act from and
against any Damages arising out of or resulting from any inaccuracy in or breach
of any representation or warranty made by any Management Shareholder in Article
4 of this Agreement.
(d) Purchaser covenants and agrees to defend, indemnify and
hold harmless the Company and the Management Shareholders from and against any
Damages arising out of or resulting from: (i) any inaccuracy in or breach of any
representation or warranty made by Purchaser in this Agreement or in any writing
delivered pursuant to this Agreement or at the Closing; or (ii) the failure by
Purchaser to perform or observe any covenant, agreement or condition to be
performed or observed by it pursuant to this Agreement.
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(e) The maximum aggregate liability of the Company and the
Management Shareholders for indemnification under Article 10 of this Agreement
is (i) $1,000,000 prior to the exercise by Purchaser of the First Call, (ii)
$6,000,000 after the exercise by Purchaser of the First Call but prior to the
exercise by Purchaser of Second call under the Shareholders' Agreement and (iii)
the sum of $6,000,000 and the Second Call Purchase Price (as defined in the
Shareholders' Agreement) after the exercise by Purchaser of the Second Call;
provided however, that with respect to indemnification by the Management
Shareholders, their respective personal residences shall be excluded from
satisfying such indemnification obligations. The Company and the Management
Shareholders shall not be liable for indemnification under this Agreement until
the aggregate of such claims exceeds $50,000 and then Purchaser shall be
entitled to recover the entire amount of such claims.
(f) The maximum aggregate liability of the Purchaser for
indemnification under Article 10 of this Agreement is (i) $1,000,000 prior to
the exercise by Purchaser of the First Call, (ii) $6,000,000 after the exercise
by Purchaser of the First Call but prior to the exercise by Purchaser of Second
call under the Shareholders' Agreement and (iii) the sum of $6,000,000 and the
Second Call Purchase Price (as defined in the Shareholders' Agreement) after the
exercise by Purchaser of the Second Call. The Purchaser shall not be liable for
indemnification under this Agreement until the aggregate of such claims exceeds
$50,000 and then the Company and the Management Shareholders shall be entitled
to recover entire amount of such claims.
10.3 Third Party Claims.
(a) If any party entitled to be indemnified pursuant to
Section 10.2 (an "Indemnified Party") receives notice of the assertion by any
third party to any claim or of the commencement by any such third person of any
Action (any such claim or Action being referred to herein as an "Indemnifiable
Claim") with respect to which another party hereto (an "Indemnifying Party") is
or may be obligated to provide indemnification, the Indemnified Party shall
promptly notify the Indemnifying Party in writing (the "Claim Notice") of the
Indemnifiable Claim; provided, that the failure to provide such notice shall not
relieve or otherwise affect the obligation of the Indemnifying Party to provide
indemnification hereunder, except to the extent that any Damages directly
resulted or were caused by such failure.
(b) The Indemnifying Party shall have thirty days after
receipt of the Claim Notice to undertake, conduct and control, through counsel
of its own choosing, and at its expense, the settlement or defense thereof, and
the Indemnified Party shall cooperate with the Indemnifying Party in connection
therewith; provided, that (i) the Indemnifying Party shall permit the
Indemnified Party to participate in such settlement or defense through counsel
chosen by the Indemnified Party (subject to the consent of the Indemnifying
Party, which consent shall not be unreasonably withheld), provided that the fees
and expenses of such counsel shall not be borne by the Indemnifying Party, and
(ii) the Indemnifying Party shall not settle any Indemnifiable Claim without the
Indemnified Party's consent. So long as the Indemnifying Party is vigorously
contesting any such Indemnifiable Claim in good faith, the Indemnified Party
shall not pay or settle such claim without the Indemnifying Party's consent,
which consent shall not be unreasonably withheld.
-37-
<PAGE>
(c) If the Indemnifying Party does not notify the Indemnified
Party within thirty days after receipt of the Claim Notice that it elects to
undertake the defense of the Indemnifiable Claim described therein, the
Indemnified Party shall have the right to contest, settle or compromise the
Indemnifiable Claim in the exercise of its reasonable discretion; provided, that
the Indemnified Party shall notify the Indemnifying Party of any compromise or
settlement of any such Indemnifiable Claim.
(d) Anything contained in this Section 10.3 to the contrary
notwithstanding, the Management Shareholders shall not be entitled to assume the
defense for any Indemnifiable Claim (and shall be liable for the reasonable fees
and expenses incurred by the Indemnified Party in defending such claim) if the
Indemnifiable Claim seeks an order, injunction or other equitable relief or
relief for other than money damages against Purchaser or the Company which
Purchaser determines, after conferring with its counsel, cannot be separated
from any related claim for money damages and which, if successful, would
adversely affect the business, properties or prospects of the Company.
10.4 Indemnification Non-Exclusive. The foregoing indemnification
provisions are in addition to, and not in derogation of, any statutory,
equitable or common-law remedy any party may have for breach of representation,
warranty, covenant or agreement.
ARTICLE 11
GENERAL PROVISIONS
11.1 Notices. All notices and other communications under or in
connection with this Agreement shall be in writing and shall be deemed given (a)
if delivered personally (including by overnight express or messenger), upon
delivery, (b) if delivered by registered or certified mail (return receipt
requested), upon the earlier of actual delivery or three days after being
mailed, or (c) if given by telecopy, upon confirmation of transmission by
telecopy, in each case to the parties at the following addresses:
(a) If to the Purchaser, addressed to:
Numerex Corp.
2360 Maryland Road
Willow Grove, PA 19090
Attention: John J. Reis
Telecopy: (610) 892-0725
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<PAGE>
With a copy to:
Blank Rome Comisky & McCauley
1200 Four Penn Center Plaza
Philadelphia, PA 19103
Attention: Barry H. Genkin, Esquire
Telecopy: (215) 569-5555
(b) If to the Company, address to:
Uplink Security, Inc.
1395 South Marietta Parkway
Building 200, Suite 228
Marietta, GA 30067
Attention: John Collings, III
Telecopy: (770) 429-5533
With a copy to:
Wagner, Johnston & Rosenthal, P.C.
3343 Peachtree Road, N.E.
Atlanta Financial Center
Suite 800, East Tower
Atlanta, GA 30326-1044
Attention: Craig A. Wagner, Esquire
Telecopy: (404) 261-6779
(c) If to any Management Shareholder, to the address set
forth below such Management Shareholder's name on
Exhibit A hereto.
11.2 Severability. If any term or provision of this Agreement or the
application thereof to any circumstance shall, in any jurisdiction and to any
extent, be invalid or unenforceable, such term or provision shall be ineffective
as to such jurisdiction to the extent of such invalidity or unenforceability
without invalidating or rendering unenforceable such term or provision in any
other jurisdiction, the remaining terms and provisions of this Agreement or the
application of such terms and provisions to circumstances other than those as to
which it is held invalid or enforceable.
11.3 Entire Agreement. This Agreement, including the annexes and
schedules attached hereto and other documents referred to herein, contains the
entire understanding of the parties hereto in respect of its subject matter and
supersedes all prior and contemporaneous agreements and understandings, oral and
written, between the parties with respect to such subject matter.
-39-
<PAGE>
11.4 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of Purchaser and the Management Shareholders and their
respective successors, heirs and assigns; provided, however, that (i) the rights
of the Purchaser to exercise the First Call pursuant to Section 2.5 hereof shall
be unassignable and non-transferrable, unless prior to or contemporaneously with
such assignment or transfer of such rights, the assignee or transferee of such
rights assume all of the rights and obligations as "Lender" under that certain
Loan and Security Agreement of even date herewith and (ii) no Management
Shareholder shall directly or indirectly transfer or assign any of such
Management Shareholder's respective rights hereunder in whole or in part without
the prior written consent of Purchaser, and any such transfer or assignment
without said consent shall be void, ab initio. Subject to the immediately
preceding sentence, and except as set forth in Article 10, this Agreement is not
intended to benefit, and shall not run to the benefit of or be enforceable by,
any other person or entity other than the parties hereto and their permitted
successors and assigns.
11.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all such
counterparts together shall constitute but one and the same Agreement.
11.6 Recitals, Schedules and Annexes. The recitals, schedules and
annexes to this Agreement are incorporated herein and, by this reference, made a
part hereof as if fully set forth at length herein.
11.7 Construction.
(a) The article, section and subsection headings used herein
are inserted for reference purposes only and shall not in any way affect the
meaning or interpretation of this Agreement.
(b) As used in this Agreement, the masculine, feminine or
neuter gender, and the singular or plural, shall be deemed to include the others
whenever and wherever the context so requires.
(c) For the purposes of this Agreement, unless the context
clearly requires, "or" is not exclusive.
11.8 Governing Law. This Agreement shall be governed by and construed
in accordance with the internal laws (and not the law of conflicts) of the
Commonwealth of Pennsylvania.
* * *
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<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement, or has caused this Agreement to be executed on its behalf by a
representative duly authorized, all as of the date first above set forth.
NUMEREX CORP. UPLINK SECURITY, INC.
By: /s/ John J. Reis By: /s/ John K. Collings, III
----------------------- ---------------------------
John J. Reis, President John K. Collings, III, President
SHAREHOLDERS:
/S/ DAVID G. TATTERSALL
- ------------------------
DAVID G. TATTERSALL
/S/ PETER J. QUINN
- ------------------------
PETER J. QUINN
/S/ JOHN K. COLLINGS, III
- -------------------------
JOHN K. COLLINGS, III
-41-
<PAGE>
EXHIBIT 2.5
DETERMINATION OF FIRST CALL PERCENTAGE
LOAN CONVERSION FORMULA
% Additional Shares = 15.5% + [(100% - BPA) x .3666]
Business Cummulative
Plan Initial NMRX First Call NMRX1
Attainment Shares Percentage Shares
100.0% 19.50% 15.5% 35.00%
90.0% 19.50% 19.2% 38.67%
80.0% 19.50% 22.8% 42.33%
70.0% 19.50% 26.5% 46.00%
60.0% 19.50% 30.2% 49.66%
50.0% 19.50% 33.8% 53.33%
40.0% 19.50% 37.5% 57.00%
30.0% 19.50% 41.2% 60.66%
25.0% 19.50% 43.0% 62.50%
BPA = Business Plan Attainment.
BPA is determined by formula as a function of revenue and net income attainment.
BPA = (%Gross Revenue Attained vs Plan + % Pre Tax Income Attained vs. Plan)/2
Where:
% Gross Revenue Attained vs Plan Cannot Exceed 100%
% Pre-Tax Income Attained vs Plan Can Exceed 100%
Business Plan Objectives Are As Follows:
(000s) Year 3
Gross Revenue $100,526
Pre-Tax Income $7,357
- -------------
1 This assumes that Numerex ownership of Uplink Common Stock at the third
anniversary of the Closing Date under the Stock Purchase Agreement is equal
to 19.5%. Should Numerex's ownership interest be changed, other than
through the above Loan Conversion Formula, the Cumulative NMRX Shares shall
be adjusted accordingly.
-42-
EXHIBIT 2.10
================================================================================
UPLINK SECURITY, INC.
SHAREHOLDERS' AGREEMENT
among
UPLINK SECURITY, INC.
NUMEREX CORP.
and
THE SHAREHOLDERS LISTED ON EXHIBIT A
July 16, 1997
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
SECTION 1: GENERAL RESTRICTIONS.......................................................1
1.1 Restriction on Transfers............................................1
1.2 Permitted Transferees...............................................2
1.3 Representation......................................................2
1.4 Non-Compliance......................................................2
1.5 Corporate Action....................................................2
1.6 No Implied Employment...............................................2
1.7 Execution and Delivery .............................................3
1.8 No Conflicts .......................................................3
SECTION 2: TRIGGERING EVENTS..........................................................3
2.1 Definition..........................................................3
2.2 Notice of Occurrence................................................4
SECTION 3: OPTIONAL AND MANDATORY PURCHASE............................................4
3.1 Option to Numerex...................................................4
3.2 Option to the Company...............................................4
3.3 Option to Remaining Shareholders....................................5
3.4 Intentionally Omitted...............................................5
3.5 Purchase of All Shares..............................................5
3.6 Closing on Optional Purchase........................................5
3.7 Right to Transfer...................................................6
3.8 Right to Participate in Sales.......................................6
3.9 Requirement to Participate in Sales.................................6
3.10 Effect of Sale to Third Party by Numerex ...........................6
SECTION 4: FIRST REFUSAL ON SALE OF THE COMPANY.......................................7
4.1 Right of First Refusal..............................................7
4.2 Closing on First Refusal Exercise...................................7
4.3 Sale of the Company.................................................7
4.4 Second Call ........................................................7
SECTION 5: OPTION FOR SHAREHOLDERS' SHARES............................................8
5.1 Option for Shareholders' Shares.....................................8
5.2 Closing of Option Exercise..........................................9
5.3 Negotiation Period..................................................9
5.4 Forced Sale Option .................................................9
SECTION 6: PURCHASE AND OPTION PRICE.................................................10
6.1 Third Party Offers.................................................10
6.2 Other Triggering Events............................................10
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
6.3 Appraisal For Fair Market Value....................................10
SECTION 7: PAYMENT TERMS............................................................ 11
SECTION 8: OTHER PROVISIONS..........................................................12
8.1 Representations and Warranties.....................................12
8.2 Special Matters....................................................12
8.3 Sale or Transfer of Shares by Initial Shareholders............ ....13
8.4 Board of Directors.................................................13
8.5 Future Capital Raising.............................................13
8.6 Failure to Transfer Shares.........................................13
8.7 Endorsement Upon Share Certificate.................................13
8.8 Further Assurances.................................................14
8.9 Joinder of Spouse..................................................14
8.10 Inconsistent Agreements............................................14
8.11 Notices............................................................14
8.12 Settlement of Disputes.............................................15
8.13 Amendment .........................................................15
8.14 Waiver.............................................................15
8.15 Termination of Prior Agreements....................................15
8.16 Entire Understanding...............................................15
8.17 Parties In Interest................................................16
8.18 Severability.......................................................16
8.19 Counterparts.......................................................16
8.20 No Third Party Beneficiaries.......................................16
8.21 Section Heading....................................................16
8.22 References.........................................................16
8.23 Controlling Law....................................................16
8.24 Jurisdiction and Process ..........................................16
8.25 Certain Definitions ...............................................16
8.26 Expenses ..........................................................17
</TABLE>
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<PAGE>
SHAREHOLDERS' AGREEMENT
PARTIES: UPLINK SECURITY, INC.,
a Georgia Corporation (the "Company")
1395 South Marietta Parkway
Building 200, Suite 228
Marietta, GA 30067
NUMEREX CORP.,
a Pennsylvania corporation ("Numerex")
2360 Maryland Road
Willow Grove, PA 19090
Certain shareholders listed on Exhibit A attached hereto and
designated thereon as "Initial Shareholders".
DATE: July 16, 1997
BACKGROUND: The Company is engaged in the business of developing, designing and
marketing the wireless transport of alarm signals (the "Business"). On the date
hereof, the Company, Numerex and the Initial Shareholders entered into a Stock
Purchase Agreement (the "Purchase Agreement"), pursuant to which Numerex
purchased shares of Common Stock of the Company ("Shares") directly from the
Company. Upon the date hereof, Numerex shall be the legal and beneficial owner
of 31,405 Shares. Subject to certain terms and conditions in the Purchase
Agreement and herein, Numerex may in the future acquire all or a part of the
remaining issued and outstanding Shares.
The Company, Numerex and the Initial Shareholders desire to enter into
an agreement which (i) grants certain rights to, and imposes certain
restrictions and obligations on them in respect of the Shares of the Company
which are now or hereafter owned or held by them or any Person (as hereinafter
defined) to whom they Transfer (as hereinafter defined) such shares in
accordance with this Agreement and (ii) provides for the management and conduct
of the business of the Company, all on the terms and conditions stated in this
Agreement. Numerex, the Initial Shareholders and the Persons to whom they
Transfer Shares in accordance with this Agreement are sometimes referred to
individually as a "Shareholder" and collectively as "Shareholders".
INTENDING TO BE LEGALLY BOUND HEREBY, and in consideration of the
mutual agreements stated below, the parties agree as follows:
SECTION 1: GENERAL RESTRICTIONS
1.1 Restriction on Transfers. Each Shareholder severally
agrees with each other Shareholder and with the Company that such Shareholder
shall not Transfer or attempt to Transfer, or solicit any offer for the purchase
of, any Shares now owned by such Shareholder or which such
<PAGE>
Shareholder may at any time hereafter own, acquire or be entitled to, except in
strict accordance with the provisions of this Agreement.
1.2 Permitted Transferees. Notwithstanding Section 1.1 hereof,
(a) parties to that certain Agreement dated as of March 17, 1997 by and between
John K. Collings, III, Peter John Quinn, David Geoffrey Tattersall and Uplink
Security, Inc. shall have the right to make Transfers as specifically provided
therein, provided that as a condition to receiving such shares, such transferee
agrees in writing to be bound by the terms and conditions of this Agreement, (b)
a Shareholder shall have the right to Transfer inter vivos or by will or the
laws of descent and distribution of all or a portion of his Shares outright to a
spouse or children or to a trust for the benefit of a spouse or children, if
such transferee agrees in writing to be bound by the terms and conditions of
this Agreement as if he were the transferor and an Initial Shareholder, (c) an
Initial Shareholder shall have the right to Transfer all of the Shares of the
Company owned by such Initial Shareholder to any affiliate of such Initial
Shareholder, provided that as a condition to receiving such Shares, such
affiliate agrees in writing to be bound by the terms and conditions of this
Agreement as if it were the Initial Shareholder, and (d) Numerex shall have the
right to Transfer all or a portion of the Shares of the Company owned by it to
any affiliate of Numerex or to a company which it owns, provided that as a
condition to receiving such shares, such affiliate or company agrees in writing
to be bound by the terms and conditions of this Agreement as if it were Numerex
(transferees under (a), (b), (c) and (d) being collectively called the
"Permitted Transferees"). For purposes of this Agreement, "affiliate" shall be
defined as any entity which controls or is under common control with Numerex or
the Initial Shareholders, as applicable, or which Numerex or the Initial
Shareholders, as applicable, holds at least an eighty percent (80%) controlling
interest, directly or through wholly-owned subsidiaries.
1.3 Representation. Each Shareholder represents and warrants
to the other Shareholders that his will and other estate planning documents and
techniques do not and shall not provide for any Transfer of Shares in violation
of Section 1.1 or any other provision of this Agreement.
1.4 Non-Compliance. In the event any Shareholder shall
Transfer or attempt to Transfer any Shares otherwise than in strict accordance
with the provisions of this Agreement, such action shall be void and of no
effect, and no dividends or distributions of any kind whatsoever shall be paid
by the Company in respect of such Shares (all such dividends and distributions
being deemed waived by such Shareholder), and the voting rights of such Shares
shall be suspended during the period commencing with such Shareholder's initial
failure to comply with the provisions of this Agreement and ending when (i) the
Shareholder complies with the provisions of this Agreement, or (ii) the Company,
based on the unanimous approval of its board of directors, agrees in writing to
terminate such suspension and to permit such Transfer.
1.5 Corporate Action. The Company shall not register the
transfer of Shares to any transferee of any Shareholder, issue any certificate
in lieu of such Shares, or issue any new Shares, unless each and every condition
hereof affecting such Shares or certificates has been satisfied.
1.6 No Implied Employment. Each Shareholder acknowledges and
agrees that neither the issuance of Shares to such Shareholder nor anything
contained in this Agreement gives
2
<PAGE>
such Shareholder, if an employee of the Company, any right to be retained in the
employ of the Company, or affect the Company's right at any time to discharge or
discipline such Shareholder or to terminate his employment.
1.7 Execution and Delivery. The Shareholders' Agreement has
been duly executed and delivered by Numerex and constitutes a legal, valid and
binding agreement by Numerex, enforceable against Numerex and the Initial
Shareholders in accordance with its terms.
1.8 No Conflicts. The execution, delivery and performance of
the Shareholders' Agreement and the consummation of the transactions
contemplated hereby will not conflict with or result in a material breach or
violation of any term or provision, or (with or without notice or passage of
time, or both) constitute a default under, any indenture, mortgage, deed of
trust, trust (constructive or other), loan agreement or other agreement or
instrument to which Numerex is a party or by which Numerex is bound, or violates
any Legal Requirement applicable to or binding upon Numerex.
SECTION 2: TRIGGERING EVENTS
2.1 Definition. The following events are "Triggering Events" with
respect to (a) the Shareholder to whom the event relates and (b) the Permitted
Transferees of the Shareholder to whom the event relates (such Shareholder and
all Permitted Transferees of such Shareholder pursuant to Section 2 are
sometimes collectively referred to as an "Affected Shareholder"):
(i) The receipt by a Shareholder (sometimes referred to as a
"Selling Shareholder") of a bona fide written offer, which it desires to accept,
acceptable to such Shareholder, to acquire all or some portion of such
Shareholder's Shares ("Offer").
(ii) The death of an individual Shareholder (sometimes
referred to as a "Deceased Shareholder") and the transfer of such Shareholder's
Shares by will or the laws of descent and distribution to a Person other than a
Permitted Transferee.
(iii) The commencement of bankruptcy, reorganization or
similar proceedings by a Shareholder, the commencement of bankruptcy or similar
proceedings against a Shareholder that are not terminated within 120 days after
commencement, the appointment of a bankruptcy or other judicial representative
for a Shareholder, such Shareholder's Shares or any material part of his or her
properties, provided that any such appointment that was involuntary is not
terminated within 120 days, the attachment of, execution against, levy upon or
other seizure of the Shares of a Shareholder (other than an attachment solely
for jurisdictional purposes) unless and only as long as the Company's counsel
determines that the same is being contested in good faith, an assignment by a
Shareholder for the benefit of creditors, whether or not such assignment
includes Shares, an admission by a Shareholder in writing of his or her
inability to pay such Shareholder's debts as they become due, or the attempted
rejection of this Agreement by a bankruptcy or other judicial representative who
succeeds to the Shares of a Shareholder.
(iv) The Transfer or attempted Transfer by a Shareholder or
any party acting on behalf of a Shareholder of any of his or her Shares in
violation of any provision of this Agreement, or any material breach by a
Shareholder of any provision of this Agreement.
3
<PAGE>
2.2 Notice of Occurrence. Within 15 days after the occurrence of any
Triggering Event, the Affected Shareholder (or his or her personal
representative) shall give notice of the occurrence ("Notice of Occurrence") to
the Company and the other Shareholders. Failure to give Notice of Occurrence
shall neither prevent nor relieve any of the parties from exercising their
rights or satisfying their obligations under this Agreement, and any other party
to this Agreement may at any time give Notice of Occurrence on behalf of the
Affected Shareholder (or his or her legal or personal representative). If the
Affected Shareholder is a Selling Shareholder, the Notice of Occurrence shall
include a copy of the Offer, stating the name of the offeror ("Offeror") and the
price ("Offer Price") and other terms ("Offer Terms") of the Offer.
SECTION 3: OPTIONAL AND MANDATORY PURCHASE
Upon the occurrence of any Triggering Events, the Affected
Shareholder's Shares shall be sold in accordance with this Section 3. For
purposes of this Section 3, "Remaining Shareholders" shall mean all Shareholders
except Numerex and the Affected Shareholders; and (ii) "Non-Affected
Shareholders" shall mean all Shareholders except for the Affected Shareholder.
3.1 Option to Numerex. So long as Numerex owns Shares, prior to the
expiration of the First Call Period, as defined in Section 2.5 of the Purchase
Agreement, and in the event Numerex exercises the First Call, after the
expiration of the First Call Period, Numerex shall have the first option to
purchase all or any of the Shares owned by the Affected Shareholder on the date
the Triggering Event occurred, for the Purchase Price (as defined in Section 6)
and on the Payment Terms (as defined in Section 7), by giving notice, within
thirty (30) days after the date of the Notice of Occurrence, to the Affected
Shareholder (or his personal representative) and to the Remaining Shareholders
of the exercise of its option. The exercise of the option by Numerex shall be
effective only if the notices given by Numerex, the Company, if applicable, and
the Remaining Shareholders, if applicable, who exercised their options indicate
that Numerex, the Company and the Remaining Shareholders together intend to
purchase all of the Shares of the Affected Shareholder that are subject to the
Offer.
3.2 Option to the Company. The Company shall have the option to
purchase all or any Shares of the Affected Shareholder that was not purchased by
Numerex in accordance with Section 3.1 ("Remaining Stock"), for the Purchase
Price and on the Payment Terms, by giving written notice, within forty-five (45)
days after the date of Notice of Occurrence, to the Affected Shareholder (or his
personal representative) and Numerex of the exercise of its option. The notice
shall state whether the Company intends to purchase all or only a part of the
Remaining Stock. The Company may only purchase, pursuant to this Section 3.2,
that number of shares of the Remaining Stock to the extent the Company has
sufficient capital surplus on retained earnings to permit it to lawfully
purchase and pay for any such shares. The exercise of the option by the Company
shall be effective only if the notices given by the Company and the Remaining
Shareholders, if applicable, who exercised their options indicate that the
Company and the Remaining Shareholders together intend to purchase all of the
Remaining Stock.
3.3 Option to Remaining Shareholders. The Remaining Shareholders shall
have the option to purchase all or any of the Remaining Stock or by the Company
in accordance with Section 3.2, for the Purchase Price and on the Payment Terms,
by giving notice, within sixty (60) days after
4
<PAGE>
the date of Notice of Occurrence, to the Affected Shareholder (or his personal
representative), Numerex and the Company of the exercise of this option. The
notice shall state whether such Remaining Shareholder intends to purchase all or
only a part of the Affected Shareholder's Shares that such holder is entitled to
purchase under this Section 3.3 and the number of the Affected Shareholder's
Shares to be purchased by him, if less than all. The exercise of the options by
the Remaining Shareholders shall be effective only if the notices given by the
Remaining Shareholders who exercised their options indicate that such the
Remaining Shareholders together intend to purchase all of the Remaining Stock.
Unless otherwise agreed upon in writing by all of the Remaining Shareholders,
each of the Remaining Shareholders shall have the option to purchase that
proportion, rounded to the nearest whole number to eliminate fractional shares,
of the Remaining Stock which the number of Shares held by him bears to the
number of Shares held by all Remaining Shareholders who exercised their options.
If any Remaining Shareholder does not exercise his option to purchase his full
proportionate share of the Remaining Stock, the other Remaining Shareholders may
purchase that proportion, rounded to the nearest whole number to eliminate
fractional shares, of the Shares not so purchased which the number of Shares
held by him bears to the number of Shares held by all Remaining Shareholders who
exercised their options, by giving written notice of the exercise of his option
to the Affected Shareholder, the other Remaining Shareholders, the Company and
Numerex within fifteen (15) days after the notice, pursuant to this Section 3.3,
is given.
3.4 Intentionally Omitted.
3.5 Purchase of All Shares. Unless otherwise agreed to by the Affected
Shareholder, all and not less than all of the Affected Shareholder's Shares must
be purchased pursuant to Sections 3.1, 3.2 or 3.3 hereof, as the case may be, in
order that there shall be a purchase of such Affected Shareholder's Shares
within the intent, scope and terms of this Agreement, except with regard to the
Triggering Events described in Sections 2.1(iii) and 2.1(iv) where all of the
Affected Shareholder's Shares are not purchased pursuant to Sections 3.1, 3.2 or
3.3.
3.6 Closing on Optional Purchase. If Numerex, the Company and/or the
Remaining Shareholders shall have exercised their options to purchase the
Affected Shareholder's Shares pursuant to Sections 3.1, 3.2 or 3.3 hereof, the
closing of the purchase and sale contemplated by this Section 3.6 shall be held
at 10:00 a.m., on the earlier of the 90th day following the date Notice of
Occurrence is given or the 30th day after the exercise of the option that
results in options to purchase all (but not less than all) of the Affected
Shareholder's Shares being exercised, at the then principal office of the
Company, or at such other time and place as the parties shall mutually agree. At
the closing, the Affected Shareholder (or his personal representative) shall
deliver to the purchasers certificates for the Affected Shareholder's Shares,
duly endorsed for transfer, and the purchasers shall pay the Purchase Price to
the Selling Shareholder in accordance with the Payment Terms.
3.7 Right to Transfer. If the Triggering Event is the event described
in Section 2.1(i) and all of the Affected Shareholder's Shares are not purchased
pursuant to Sections 3.1, 3.2, and 3.3 hereof, as the case may be, the Affected
Shareholder may, for a period of ninety (90) days following the final date for
acceptance under Section 3.1, 3.2 or 3.3 thereof, as the case may be, sell all
such Shares related to such Offer to the Offeror; provided, however, in the case
of an Offer, that no such Shares shall be sold to the Offeror upon any terms or
conditions more favorable to Offeror than the
5
<PAGE>
Offer Terms as such Offer Terms were described in the Notice of Occurrence; and
provided further that such Offeror shall agree in writing to be bound by the
terms and conditions of this Agreement as if the Offeror were the Shareholder
who sold such Shares. If the Affected Shareholder wishes to sell such Shares on
terms and conditions more favorable to the Offeror than the Offer Terms or has
not sold such Shares on the Offer Terms within such ninety (90) day period, the
Affected Shareholder shall be obligated to make new offers and re-offers to
Numerex, the Company and the Remaining Shareholders in accordance with this
Section 3 before the Affected Shareholder shall be permitted to Transfer such
Affected Shareholder's Shares, or any part thereof, to any Person.
3.8 Right to Participate in Sales. In the event Affected Shareholder(s)
shall be permitted to sell its Shares to an Offeror pursuant to Section 3.7
hereof and such Affected Shareholder(s) own at least 51% of the outstanding
Shares of the Company, the Affected Shareholder(s) shall give the Non-Affected
Shareholders written notice at least twenty (20) days prior to the consummation
of any and all such sales. Except as modified hereunder, each Non-Affected
Shareholder shall have the right, as a condition of such sale by the Affected
Shareholder(s), to sell to the Offeror, on the same terms and conditions as the
Affected Shareholder(s), that proportion, rounded to the nearest whole number to
eliminate fractional shares, of the Shares proposed to be sold by the Affected
Shareholder(s) which the number of Shares owned by such Non-Affected Shareholder
bears to the number of Shares owned by all Shareholders (including the Affected
Shareholder(s)), and the number of Shares that the Affected Shareholder(s) may
sell pursuant to such Offer shall be correspondingly reduced. Each Non-Affected
Shareholder desiring to participate in any such sale shall notify the Affected
Shareholder(s) of such intention within ten (10) days after notice is given in
accordance with the first sentence of this Section 3.8.
3.9 Requirement to Participate in Sales. If (i) the Triggering Event
that occurs is described in Section 2.1(i) and the Offeror requires, as a
condition of the sale, that the Offeror acquire all of the Shares of the
Non-Affected Shareholders, and (ii) on the date of such Triggering Event,
Numerex owns 75% or more of the outstanding Shares and (iii) Numerex is
permitted to sell its Shares pursuant to Section 3.7, then the Non-Affected
Shareholders shall sell all of their Shares to the Offeror for not less than the
same price terms and other terms and conditions as those offered to Numerex.
3.10 Effect of Sale to Third Party by Numerex. In the event that
Numerex sells all of its Shares to a third party prior to the third annual
anniversary of the date hereof, then the rights of Numerex terminate under this
Agreement, including, without limitation, the rights granted pursuant to
Sections 3.1, 3.9, 4.1, 4.3, 4.4, 5.1, 8.2, 8.4 and 8.5, and the obligations of
the parties as between Numerex and the Initial Shareholders under this Agreement
and the Purchase Agreement shall be null and void; provided however, (i) that
the representations, warranties, covenants and indemnifications contained in the
Purchase Agreement shall survive as provided therein and (ii) the Loan and
Security Agreement of even date herewith ("Loan Agreement") shall continue in
full force and effect pursuant to its terms.
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SECTION 4: FIRST REFUSAL ON SALE OF THE COMPANY.
4.1 Right of First Refusal. If it is determined to conduct a Sale of
the Company (as defined below) pursuant to an Offer, which the Company desires
to accept, Numerex shall have the right ("Right of First Refusal") to purchase
the shares and/or assets, as stated in the Offer, for the purchase price and on
the payment terms consistent with the Offer, or at Fair Market Value determined
as of the Notice of Offer in the event that Fair Market Value would be a higher
purchase price than that of the Offer. Within fifteen (15) days of receipt of an
Offer by the Company or any Shareholder, the recipient shall send written notice
of the Offer to each Shareholder and Numerex ("Notice of Offer"). Numerex may
exercise its Right of First Refusal by giving notice to the Company within
thirty (30) days of receiving the Notice of Offer.
4.2 Closing on First Refusal Exercise. If Numerex, shall have exercised
its Right of First Refusal pursuant to Section 4.1 hereof, the closing of the
purchase and sale contemplated by this Section 4.2 shall be held at 10:00 a.m.,
on the earlier of the 60th day following the date Notice of Offer is given or
the 30th day after the exercise of the Right of First Refusal, at the then
principal office of the Company, or at such other time and place as the parties
shall mutually agree. At the closing, the Company or the Selling Shareholders
shall deliver to Numerex evidence of the transfer of assets or stock, as the
case may be, certificates for the Affected Shareholder's Shares, duly endorsed
for transfer, and Numerex shall pay the purchase price to the selling
shareholders in accordance with the payment terms.
4.3 Sale of the Company. "Sale of the Company" shall mean (i) sale of
all or substantially all of the assets of the Company, (ii) the merger or
consolidation with any other person or entity or (iii) a transaction or series
of transactions in which any person or entity or group of persons or entities
acquires, either directly or indirectly, securities representing more than 50%
of combined voting power of the Company's outstanding securities.
4.4 Second Call.
(a) Second Call. If the First Call pursuant to Section 2.5 of
the Purchase Agreement is exercised, then for a period of ninety (90) days
commencing on the exercise of the First Call ("Second Call Period"), Numerex
shall have the right to purchase ("Second Call") that number of Shares ("Second
Call Shares") from the Initial Shareholders, on a pro rata basis, determined by
multiplying the total number of outstanding Shares as of the date the Second
Call Notice (as defined below) is given and after giving effect to the exercise
of the First Call, if any, by the Second Call Percentage (as defined below). The
"Second Call Percentage" shall be (i) the percentage ownership of Shares of the
Company by Numerex as of the date of the Second Call Notice after giving effect
to the exercise of the First Call, if any, subtracted from (ii) 51%. If,
immediately prior to the Second Call Period, Numerex owns 51% or more of the
outstanding shares of the Company, then the provisions of this Section 4.4(a)
shall be null and void, and of no further force or effect. Numerex may exercise
this Second Call by giving the Initial Shareholders written notice ("Second Call
Notice") at any time during the Second Call Period.
(b) Number of Shares; Purchase Price; Closing. Upon the giving
of the Second Call Notice, the parties shall promptly determine the number of
Second Call Shares. The purchase
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price ("Second Call Purchase Price") shall be the lesser of (a) Four Million
Dollars ($4,000,000) or (b) 85% of the Fair Market Value (defined below);
provided however, for purposes of determining Fair Market Value under Section
6.3, (i) Numerex shall be deemed the "Affected Shareholder" and the Initial
Shareholders shall be deemed "Non-Affected Shareholders" and (ii) determination
of Fair Market Value shall be made as of the last day of the most recently
completed quarter preceding the exercise of the Second Call. The closing of the
Second Call shall be held at 10:00 a.m. within thirty (30) days after the Second
Call Notice is given, or as otherwise agreed by the parties. Upon the closing,
(i) the Company, the Initial Shareholders and the Management Shareholders (as
defined in the Purchase Agreement) shall make representations and warranties to
Numerex that are comparable to the representations and warranties contained in
Section 8.1 hereof; provided however, that such representations and warranties
shall be deemed to have been given as of the Second Call Notice or if such
representations and warranties relate to financial matters, such
representations, warranties shall be deemed to have been given as of the last
day of the most recently completed fiscal quarter. At the Closing, the Initial
Shareholders shall deliver certificates to Numerex, endorsed to Numerex, for the
Second Call Shares, transferring good and marketable title to such Second Call
Shares, free and clear of all Liens, and Numerex shall pay the Second Call
Purchase Price to the Initial Shareholders.
SECTION 5: OPTION FOR SHAREHOLDERS' SHARES
5.1 Option for Initial Shareholders' Shares. If the First Call pursuant
to Section 2.5 of the Purchase Agreement is exercised by Numerex, then at any
time and from time to time during the thirty (30) days ("Option Period")
following each of the fourth, fifth and sixth annual anniversaries of the date
hereof ("Fourth Anniversary", "Fifth Anniversary" and "Sixth Anniversary",
respectively), Numerex shall have the right to purchase from the Initial
Shareholders ("Option for Initial Shareholders' Shares"), the number of Shares
as follows:
(a) during the Option Period following the Fourth Anniversary,
up to one-third of the Shares owned by each of the Initial Shareholders as of
the Fourth Anniversary;
(b) during the Option Period following the Fifth Anniversary,
any remaining number of Shares which were subject to option under paragraph (a)
above, but were not purchased, and after giving effect to such purchase, if any,
up to one-half of the Shares owned by the Initial Shareholders as of the date of
the Fifth Anniversary, and
(c) during the Option Period following the Sixth Anniversary,
up to all remaining Shares owned by the Shareholders.
Numerex may exercise this Option for Initial Shareholders' Shares by
giving written notice ("Option Notice") to the Initial Shareholders at any time
during any Option Period. With respect to any exercise of the Option for Initial
Shareholders' Shares, each Initial Shareholder shall be required to sell that
proportion, rounded to the nearest whole number to eliminate fractional shares,
of the Shares owned by each such Initial Shareholder by the number of Shares
owned by all Initial Shareholders at the time the Option Notice is given from
time to time pursuant to this Section 5.1.
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5.2 Closing of Option Exercise. Upon the giving of any Option Notice,
the parties shall promptly determine the number of Shares subject to the
exercise of the Option for Initial Shareholders' Shares. The purchase price
("Option Purchase Price") shall be Fair Market Value, as calculated in
accordance with Section 6.3; provided however, for purposes of determining Fair
Market Value under this Section 5.2, (i) Numerex shall be deemed the "Affected
Shareholder" and the Initial Shareholders shall be deemed "Non-Affected
Shareholders" and (ii) determination of Fair Market Value shall be made as of
(i) June 30, 2001 with respect to an exercise under Section 5.1(a), (ii) June
30, 2002 with respect to an exercise under Section 5.1(b) and (iii) June 30,
2003 with respect to an exercise under Section 5.1(c). The closing of the
purchase and sale contemplated by Section 5.1 shall be held at 10:00 a.m., on a
date within thirty (30) days after the Option Notice is given, provided that in
the event the Option Purchase Price has not been determined within thirty (30)
days after the Option Notice is given, then the closing shall be held as soon as
reasonably practicable after determination of the Option Purchase Price, as
applicable. At the closing, any Initial Shareholder selling his Shares shall
deliver to Numerex certificates for the Shares owned by such Initial
Shareholder, duly endorsed for transfer, and Numerex shall pay the Option
Purchase Price.
5.3 Negotiation Period. For the period of sixty (60) days following the
Sixth Anniversary ("Negotiation Period"), Numerex on the one hand or the Initial
Shareholders on the other hand may approach the other party with an offer to
purchase such other party's Shares or sell such party's Shares on terms as the
parties shall mutually agree. In the event Numerex or the Initial Shareholders
offer to purchase or sell Shares during the Negotiation Period, either party
may, upon their sole discretion, elect to withdraw from such negotiations at any
time.
5.4 Forced Sale Option. In the event that (i) Shares remain owned by
the Initial Shareholders upon expiration of the Negotiation Period and (ii) an
initial public offering of the Company's Common Stock has not been consummated
by the Sixth Anniversary, then each of Numerex and the Initial Shareholders
shall have the option at any time during the sixty (60) day period commencing on
the day after the expiration of the Negotiation Period for the Sixth Anniversary
to cause a Forced Sale (as defined below) of the Company. A Forced Sale shall
occur when either Numerex or a majority in interest of the Initial Shareholders
consent in writing to such Forced Sale and deliver such consent to the Company
("Forced Sale Notice"). A "Forced Sale" shall mean an obligation of the Company
to use its best efforts, including, but not limited to the engagement of a
broker, to sell all of the Shares to a third-party purchaser. The Forced Sale
shall be made at the Fair Market Value, as such term is defined in Section 6.3;
provided however, that for purposes of determining Fair Market Value under this
Section 5.3, (i) if Numerex on the one hand or the Shareholders on the other
hand shall deliver a Forced Sale Notice, such party or parties shall be deemed
"Affected Shareholder(s)" and the other party or parties shall be deemed
"Non-Affected Shareholder(s)" and (ii) the determination of Fair Market Value
shall be made as of the time of the Forced Sale. Once written consents are
obtained by the Company to cause a Forced Sale as provided hereunder, all of the
Shareholders hereto agree to sell their Shares in the manner and on the terms
and conditions described herein.
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SECTION 6: PURCHASE AND OPTION PRICE
6.1 Third Party Offers. In the event that a Triggering Event described
in Section 2.1(i) takes place, the Purchase Price, for purposes of Section 3,
shall be the Offer Price in writing to the Affected Shareholder by such third
party.
6.2 Other Triggering Events. In the event that a Triggering Event takes
place other than that described in Section 2.1(i), the Purchase Price shall be
Fair Market Value, as determined in Section 6.3 hereof.
6.3 Appraisal For Fair Market Value.
(a) Fair Market Value. "Fair Market Value" shall mean the fair
market value of the Company as a going concern, assuming that the Company is
sold pursuant to a sale of capital stock.
(i) Fair Market Value shall be determined by the
agreement of the Non-Affected Shareholders and the Affected Shareholder(s),
through a majority vote the Shares of each of the Affected Shareholders and the
Non-Affected Shareholder(s), in each case acting as an independent class, within
ten (10) days of the date on which any party notifies all Shareholders that this
Agreement then requires that "Fair Market Value" be determined, specifically
referring to the paragraph and subparagraphs of this Agreement that require such
determination.
(ii) If the Affected Shareholders and the
Non-Affected Shareholders(s) shall not so agree on the amount of the Fair Market
Value within such ten-day period, then within ten (10) days after such initial
ten-day period, each of the Non-Affected Shareholders and the Affected
Shareholder(s), acting in each case as an independent class, by a majority vote
of the Shares each of the Affected Shareholders and the Non-Affected
Shareholder(s), will appoint a Qualified Appraisal Firm (as hereinafter defined)
to make the determination, within thirty (30) days of such appointment, of the
proposed fair market value of the Company as a going concern and the average of
the determinations by such appraisal firms of the proposed fair market value of
the Company as a going concern (the "Proposed Value") will be the Fair Market
Value; provided, however, that if the difference between such Proposed Values is
more than 15% of the amount of the lower Proposed Value, then the two appraisal
firms will appoint a third appraisal firm to determine, within thirty (30) days
of its appointment, a Proposed Value and the Fair Market Value shall be equal to
the average of all three Proposed Values; provided, further, that if the
Proposed Value of the appraisal firms appointed by either the Non-Affected
Shareholders or the Affected Shareholder(s) shall vary by more than 15% from the
Proposed Value determined by the third appraisal firm, such varying Proposed
Value shall not be included in such average in determining Fair Market Value. If
only two appraisal firms are appointed, each of the Non-Affected Shareholder and
the Affected Shareholder(s), in each case, as an independent class, shall pay
the cost of their respectively appointed appraisal firm and if a third appraisal
firm is appointed, each of the Non-Affected Shareholders (pro rata based on
their respective ownership of Shares owned by Non-Affected Stockholders), in
each case, as an independent class, shall pay one-half the cost of the third
appraisal firm. In connection with any determination of Fair Market Value, (A) a
majority vote of the Shares of the Non-Affected Shareholders (or in the case of
a Forced Sale, either Numerex or a majority of the Initial Shareholders) shall
have the right to request an audit of the financial statements for the
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Company's applicable "stub" period (the "Stub Audit"), at the Company's expense,
if such determination of Fair Market Value shall be made more than ninety (90)
days after the end of the Company's fiscal year, and (B) any revenues or costs
associated with business transactions between the Company and the Affected
Shareholder(s) or any affiliates of the Affected Shareholder(s) shall be
restated by the appraisal firm(s), to the extent necessary, to reflect the
revenues or costs which would have recognized had such transactions been on an
arm's length basis (the "Revenue Restatement"). Notwithstanding anything
contained herein to the contrary, any required periods for the determination of
Fair Market Value shall be extended to the extent necessary to permit the
completion of any Stub Audit requested to be made under the terms of this
Agreement and any Stub Audit and/or Revenue Restatement shall be considered by
the parties and the relevant appraisal firm(s) in determining Fair Market Value.
If Fair Market Value is required, under the terms of this Agreement, to be
stated on a per Share basis, the calculation thereof shall be based on the total
number of shares of Common Stock outstanding, assuming exercise of all the
outstanding options and receipt of the aggregate maximum number of shares of
Common Stock issued, delivered or exchanged therefore or thereunder.
(b) Qualified Appraisal Firm. "Qualified Appraisal Firm" means
any firm engaged in business valuation services, but excluding any firm which
received more than $15,000 in fees during the preceding 24 calendar months from
any party hereto.
(c) Inspection. The appraisal firms engaged for the purpose of
providing an appraisal under Section 6.3(a) hereof ("Appraisers") shall have the
right, during normal business hours, to (i) inspect and make copies of all
documents and other information relating to the Company or its business,
including internal accountants' work papers, (ii) inspect all properties and
assets used by the Company in its business, and (iii) consult with the officers,
employees, accountants, counsel and advisors of the Company, for the purpose of
rendering their appraisals, provided such Appraisers shall have entered into a
confidentiality agreement with the Company pursuant to which the Appraisers
agree to maintain the confidentiality of all confidential and proprietary
information obtained by the appraisers in performing their appraisals.
(d) Disclosure. Whenever the Fair Market Value must be
determined under this Agreement, the Company and the Shareholder or Shareholders
selling his or their Shares shall disclose in writing to the purchaser or
purchasers of those Shares and the appraisers referred to in Section 6.3 all
facts of which it, he or they have knowledge and which may affect the
determination of Fair Market Value.
SECTION 7: PAYMENT TERMS
As used in this Agreement, "Payment Terms" means, except as otherwise
agreed to by the selling and purchasing Shareholders, the Purchase Price that
shall be paid on the Closing Date via certified check or wire transfer of funds,
or in Numerex Common Stock, as the parties hereto may mutually agree.
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SECTION 8: OTHER PROVISIONS
8.1 Representations and Warranties. Each of the Initial Shareholders
hereby severally represents and warrants to, and covenants and agrees with,
Numerex that:
(a) Ownership of Shares. Such Initial Shareholder owns of
record and beneficially the number of Shares set forth opposite the name of such
Initial Shareholder on Exhibit A hereto, and as of the respective Closing Dates
such Initial Shareholder will have, good and marketable title to such Shares,
free and clear of all Liens.
(b) Execution and Delivery. All consents, approvals,
authorizations and order necessary for the execution, delivery and performance
by such Initial Shareholder of this Agreement have been duly and lawfully
obtained, and such Initial Shareholder has, and at the Closings will have, full
right, power, authority and capacity to execute, deliver and perform this
Agreement. This Agreement has been duly executed and delivered by such Initial
Shareholder and constitutes a legal, valid and binding agreement of such Initial
Shareholder enforceable against such Initial Shareholder in accordance with its
terms, except to the extent that enforceability may be limited by bankruptcy,
insolvency and other similar or equitable principles affecting the enforcement
or creditors' rights generally.
(c) No Conflicts. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby will
not conflict with or result in a breach or violation of any term or provisions
of, or (with or without notice or passage of time, or both) constitute a default
under, any indenture, mortgage, deed of trust, trust (constructive and other),
loan agreement or other agreement or instrument to which such Initial
Shareholder is a party or by which Initial Shareholder or such Initial
Shareholder's Shares are bound, or violate any Legal Requirement applicable to
or binding upon such Initial Shareholder.
(d) No Brokers. No broker, finder or similar agent has been
employed by or on behalf of such Initial Shareholder in connection with this
Agreement or the transactions contemplated hereby, and such Initial Shareholder
has not entered into any agreement or understanding of any kind with any person
or entity for the payment of any brokerage commission, finder's fee or any
similar compensation in connection with this Agreement or the transactions
contemplated hereby, which such commission, fee or any similar compensation
associated therewith shall be paid by the Initial Shareholders.
8.2 Special Matters. For so long as Numerex on the one hand, or the
Initial Shareholders on the other hand, or their successors, hold in the
aggregate not less than 15% of the Shares outstanding ("Minority Shareholder"),
such party or parties shall not take any action which is intended to have a
material adverse effect on the Shares, without first obtaining the affirmative
vote of (i) a majority of the Shares held by the Initial Shareholders, if the
Initial Shareholders constitute a Minority Shareholder or (ii) Numerex, if
Numerex is a Minority Shareholder. Without limiting the generality of the
foregoing, any of the following actions shall require such affirmative vote:
(a) amend the Company's Bylaws or Articles of Incorporation;
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(b) change the nature or scope of the business of the Company
with regard to wireless transport of alarm signals; or
(c) liquidate or dissolve the Company, except where such
liquidation or dissolution is incident to a sale of the Company, or as otherwise
permitted under this Agreement.
8.3 Sale or Transfer of Shares by Initial Shareholders. Upon the
occurrence of any event hereunder involving a sale or transfer of shares from a
Shareholder, at the closing of such sale or transfer, such Shareholder shall
make representations and warranties to the purchaser that are comparable to the
representations and warranties contained in Section 8.1 hereof. Further, at such
closing, the selling party shall transfer good and marketable title to such
Shares, free and clear of all Liens.
8.4 Board of Directors. The Shareholders agree to vote all Shares now
owned or hereafter acquired or controlled by them, and otherwise use their best
efforts as Shareholders of the Company, (i) to set the number of directors of
the Company at five, and (ii) to elect as directors those persons that are
nominated by Numerex on the one hand, and the Initial Shareholders on the other
hand, in a proportion equal to, or as near as equal as possible, to the number
of Shares held by (x) Numerex and (y) all of the other Shareholders, each of (x)
and (y) being compared to the total number of Shares outstanding, at the time of
such election; provided however, (a) that the number of directors designated by
Numerex shall be no less than one and (b) at all times after the Initial
Shareholders own less than 40% but greater than 15% of the Shares, they shall be
entitled to two directors who shall be nominated by a majority of the Initial
Shareholders and reasonably approved by Numerex. All calculations hereunder
shall be (i) based solely upon the Shares which are outstanding and (ii) rounded
to the nearest whole director seat, in the event that a fractional computation
results.
8.5 Future Capital Raising. In the event that the Company requires
financing in addition to the financing ("Additional Financing") contemplated by
the Purchase Agreement, Numerex shall have the right, but not the obligation, to
provide such Additional Financing on terms, negotiated by Numerex and the
Company in good faith, which are no less favorable to the Company than the
Company could obtain from alternative financing sources.
8.6 Failure to Transfer Shares. If any Shareholder whose Shares are
subject to purchase hereunder does not assign and transfer such Shares to a
purchaser as required hereunder, such Shares shall be deemed assigned and
transferred to the purchaser. The Company, upon receipt of written notice, shall
mark its records to indicate that the certificates have been canceled and shall,
if necessary, issue new certificates to the purchaser. Each Shareholder hereby
gives the Secretary of the Company an irrevocable power of attorney to make
assignments and transfers on the Company's books on behalf of such Shareholder
in accordance with the foregoing.
8.7 Endorsement Upon Share Certificate. Each Shareholder acknowledges
that all certificates for Shares shall bear the following legend in addition to
any other legend that may be required by law or agreement:
"The shares represented by this certificate may not be
transferred, hypothecated, pledged or otherwise disposed of,
except in compliance
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with the Agreement, dated July ___, 1997 between the Company
and its Shareholders, copies of which are on file in the
office of the Secretary of the Company."
8.8 Further Assurances. Each Shareholder agrees that he shall promptly
execute and deliver all such further agreements, certificates, instruments and
documents, and perform such further actions, as the Company or any other
Shareholder may reasonably request in order to fully carry out the purposes and
intent of this Agreement.
8.9 Joinder of Spouse. Each Shareholder who is a natural person shall
cause such Shareholder's spouse to execute and deliver the Joinder of Spouse
attached hereto as Exhibit B, approving this Agreement and waiving any and all
rights such spouse may have relating to this Agreement or such Shareholder's
Shares.
8.10 Inconsistent Agreements. No Shareholder shall enter into any
agreement or arrangement that conflicts with, or is inconsistent with, any of
the terms or conditions of this Agreement.
8.11 Notices. All notices and other communications under or in
connection with this Agreement shall be in writing and shall be deemed given (a)
if delivered personally (including by overnight express or messenger), upon
delivery, (b) if delivered by registered or certified mail (return receipt
requested), upon the earlier of actual delivery or three days after being
mailed, or (c) if given by telecopy, upon confirmation of transmission by
telecopy, in each case to the parties at the following addresses:
(a) If to Numerex, addressed to:
Numerex Corp.
2360 Maryland Road
Willow Grove, PA 19090
Attention: John J. Reis
Telecopy: (610) 892-0725
With a copy to:
Blank Rome Comisky & McCauley
1200 Four Penn Center Plaza
Philadelphia, PA 19103
Attention: Barry H. Genkin, Esquire
Telecopy: (215) 569-5555
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(b) If to the Company, address to:
Uplink Security, Inc.
1395 South Marietta Parkway
Building 200, Suite 228
Marietta, GA 30067
Attention: John K. Collings, III
Telecopy: (770) 429-5533
With a copy to:
Wagner, Johnston & Rosenthal, P.C.
3343 Peachtree Road, N.E.
Atlanta Financial Center
Suite 800, East Tower
Atlanta, GA 30326-1044
Attention: Craig A. Wagner, Esquire
Telecopy: (404) 261-6779
(c) If to any Initial Shareholder, to the address set
forth below such Initial Shareholder's name on
Exhibit A, attached hereto.
8.12 Settlement of Disputes. Other than for claims in equity, any
claims, controversies, demands, disputes, or differences between or among the
parties hereto or any persons bound hereby shall be submitted to and settled by
arbitration in the City of Philadelphia, Pennsylvania, before a single
arbitrator chose by mutual agreement of the disputing parties who shall be
knowledgeable in the field of business law and such arbitration shall be before
and in accordance with the rules then obtaining of the American Arbitration
Association. The parties agree to bear joint and equal responsibility for all
fees, abide by any decision rendered as final and binding and waive the right to
submit the dispute to a jury trial. Judgment upon any award may be entered in
any court of competent jurisdiction. Notwithstanding any of the foregoing,
nothing herein contained shall preclude a party hereto from resort to judicial
process if such party, in its or his sole discretion, chooses to seek any form
of equitable or injunctive relief.
8.13 Amendment. This Agreement may be amended, modified or supplemented
by the parties hereto, provided that any such amendment, modification or
supplement shall be in writing and signed by the parties hereto and in a form
consistent with Exhibit C attached hereto.
8.14 Waiver. No waiver with respect to this Agreement shall be
enforceable unless in writing and signed by the party against whom enforcement
is sought. Except as otherwise expressly provided herein, no failure to
exercise, delay in exercising, or single or partial exercise of any right, power
or remedy by any party, and no course of dealing between or among any of the
parties, shall constitute a waiver of, or shall preclude any other or further
exercise of, any right, power or remedy.
8.15 Termination of Prior Agreements. The parties hereby terminate,
effective immediately, any and all existing buy-sell, shareholders' or similar
agreements to which any or all of them are parties to the extent any such
agreement governs any Shares.
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8.16 Entire Understanding. This Agreement states the entire
understanding among the parties with respect to the subject matter hereof, and
supersedes all prior oral and written communications and agreements, and all
contemporaneous oral communications and agreements, with respect to the subject
matter hereof.
8.17 Parties In Interest. This Agreement shall bind, benefit and be
enforceable by and against each party hereto and its successors, assigns, heirs
and legal and personal representatives. No party shall in any manner assign any
of its or his rights or obligations under this Agreement, except as permitted by
this Agreement, without the express prior written consent of the other parties.
8.18 Severability. If any provision of this Agreement is construed to
be invalid, illegal or unenforceable, then the remaining provisions hereof shall
not be affected thereby and shall be enforceable without regard thereto.
8.19 Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall constitute an
original hereof, and it shall not be necessary in making proof of this Agreement
to produce or account for more than one original counterpart hereof.
8.20 No Third Party Beneficiaries. No provision of this Agreement is
intended to or shall be construed to grant or confer any right to enforce this
Agreement, or any remedy for breach of this Agreement, to or upon any Person
other than the parties hereto.
8.21 Section Headings. Section and subsection headings in this
Agreement are for convenience of reference only, do not constitute a part of
this Agreement, and shall not affect its interpretation.
8.22 References. All words used in this Agreement shall be construed to
be of such number and gender as the context requires or permits. Unless a
particular context clearly provides otherwise, the words "hereof" and
"hereunder" and similar references refer to this Agreement in its entirety and
not to any specific Section or subsection hereof. For the purpose of this
Agreement, "including means" including without limitation.
8.23 Controlling Law. This Agreement is made under, and shall be
construed and enforced in accordance with, the laws of the Commonwealth of
Pennsylvania applicable to agreements made and to be performed solely therein,
without giving effect to principles of conflicts of law.
8.24 Jurisdiction and Process. Each of the parties (a) irrevocably
consents to the exclusive jurisdiction of the Courts of Common Pleas of
Philadelphia County, Pennsylvania, or the United States District Court for the
Eastern District of Pennsylvania, in any and all actions between or among any of
the parties, whether arising hereunder or otherwise, and (b) irrevocably
consents to service of process by first class certified mail, return receipt
requested, postage prepaid, to the address as which such party is to receive
notice in accordance with Section 7.7.
16
<PAGE>
8.25 Certain Definitions.
(a) "Person" means any individual, sole proprietorship, joint
venture, partnership, corporation, association, cooperative, trust, estate,
government body, administrative agency, regulatory authority, or other entity of
any nature.
(b) "Transfer" means any sale, exchange, gift, bequest, pledge,
hypothecation, encumbrance, descent or distribution pursuant to any intestacy
laws or other operation of law, or any other direct or indirect disposition of
Shares which would change the legal or beneficial ownership thereof, including,
without limitation, any transaction that creates any form of joint or common
ownership in Shares between a Shareholder and one or more Persons (whether or
not that other Person is the spouse of such Shareholder).
(c) The terms "Closing Date," "Legal Requirement" and
"Permits" shall have the meanings given to those terms in the Stock Purchase
Agreement.
8.26 Expenses. All costs and expenses (including, without limitation,
all legal fees and expenses and fees and expenses of any brokers, finders or
similar agents) incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring the same.
* * *
17
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement or have
caused this Agreement to be executed on their behalf by their duly authorized
officers as of the date first stated above.
NUMEREX CORP. UPLINK SECURITY, INC.
By: /s/ John J. Reis By: /s/ John K. Collings, III
----------------------------- ------------------------------------
John J. Reis, President John K. Collings, III, President
SHAREHOLDERS:
ABN AMRO INVESTMENTS
(IRELAND) LIMITED
By: /s/ Authorized Officer /s/ David G. Tattersall
----------------------------- ----------------------------------------
Name: DAVID G. TATTERSALL
Title:
AIB CUSTODIAL NOMINEES LIMITED
By: /s/ Authorized Officer /s/ Peter J. Quinn
----------------------------- ----------------------------------------
Name: PETER J. QUINN
Title:
COMOLINK TECHNOLOGY LTD.
By: /s/ Authorized Officer
----------------------------- ----------------------------------------
Name: PAMELA van de POLL
Title:
/s/ Malcolm Lewis
----------------------------------------
MALCOLM LEWIS
18
<PAGE>
SHAREHOLDERS (CONT'D):
/s/ Ian R. Jackson
----------------------------------------
IAN R. JACKSON
/s/ George S. Watson
----------------------------------------
GEORGE S. WATSON
/s/ John K. Collings, III
----------------------------------------
JOHN K. COLLINGS, III
/s/ Roy G. Thurston
----------------------------------------
ROY G. THURSTON
/s/ Victor L. Slider
----------------------------------------
VICTOR L. SLIDER
/s/ Thomas Murray
----------------------------------------
THOMAS MURRAY
/s/ Robert A. Hay
----------------------------------------
ROBERT A. HAY
19
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT A
MANAGEMENT SHAREHOLDERS
Shareholder Shares of Common Stock Address
- ----------- ---------------------- -------
<S> <C> <C>
David G. Tattersall 29,942 9 Baily Green
Howth
Co. Dublin, Ireland
Peter J. Quinn 9,491 2 Stradbrook Grove
Blackrock
Co. Dublin, Ireland
John K. Collings, III 14,686 5347 St. Martin's Court
Mableton, GA 30064
</TABLE>
20
<PAGE>
EXHIBIT 2.11
LOAN AND SECURITY AGREEMENT
Dated as of July 16, 1997
between
NUMEREX CORP.
and
UPLINK SECURITY, INC.
<PAGE>
LOAN AND SECURITY AGREEMENT
This LOAN AND SECURITY AGREEMENT ("Agreement") is made and entered into as
of this 16th day of July, 1997, between UPLINK SECURITY, INC. a Georgia
corporation ("Borrower") and NUMEREX CORP., a Pennsylvania corporation
("Lender").
BACKGROUND
Borrower desires to establish financing arrangements with Lender to provide
working capital to Borrower. Lender is willing to make loans and extensions of
credit to Borrower under the terms and provisions set forth in this Agreement.
For all purposes of this Agreement, the capitalized terms specified in Section 8
hereof shall have the meanings set forth in that section, except as otherwise
specifically provided.
Terms
NOW, THEREFORE, in consideration of the terms and conditions set forth
herein, and of any loans, advances, or extensions of credit heretofore, now or
hereafter made to or for the benefit of Borrower by Lender, and intending to be
legally bound hereby, the parties hereto agree as follows:
1. Loans.
1.1 Commitment for Loans. Subject to the terms and conditions hereof,
including without limitation, satisfaction of the terms and conditions set forth
on Schedule 1.1 attached hereto and incorporated herein by reference, and in
reliance on the representations and warranties contained in this Agreement,
Lender agrees to make loans (such loans being collectively referred to herein as
the "Working Capital Loan") to Borrower at the times set forth on Schedule 1.1
attached hereto and incorporated herein by reference in an aggregate principal
amount not to exceed at any one time the Commitment Amount. Lender shall have no
obligation to make Working Capital Loans at any other times than as specified in
Schedule 1.1.
2
<PAGE>
1.2 Note. Borrower's obligation to repay the Working Capital Loan with
interest in accordance with the terms of this Agreement shall be evidenced by
the Line of Credit Note (the "Note") in the amount of the Commitment Amount
substantially in the form of Exhibit 1.2 attached hereto.
1.3 Principal. Absent earlier acceleration after an Event of Default,
Borrower shall repay the aggregate unpaid principal amount of the Working
Capital Loan on one of the two bases set forth below:
(A) If Lender exercises the First Call, the entire outstanding
principal balance of the Working Capital Loan shall be due and payable on the
date which is five (5) days after the closing of such First Call; or
(B) If Lender does not exercise the First Call, (i) one third (1/3)
of the then outstanding principal balance of the Working Capital Loan shall be
due and payable on the fourth (4th) anniversary of the date hereof; (ii)
one-half (1/2) of the then outstanding principal balance of the Working Capital
Loan shall be due and payable on the fifth (5th) anniversary of the date hereof;
and (iii) the remaining principal balance shall be due and payable on the sixth
(6th) anniversary of the date hereof.
1.4 Interest. Interest on the unpaid principal amount of the Working
Capital Loan will accrue at the rate of interest designated from time to time as
the "prime rate" in the Money Rate section of The Wall Street Journal ("Prime
Rate"). If for any reason, The Wall Street Journal is unavailable, "prime rate"
shall be as quoted in another publication of comparable standing. The interest
rate herein described shall fluctuate quarterly based on the "prime rate" as
applicable on the first Business Day of each quarter to reflect fluctuations in
the Prime Rate without notice to Borrower. Interest shall be calculated on the
basis of a year of 360 days and on the actual number of days elapsed. All
accrued and unpaid interest on the Working Capital Loan shall be paid along with
each principal payment made in accordance with Section 1.3 above.
1.5 Making the Working Capital Loan. Borrower shall give Lender notice
no later than 12:00 noon (Eastern time) at
3
<PAGE>
least three (3) Business Days prior to the date of each proposed borrowing. Each
such notice shall be in writing given by Borrower setting forth the amount of
the proposed borrowing, which shall not exceed the amount permitted for such
proposed borrowing in accordance with Schedule 1.1 attached hereto and
incorporated herein by reference and shall attach the applicable financial
statements which verify that the performance criteria set forth in Schedule 1.1
have been satisfied. Each such notice for a Working Capital Loan hereunder shall
constitute a representation and warranty by Borrower that all the conditions in
Sections 2 and 3, as the case may be, have been satisfied. Subject to the
satisfaction of the terms and conditions hereof, including without limitation,
the terms and conditions set forth on Schedule 1.1 attached hereto and
incorporated herein by reference, Lender shall make the requested Working
Capital Loan available to Borrower by delivering by wire transfer, in
immediately available funds, an amount equal to the borrowing to such account
designated by Borrower.
1.6 Prepayment. Borrower may prepay the Working Capital Loan, in whole
or in part, at any time, without premium or penalty, by paying to Lender the
amount to be prepaid with accrued interest thereon to the date of such
prepayment by 12:00 noon (Eastern time) on any Business Day.
1.7 Payment. Any principal, interest, fees or other obligations payable
by Borrower hereunder shall be paid to Lender in immediately available funds
before 12:00 noon (Eastern time) on their respective due dates at the office of
Lender set forth in Section 9.1 hereof.
1.8 Security for the Working Capital Loan.
(A) Borrower hereby grants to Lender, as security for repayment of
the Obligations, a first priority lien and security interest on all of
Borrower's now owned or hereafter acquired, created or arising accounts,
accounts receivable, contract rights, chattel paper, inventory, general
intangibles, equipment, deposit accounts, instruments, documents and
investment property (as each such term is defined in the UCC) and in any real
property owned by such Borrower and all cash and non-cash proceeds (including
without limitation, insurance proceeds of the foregoing (collectively, the
"Collateral").
4
<PAGE>
(B) This Agreement constitutes a security agreement under the UCC.
Borrower agrees to execute and/or deliver to Lender all mortgages, deeds of
trust, security documents, assignments, software escrow agreements, financing
statements, continuation and amendment statements, and other documents requested
by Lender or its affiliates, from time to time to perfect, protect, defend and
enforce Lender's liens, security interests and rights under this Agreement, all
at Borrower's sole expense.
(C) Each of the officers of Lender or its representative is hereby
irrevocably made, constituted and appointed the true and lawful attorney for
Borrower (without requiring it to act as such) with full power of substitution
to do the following after the occurrence of an Event of Default (with such power
being irrevocable and coupled with an interest): (1) endorse the name of
Borrower upon any and all checks, drafts, money orders and other instruments for
the payment of monies that are payable to Borrower and constitute collections on
Borrower's Accounts or other dispositions of Collateral; (2) execute in the name
of Borrower any financing statements, mortgages or deeds of trust; (3) execute
in the name of Borrower schedules, assignments, instruments, documents and
statements that Borrower is obligated to give Lender hereunder and send notices
to third parties to make payments of proceeds of any Collateral directly to
Lender; and (4) do such other and further acts and deeds in the name of Borrower
that Lender may reasonably deem necessary or desirable to enforce any account or
other Collateral or perfect Lender's security interest or lien in the
Collateral.
(D) In addition to all other rights, options and remedies granted to
Lender under this Agreement, Lender may, upon the occurrence of an Event of
Default, exercise any other rights granted to it under the UCC and any other
applicable law, including, without limitation, the following rights and
remedies:
(i) the right to take possession of, send notices, and collect
directly the Collateral, with or without judicial process;
(ii) by its own means or with judicial assistance, enter any of
Borrower's premises and take possession of the Collateral, or render it
unusable, or dispose of the
5
<PAGE>
Collateral on such premises without any liability for rent, storage, utilities
or other sums, and Borrower shall not resist or interfere with such action;
(iii) require Borrower, at Borrower's expense, to assemble all
or any part of the Collateral and make it available to Lender at any place
designated by Lender.
Lender will give Borrower reasonable notice of the time and place of any public
sale thereof or of the time after which any private sale or any other intended
disposition thereof is to be made. The requirements of reasonable notice shall
be met if such notice is mailed, postage prepaid, to the business address of
Borrower shown in this Agreement at least ten (10) days before the time of the
intended sale or disposition. Expenses of retaking, holding, preparing for sale,
selling or the like shall include Lender's reasonable attorneys' fees and legal
expenses incurred or expended by Lender to enforce any payment due it under this
Agreement either as against Borrower or in prosecution or defense of any action
or concerning any matter growing out of or in connection with the subject matter
of this Agreement and the Collateral pledged hereinafter.
(E) Lender shall have the right to proceed against all or any
portion of the Collateral in any order and may apply such Collateral to the
Obligations of Borrower to Lender in any order. All rights and remedies granted
Lender hereunder and under any agreement referred to herein, or otherwise
available at law or in equity, shall be deemed concurrent and cumulative, and
not alternative remedies, and Lender may proceed with any number of remedies at
the same time until all Obligations of Borrower to Lender, are satisfied in
full. The exercise of any one right or remedy shall not be deemed a waiver or
release of any other right or remedy, and Lender, upon the occurrence of an
Event of Default, may proceed against Borrower, and/or the Collateral, at any
time, under any agreement, with any available remedy and in any order.
1.9 Use of Proceeds. Borrower shall use the proceeds of the
Working Capital Loan for repayment of debt, fixed asset purchases and the
working capital purposes of Borrower as set forth in the Business Plan furnished
to Lender by Borrower and attached as Schedule 1.9 hereto.
6
<PAGE>
1.10 Default Interest.
Upon the occurrence of an Event of Default, interest on the
outstanding amount of the Working Capital Loan and, to the extent permitted by
law, all other Obligations (after as well as before judgment or the commencement
of any bankruptcy or other insolvency proceeding) will accrue at a per annum
rate equal to the Prime Rate plus two (2) percentage points ("Default Rate").
1.11 Maximum Rate. Nothing contained in this Agreement or the
Note shall require Borrower to pay interest at a rate prohibited by applicable
statute. If interest payable to Lender on any date would be in a prohibited
amount (as finally determined by a court of competent jurisdiction), it shall be
automatically reduced to an amount which is not prohibited and any amounts paid
in excess of the prohibited amount shall be applied to the reduction of the
principal balance of the Working Capital Loan.
2. Conditions Precedent to Effectiveness of the Commitment. The
effectiveness of the Commitment is subject to the prior satisfaction of each of
the following conditions:
2.1 Representations. The representations and warranties of Borrower
contained in this Agreement and in any other writings delivered to Lender
pursuant hereto, or in connection herewith, on or prior to the date hereof,
shall be true and correct in all material respects on and as of the date hereof.
2.2 Deliveries to Lender. Lender shall have received on or before the
date hereof the following, each in form and substance satisfactory to Lender and
its counsel:
(A) this Agreement and the Note, each duly executed and delivered by
Borrower;
(B) evidence of such insurance coverage with respect to the
business, and operations of Borrower and the Collateral as Lender may reasonably
request, with such insurance naming Lender as Lender Loss Payee and providing
that such
7
<PAGE>
insurance shall not be terminated or cancelled without at least 30 days prior
written
notice to Lender;
(C) the following authorizing documents from Borrower: (i) a copy of
the resolutions adopted by its board of directors (and if required its
shareholders or other constituent governing body) certified by Borrower's
authorized officer as of the date hereof, authorizing the execution, delivery
and performance of this Agreement and the other Loan Documents); (ii) an
incumbency certificate with such officers' signatures; (iii) a copy of
Borrower's organization documents and all amendments thereto certified by the
secretary of Borrower as of the date hereof; (iv) a copy of Borrower's bylaws or
similar governance document, as amended, certified by the secretary of Borrower
as of the date hereof; and (v) a good standing certificate from the Secretary of
State of Borrower's state of organization and each state in which Borrower is
doing business, where failure to qualify as a foreign corporation in good
standing would have a material adverse affect on its business and prospects;
(D) copies of all current licenses, certifications and financial
information as Lender shall reasonably require;
(E) a favorable written opinion of counsel to Borrower, dated the
date hereof, as to such matters as Lender may reasonably request and such other
approvals, opinions or documents as Lender may reasonably request;
(F) all UCC-1 financing statements required by Lender to perfect
Lender's security interest in the Collateral and a mortgage (or mortgages)
granting to Lender a first lien security interest in the real property (if any)
of each Borrower;
(G) receipt by Lender of UCC-1 financing statement, judgment and
state and federal tax lien searches against Borrower in each jurisdiction where
Borrower or any of Borrower's assets are located which evidence that there are
no liens or judgments against Borrower except Permitted Liens;
(H) a consent agreement from Europlex Research Limited in favor of
Lender whereby [Europlex Research Limited] agrees to allow Lender (if Lender so
elects) to exercise the
8
<PAGE>
rights of Borrower under the License Agreement dated February 28, 1997 between
Borrower and Research Limited after the occurrence of an Event of Default.
(I) a consent agreement from Bell South Wireless in favor of Lender
whereby Bell South Wireless Inc. agrees to allow Lender (if Lender so elects) to
exercise the rights of Borrower under the License Agreement dated November 24,
1995 between Borrower and Bell South Wireless Inc. after the occurrence of an
Event of Default.
3. Conditions Precedent to Working Capital Loans. The obligation of Lender
to make each Working Capital Loan is subject to the satisfaction (the
determination as to whether such conditions have been satisfied is to be made by
Lender in its commercially reasonable judgment), at the time of each such
proposed borrowing, of each of the following conditions:
3.1 Representations; No Default. The representations and warranties
contained in Section 4 of this Agreement and in any other writing delivered to
Lender pursuant hereto on or prior to the date of such borrowing shall be true
and correct in all material respects on and as of such date as though made on
and as of such date (except to the extent of changes resulting from transactions
permitted by this Agreement, changes disclosed in writing and accepted by
Lender, and to the extent such representations and warranties expressly relate
to an earlier date; provided that any disclosure indicating a Default or Event
of Default shall not be deemed a waiver by Lender of such Default or Event of
Default); and no Default or Event of Default shall have occurred and be
continuing or would result from the making of the Working Capital Loan to be
made on such date.
3.2 Notice. Lender shall have received a notice for such borrowing
pursuant to Section 1.5 hereof.
3.3 No Violation. The making of the Working Capital Loan shall not
contravene any law, rule or regulation enacted after the date hereof applicable
to Lender.
3.4 Certificate. Lender shall have received a certificate from the chief
financial officer or chief executive officer of Borrower to the effect that each
of the conditions in
9
<PAGE>
Section 3.1 hereof (without giving effect to Lender's satisfaction) has been
satisfied.
3.5 Performance Criteria. Lender shall be satisfied, in its commercially
reasonable judgment, that Borrower shall have satisfied the applicable
performance criteria set forth on Schedule 1.1 attached hereto and incorporated
herein by reference.
4. Representations and Warranties of Borrower. Borrower hereby represents
and warrants to Lender as follows:
4.1 Corporate Status.
(A) Borrower is a corporation duly organized, validly existing and
in good standing under the laws of its jurisdiction of organization, and has the
power and authority to own its property and assets and to transact the business
in which it is engaged. Borrower has no subsidiaries and is not a subsidiary of
any other Person nor does Borrower operate any portion of its business through
any other Person.
(B) Borrower is duly qualified to transact business as a foreign
corporation and is in good standing in each jurisdiction in which the conduct of
its business or its ownership, leasing or operation or property requires such
qualification, except where failure to so qualify would not have a material
adverse affect on its business, property or assets. Borrower is qualified to
transact business in the states listed on Schedule 4.1(B).
4.2 Corporate Power and Authority. Borrower has the power and authority
to execute, deliver and perform, as the case may be, the terms and provisions of
this Agreement and the other Loan Documents, and Borrower has taken all
necessary corporate or other action to authorize the execution, delivery and
performance of the Loan Documents, the borrowings hereunder, the liens granted
upon the Collateral pursuant hereto and the making and delivery of the Note and
the other Loan Documents. This Agreement constitutes, and all other Loan
Documents, when executed and delivered pursuant hereto, constitute or will
constitute, the authorized, valid and legally binding obligations
10
<PAGE>
of Borrower, enforceable in accordance with their respective terms.
4.3 No Violation of Agreements or Laws. Neither the execution and
delivery of this Agreement or any of the other Loan Documents nor the
consummation of the transactions herein or therein contemplated, nor compliance
with the terms and provisions hereof or thereof, will violate any applicable
provision of law or any applicable regulation, or any order, writ, injunction or
decree of any court or governmental department, commission, board, bureau,
agency or instrumentality or will conflict or will be inconsistent with, or will
result in any breach of, any of the terms, covenants, conditions or provisions
of, or constitute a default under, or result in the creation or imposition of
(or the obligation to impose) any lien, charge or encumbrance upon any of the
property or assets of Borrower pursuant to the terms of any indenture,
franchise, license, permit, mortgage, deed of trust, agreement or other
instrument to which Borrower is a party or by which Borrower may be bound, or to
which Borrower may be subject except for the lien granted to Lender pursuant to
the terms hereof. No order, consent, approval or authorization of any public
body, agency, commission or board is necessary for the execution, delivery and
performance of this Agreement or any of the other Loan Documents, except for
such orders, consents, approvals or authorizations which have been obtained.
4.4 No Existing Violation or Default.
(A) Borrower is not in violation of or in default under (i) its
charter, by-laws or other organizational documents, (ii) the provisions of any
material agreement to which it is a party, (iii) to the best of Borrower's
knowledge, any applicable provision of law or any applicable regulation of any
governmental department, commission, board, bureau, agency or instrumentality
(including, without limitation, Environmental Laws) or (iv) any order, decree or
judgment of any court or governmental agency or body having jurisdiction over
Borrower, which violation or default could, immediately or with the passage of
time, have a material adverse affect on the Borrower and its business,
properties and assets.
11
<PAGE>
(B) No event of default or event that, but for the giving of notice
or the lapse of time or both, would constitute an event of default, exists under
any indenture, mortgage, loan agreement, note or other agreement or instrument
for borrowed money or any lease, permit, license or other agreement or
instrument to which Borrower is a party or by which Borrower is bound or to
which any of its properties, assets or operations are subject, where a default
with respect to which indenture, mortgage, loan agreement, note or other
agreement would have a material adverse affect on the Borrower and its
businesses, properties and assets.
4.5 Capitalization of Borrower.
(A) The authorized Capital Stock of (i) Borrower consists of
1,000,000 shares of common stock, par value $0.01, of which 161,050 shares are
issued and outstanding as of the date hereof and 1,000,000 shares of preferred
stock, par value $0.01, of which -0- shares are issued and outstanding as of the
date hereof. All such outstanding shares of capital common stock have been duly
authorized, are validly issued, fully paid and nonassessable and have been
issued in compliance with applicable federal and state securities laws.
(B) Except as set forth on Schedule 4.5(B), there are no (i)
securities or obligations of Borrower convertible into or exchangeable for any
Capital Stock of Borrower; (ii) warrants, rights or options to subscribe for or
purchase from Borrower any such Capital Stock or any such convertible or
exchangeable securities or obligations; or (iii) obligations of Borrower to
issue such Capital Stock, any such convertible or exchangeable securities or
obligations or any such warrants, rights or options. The stockholders of
Borrower have no preemptive or similar rights with respect to the Common Stock
or other ownership interests.
4.6 Subsidiaries. Except for the entities listed on Schedule 4.6,
Borrower has no subsidiaries or partnership interests in any Person. Borrower
does not operate any portion of its business through any other Person, and
Borrower is not a partner or co-venturer in any partnership or joint venture.
12
<PAGE>
4.7 Litigation and Labor Disputes. Except as described on Schedule 4.7,
there are no pending or, to the best of Borrower's knowledge, threatened
actions, suits, proceedings, arbitrations or investigations against or affecting
Borrower or any of its properties, assets or operations or with respect to which
Borrower is responsible by way of indemnity or otherwise, and Borrower is not
aware of any basis for any such action, suit, proceeding or investigation which
may involve any material risk of final judgment, order or liability which, after
giving effect to any insurance (the applicability of which is not disputed by
the carrier) would have, or would create a material risk of a material adverse
affect on the Borrower and its business, properties and assets. Borrower is not
a party to any labor dispute.
4.8 Good Title to Properties. Except as set forth on Schedule 4.8,
Borrower has good and marketable title to its property (real and personal) and
assets subject to no liens, mortgages, pledges, encumbrances or charges of any
kind. To the best of Borrower's knowledge, all material properties held under
lease by such Borrower are held under valid, subsisting and enforceable leases.
4.9 License and Permits. Borrower has all franchises, agreements,
licenses, permits and grants of authority (collectively, "Licenses") as are
necessary to own, lease or operate its properties as currently owned, leased or
operated and to conduct its business as currently conducted and all such
Licenses are valid and in full force and effect, except where the failure to
obtain such Licenses would not reasonably be expected to have a material adverse
affect on Borrower. To the best of Borrower's knowledge, Borrower is in
compliance in all respects with its obligations under such Licenses and no event
has occurred that allows, or after notice or lapse of time would allow,
revocation or termination of such Licenses, except where the failure to so
comply would not reasonably be expected to have a material adverse affect on
Borrower.
4.10 Condition of Properties. All of the properties, equipment and
systems of Borrower that are used by Borrower in the conduct of its business are
in good repair, working order and condition, reasonable wear and tear excepted,
and are and will be in compliance with all material standards or rules imposed
by
13
<PAGE>
statute or by any governmental agency or authority under any agreements to
which use of such property is subject, except where the failure to so comply
would not have a material adverse affect on the Borrower's businesses,
properties and assets.
4.11 Environmental Matters. Except as disclosed on Schedule 4.11,
Borrower (with respect to its properties) is not in violation of or subject to
any existing, pending, and to the best of such Borrower's knowledge, threatened,
investigation or inquiry by any governmental authority or any response costs or
remedial obligations under any applicable Environmental Law. Borrower has not
obtained and, to the best of Borrower's knowledge, except as disclosed on
Schedule 4.11, Borrower is not required to obtain any permits, licenses or
similar authorizations to construct, occupy, operate or use any buildings,
improvements, fixtures, or equipment forming a material part of its properties
by reason of any applicable Environmental Law (except such permits, licenses and
authorizations which have been obtained or for which applications have currently
been submitted). To the best of Borrower's knowledge, no petroleum products,
oil, or hazardous substances or solid wastes have been disposed of or otherwise
released on or are otherwise located on any of its properties, except in
accordance with applicable laws. To the best of Borrower's knowledge and without
independent investigation, the use of its properties, as previously operated and
hereafter intended to be operated by Borrower, will not result in the location
on or disposal or other release of any petroleum products, oil, or hazardous
substances or solid wastes on or to its properties, except in accordance with
applicable laws. Borrower hereby agrees to remedy promptly and take such actions
as reasonably necessary to remedy any violation of applicable Environmental Laws
caused by Borrower with respect to its properties, to pay any fines, charges,
fees, expenses, damages, losses, liabilities and response costs arising from or
pertaining to the application of any such applicable Environmental Law to
Borrower with respect to its properties.
4.12 Outstanding Indebtedness. Except as set forth on Schedule 4.12, and
after giving effect to the closing hereunder, Borrower has no Indebtedness.
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4.13 Trademarks, Patents, Licenses, Etc. To the best of Borrower's
knowledge, Borrower possesses all necessary intellectual property rights,
trademarks, trademark rights, trade names, trade name rights, copyrights,
copyright applications, patents, patent applications, patent rights and licenses
needed to conduct its business as currently being conducted. Borrower knows of
no, and Borrower has not received any notice of any, conflict between its
intellectual property rights, trademarks, trademark rights, trade names, trade
name rights, copyrights, copyright applications, patents, patent rights, patent
applications and licenses and rights or claimed rights of any third party or any
others. Borrower warrants to Lender that it has the full legal right to the
intellectual property listed on Schedule 4.13 and that except as disclosed
thereon, Borrower does not own any other intellectual property rights as
described in this Section 4.13.
4.14 Names and Locations. Neither Borrower nor any of its predecessors
operates or does business, or, within the past five years, has operated or done
business, under a fictitious, trade or assumed name, except the names set forth
on Schedule 4.14. All of the locations at which Borrower conducts its business,
and Borrower's chief executive office (indicated as such), are listed on
Schedule 4.14.
4.15 Tax Returns and Payments. Borrower has filed all tax returns
required by law to be filed by it and has paid all taxes, assessments and other
governmental charges levied upon it and any of its respective properties,
assets, income or franchises which are due and payable, other than those
presently payable without penalty or interest.
4.16 Compliance with ERISA. Borrower is in compliance with all
applicable provisions of ERISA. With respect to any "pension plan" as defined in
Section 3(2) of ERISA, no accumulated funding deficiency or "reportable event"
as defined in Section 4343 of ERISA and no termination of any plan subject to
Title IV of ERISA has occurred.
4.17 Financial Statements. The unaudited financial statements and
related schedules and notes of Borrower for the fiscal year ended December 31,
1996, and the four month period ended April 30, 1997, have been prepared in
accordance with GAAP
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applied on a consistent basis and present fairly the financial condition,
results of operation and cash flows of Borrower as of such date and for the
periods presented (subject to normal, year-end audit adjustments and excluding
notes thereto).
4.18 Undisclosed Liabilities. Except as set forth on Schedule 4.18, to
the best of Borrower's knowledge, Borrower has no material liabilities or
obligations of any nature, whether absolute, accrued, unmatured, contingent or
otherwise, known or unknown, or any unsatisfied judgments or any unusual or
extraordinary commitments, except the liabilities recorded on the balance sheet
dated April 30, 1997.
4.19 Disclosure. Neither this Agreement nor any other Loan Document
delivered to Lender by or on behalf of Borrower in connection with the
transactions contemplated by this Agreement contain any untrue statement of a
material fact or omits to state a material fact necessary in order to make the
statements contained in this Agreement and in such other documents, certificates
or instruments, in light of the circumstances in which they were made, not
misleading.
4.20 Perfection and Priority. This Agreement and the other Loan
Documents are effective to create in favor of Lender a legally valid and
enforceable security interest in the Collateral and, when financing statements
have been filed in the offices of the jurisdictions listed on Schedule 4.20
attached hereto, Borrower will have granted to Lender and Lender will have
obtained a perfected first priority security interest in the Collateral superior
in right to any and all other liens, security interests or encumbrances now or
in the future.
5. Affirmative Covenants.
From and after the date hereof and so long as the Commitment is still in
effect or any Working Capital Loan remains outstanding or unsatisfied, Borrower
agrees to the following:
5.1 Reporting Requirements. Borrower will furnish to Lender:
(A) as soon as available and in any event within forty five (45)
days after the end of each calendar quarter,
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unaudited financial statements of Borrower for the calendar quarter then ended,
prepared in accordance with GAAP (subject to normal year-end audit adjustments
and excluding notes thereto), and certified by the chief financial officer of
Borrower to be true and correct;
(B) as soon as available and in any event within seventy-five (75)
days after the end of each calendar year of Borrower, financial statements of
Borrower, prepared in accordance with GAAP, and including a balance sheet, a
statement of income and expenses for the year then ended and which, at Lender's
request, shall be audited by Ernst & Young, LLP or other independent certified
public accounting firm acceptable to Lender;
(C) as soon as available and in any event within thirty (30) days of
the end of each calendar quarter, an aged accounts receivable report in
sufficient detail to show amounts due by the account age classifications of
thirty (30) days, sixty (60) days, ninety (90) days, one hundred twenty (120)
days, and over one hundred twenty (120) days, certified by the chief financial
officer of Borrower to be true and correct;
(D) copies of the monthly, quarterly and annual reports provided to
the board of directors of Borrower at or about the same time such reports are
distributed to the board;
(E) as soon as possible and in any event within five (5) Business
Days after Borrower obtains knowledge of the occurrence of a Default or an Event
of Default, or any material adverse change in the condition or operations,
financial or otherwise of the Borrower, the written statement of the chief
financial officer of Borrower setting forth the details of such Default, Event
of Default, event or material adverse change;
(F) promptly after the commencement thereof but in any event not
later than five (5) Business Days after service of process with respect thereto
on, or the obtaining of knowledge thereof by Borrower, notice of each action
requesting injunctive relief and each action, suit or proceeding before any
court, arbitrator or governmental department, commission, board, bureau, agency
or instrumentality concerning the operations, financial or
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otherwise, of Borrower, which seeks damages or the imposition of penalties in
excess of $50,000;
(G) as soon as practicable and in any event within ten (10) Business
Days of delivery to Borrower, a copy of any letter issued by Borrower's
independent public accountants or other management consultants with respect to
Borrower's financial or accounting systems or controls, including all so-called
"management letters"; and
(H) within a reasonable period of time after a request by Lender,
such other information concerning the condition or operations, financial or
otherwise, of Borrower as Lender may, from time to time, reasonably request.
5.2 Use of Proceeds. Borrower will use the proceeds of the Working
Capital Loan made hereunder for the purposes set forth in Section 1.9.
5.3 Compliance with Laws, Etc. Borrower will comply in all material
respects with all applicable laws, rules, regulations and orders, and all
material contracts and agreements to which it or its properties are subject,
paying before the same become delinquent all taxes, assessments and governmental
charges or levies imposed upon it or upon its income or profits or its
properties, and paying all lawful claims which if unpaid might become a lien or
charge upon any of its properties, except to the extent such taxes, assessments
and governmental charges or levies are contested in good faith by proper
proceedings which stay the imposition of any penalty, fine or lien resulting
from the nonpayment thereof and with respect to which adequate reserves have
been set aside for the payment thereof.
5.4 Preservation of Existence, Etc. Borrower will maintain and preserve
its existence, rights and privileges, and become or remain duly qualified and in
good standing in each jurisdiction in which the character of the properties
owned or leased by it or in which the transaction of its business makes such
qualification necessary, and where the failure to so qualify would have a
material adverse affect on its business, properties or assets.
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5.5 Obtaining of Permits, Etc. Borrower will obtain, maintain and
observe all permits, licenses, authorizations, approvals and accreditation
necessary or useful in the proper conduct of its business, except where the
failure to do so will not have a material adverse affect on Borrower.
5.6 Maintenance of Insurance. Borrower will maintain, with responsible
and reputable insurance companies or associations, insurance (including, without
limitation, comprehensive general liability, product liability, business
interruption and hazard insurance) with respect to its properties and business,
in such amounts and covering such risks, as is required by any governmental
authority having jurisdiction with respect thereto or as is carried generally in
accordance with sound business practice by companies in similar businesses
similarly situated or as is required by any Loan Document. The policies of all
such insurance shall contain standard Mortgagee's or Lender's Loss Payable
Clauses (and with respect to liability and interruption insurance, additional
insured clauses) issued in favor of Lender under which all losses thereunder
shall be paid to Lender as Lender's interest may appear.
5.7 Maintenance of Properties, Etc. Borrower will maintain and preserve
all of its properties necessary or useful in the proper conduct of its business
in good working order and condition, ordinary wear and tear excepted, and comply
at all times with the material provisions of all leases to which it is, or
becomes, a party or under which it now or hereafter occupies property, so as to
prevent any material loss or forfeiture thereof or thereunder.
5.8 Pension Plans. Borrower will comply in all material respects with
all material requirements of ERISA and will notify Lender promptly upon receipt
by Borrower of any notice of the institution of any proceeding or other action
which may result in the termination of any employee plan under ERISA, and
deliver to Lender, promptly after the filing or receipt thereof, copies of all
reports or notices relating to such proceeding or related action which Borrower
files or receives under ERISA with or from the Internal Revenue Service, the
Pension Benefit Guaranty Corporation, or the U.S. Department of Labor.
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5.9 Environmental Compliance. Borrower will, with respect to its
properties (now owned or hereafter acquired), comply in all material respects
with applicable Environmental Laws, including, without limitation, obtaining,
remaining in material compliance with, and maintaining all necessary permits,
certificates, licenses, approvals and other authorizations required by such
Environmental Laws, and filing when due all notifications, required by such
Environmental Laws in connection with its ownership or use of any real estate or
the operation of its business. Borrower shall not send any waste to any site
listed or formally proposed for listing on the National Priority List
promulgated pursuant to CERCLA or to any site listed pursuant to any similar
state law on any state list of hazardous substance sites requiring investigation
or cleanup.
5.10 Intellectual Property. Borrower will promptly take all necessary
and appropriate action to protect its respective copyrights, trademark,
tradename and other intellectual property rights, including, without limitation,
registering its copyrights, trademarks and sourcemarks with the United States
Patent and Trademark Office and the United States Copyright Office.
5.11 Inspections. Borrower shall permit Lender and any representative
designated by Lender, to visit and inspect any of Borrower's property, assets,
books and records, including, without limitation, Borrower's financial
statements, and to discuss Borrower's affairs, finances and accounts with
Borrower's officers and employees at such reasonable times after reasonable
notice and as often as Lender may reasonably request, all at Borrower's sole
cost and expense after the occurrence of an Event of Default (prior to an Event
of Default, Lender shall bear the cost and expense of such inspections).
6. Negative Covenants.
From and after the date hereof and so long as the Commitment is still in
effect or any Working Capital Loan remains outstanding or unsatisfied, Borrower
shall not:
6.1 Liens on Property. Create or suffer to exist, any lien, security
interest or other charge or encumbrance, or any other type of preferential
arrangement, upon or with respect to
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any of its properties, rights or other assets, whether now owned or hereafter
acquired, other than the following (referred to collectively as "Permitted
Liens", except as permitted hereunder):
(A) the liens or security interests granted to Lender pursuant to
this Agreement;
(B) liens for taxes, assessments or other governmental charges which
are non-delinquent or being contested in good faith and by appropriate
proceedings and with respect to which proper reserves have been taken in
accordance with generally accepted accounting principles;
(C) deposits or pledges to secure obligations under workers'
compensation, social security or similar laws, or under unemployment insurance;
and
(D) statutory liens arising by operations of law such as mechanics,
materialmens, carriers and warehouse liens, which in the aggregate do not have a
material adverse affect on the Borrower and its properties, assets and business.
6.2 Indebtedness. Create, incur or suffer to exist any Indebtedness
other than (A) Indebtedness to Lender, (B) purchase money liens or capital lease
obligations not in excess of $100,000 at any one time outstanding or (C) the
Indebtedness listed on Schedule 4.12 ("Permitted Indebtedness"), unless such
Indebtedness has been expressly subordinated to the Indebtedness to Lender
pursuant to a subordination agreement in form and substance satisfactory to
Lender.
6.3 Merger, Consolidation. Create any subsidiary or enter into any
merger, consolidation or similar transaction, or sell, assign, lease or
otherwise dispose of (whether in one transaction or in a series of
transactions), all or substantially all of its assets (whether now or hereafter
acquired).
6.4 Sale of Assets, Etc. Assign, lease or otherwise dispose of any of
any material portion of its properties or assets (whether now owned or hereafter
acquired) to any Person, other than sales in the ordinary course of business for
a full and fair consideration.
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6.5 Guaranties, Etc. Except for existing corporate guarantees described
in Schedule 6.5, assume, guarantee, endorse or otherwise become directly or
contingently liable, including, without limitation, liable by way of agreement,
contingent or otherwise, to purchase, to provide funds for payment, or to supply
funds, in connection with any Indebtedness of any other Person.
6.6 Restrictions on Certain Amendments. Directly or indirectly, amend,
and shall not suffer, cause or permit to be amended, the certificate of
incorporation, by-laws or any other organizational document of Borrower without
the consent of Lender, which consent will not be unreasonably withheld.
6.7 Distributions. Declare or pay any dividends or make any
distributions of any kind on its common stock or other equity securities.
6.8 Change in Nature of Business. Make any material change in the nature
of its business, or discontinue or liquidate any material part of its operations
without the prior written consent of Lender which consent will not be
unreasonably withheld.
6.9 Transactions with Affiliates; Payments to Affiliates. Directly or
indirectly enter into any transaction with an Affiliate on terms less favorable
(including, but not limited to, price and credit terms) to Borrower than would
be the case if such transaction had been effected at arms length with a Person
other than an Affiliate. Borrower shall not make any payments of administrative
or similar fees to any of its Affiliates, except for payments on account of the
License Agreement dated February 28, 1997 between Borrower and Europlex Research
Limited.
6.10 Management Compensation. Increase the compensation (whether in
salary, bonus, fringe benefits or securities) of directors, officers and
management of Borrower, other than in the ordinary course of business.
6.11 Limitation on Leases. Incur, create or assume any commitment to
make any direct or indirect payment, whether as rent or otherwise, under any
lease, rental or other arrangement
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for the use of real or personal property, or both, other than in the ordinary
course of business.
6.12 Inconsistent Agreements. Enter into any agreement containing any
provision which would be violated or breached by any borrowing hereunder or by
the performance by Borrower of its Obligations hereunder or under any Loan
Document.
6.13 Locations and Change In Names. Change the location of the principal
place of business and chief executive office of Borrower or any other location
of Borrower without thirty (30) days prior written notice to Lender.
6.14 Redemptions. Except as otherwise provided in the Shareholders
Agreement, directly or indirectly redeem, purchase or otherwise acquire, any of
Company's or any subsidiary's equity securities.
6.15 Issuances. Other than pursuant to the Purchase Agreement and the
Shareholders Agreement, authorize, issue, or enter into any agreement providing
for the issuance (contingent or otherwise) of, (x) any notes or debt securities
containing equity features (including, without limitation, any notes or debt
securities convertible into or exchangeable for equity securities, issued in
connection with the issuance of equity securities or containing profit
participation features) or (y) any equity securities (or any securities
convertible into or exchangeable for any equity securities, including any
warrants or stock options.
6.16 Liquidations. Except as required by law, liquidate, dissolve or
effect a recapitalization or reorganization in any form of transaction;
6.17 Investments. Make or permit to exist, any investment other than:
(i) investments in short term obligations issued by, or guaranteed by, the
United States Government, (ii) investments in negotiable certificates of
deposit, bankers' acceptances or money market securities issued by any bank or
branch of a bank having capital and surplus of at least $50 million in the
aggregate at all times, and (iii) investments in commercial paper rated P1 or A1
by Moody's Investors Service, Inc. or Standard & Poor's Corporation,
respectively.
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7. Events of Default. Each of the following events shall constitute an
event of default ("Event of Default") hereunder:
7.1 Borrower shall fail to pay any principal of or interest on the Note
(whether by maturity, voluntary or required prepayment, acceleration, demand or
otherwise) or any amount payable hereunder or under any of the other Loan
Documents within ten (10) days of notice being received by Lender to Borrower
regarding such failure to pay; or
7.2 Any representation or warranty made by Borrower in this Agreement,
the Note or any of the other Loan Documents shall have been incorrect in any
material respect when made; or
7.3 Borrower shall fail to perform or observe any term, covenant,
condition or agreement contained in this Agreement or any of the other Loan
Documents or in any other agreement with Lender, including without limitation,
the Stock Purchase Agreement or the Shareholders Agreement, provided however,
that, with respect to the covenants set forth in Sections 5.3 through and
including 5.10 hereof, Lender shall have thirty (30) days, and with regard to
Section 5.1, Lender shall have ten (10) days, from the date on which Borrower
receives notice of such failure, to cure such failure to the satisfaction of
Lender; or
7.4 Borrower shall generally not be paying its Debts as they become due
or shall admit in writing its inability to pay its Debts generally, or shall
make a general assignment for the benefit of creditors; or any petition shall be
filed by or against Borrower under the federal bankruptcy laws, or any other
proceeding shall be instituted by or against any such person seeking to
adjudicate it a bankrupt or insolvent, or seeking liquidation, reorganization,
arrangement, adjustment or composition of it or its Debts under any law relating
to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the
entry of an order for relief or the appointment of a receiver, trustee,
custodian or other similar official for such person or for any substantial part
of its property; or Borrower shall take any action to authorize or effect any of
the actions set forth above in this paragraph and, in the case of the
institution of any involuntary proceeding against Borrower, such
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proceeding shall not be discharged within sixty (60) days of its commencement;
or
7.5 Any material provision of this Agreement or any of the other Loan
Documents shall at any time for any reason be declared to be null and void, or
the validity or enforceability thereof shall be contested by Borrower, or a
proceeding shall be commenced by Borrower, or by any governmental agency or
authority having jurisdiction over Borrower, seeking to establish the invalidity
or unenforceability thereof, or Borrower shall deny that it has any liability or
obligation purported to be created under this Agreement or the Loan Documents;
or
7.6 The sale of substantially all of the assets of Borrower; or
7.7 Borrower shall default beyond any grace period under any agreement
with any creditor of Borrower for borrowed money with an outstanding balance in
excess of $50,000.00, if as a result of such default the holder of Borrower's
obligations declares such obligation of Borrower due prior to its maturity date
or prior to its regularly scheduled date of payment; or
7.8 If any final judgment for the payment of money shall be rendered by
any court of record against Borrower in excess of $100,000, in any single
judgment or in the aggregate, and such outstanding judgment(s) have not been
dismissed, stayed or which remain undischarged or unpaid for a period of sixty
(60) days after the entry thereof; or
7.9 The issuance of any execution or distraint process against the
Collateral; or
7.10 (a) If a notice or notices of a lien, levy or assessment is filed
of record with respect to a material portion of Borrower's assets by the United
States government, or any department, agency or instrumentality thereof, or by
any state, county, municipal or other government agency, or (b) if any taxes or
Debts owing at any time hereafter to any one or more of such entities becomes a
lien, whether choate or otherwise, upon any material portion or all of
Borrower's assets unless, in the case of subclause (b) only, such liens are for
taxes, assessments or other governmental charges which are non-delinquent or are
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being contested in good faith, with due diligence and by appropriate proceedings
and with respect to which proper reserves have been taken in accordance with
generally accepted accounting principles; or
7.11 Borrower shall fail to amend its agreement with Bell South Wireless
Inc. dated as of November 24, 1995 on terms and conditions reasonably
satisfactory to Lender by September 1, 1997.
7.12 Borrower does not own, free and clear of any liens or encumbrances
the Central Message Processing Center upon or prior to the funding of $1,000,000
set forth under Item 2 of Schedule 1.1 hereof.
Upon the occurrence of any Event of Default, the obligation of Lender to
make any further advances hereunder and the Commitment shall immediately
terminate, and, at the election of Lender, Lender may by notice to Borrower, (a)
declare the Note and all interest thereon, and all other amounts payable under
this Agreement to be forthwith due and payable, whereupon the Note and all such
interest, and all such amounts shall become and be forthwith due and payable,
without presentment, demand, protest or further notice of any kind, all of which
are hereby expressly waived by Borrower; and (b) exercise any and all of its
other rights under applicable laws, hereunder (including without limitation all
rights and remedies under Section 1.8(D) and (E)) and under any of the other
Loan Documents; provided, that no notice need be given to Borrower upon the
occurrence of any Event of Default described in Section 7.4 and the Obligations
shall be automatically accelerated.
8. Definitions; Accounting and Other Terms.
8.1 Definitions. As used in this Agreement, the following terms shall
have the respective meanings indicated below (such meanings to be applicable
equally to both the singular and plural forms of such terms):
"Affiliate", as to any Person, means any other Person which directly or
indirectly controls, is controlled by or is
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under common control with such Person, or any relative (by blood or marriage) of
such Person.
"Business Day" means any day except a Saturday, Sunday or other day on
which commercial banks in the City of Philadelphia are authorized or required by
law to close.
"Capital Stock" means, with respect to any Person, any and all shares,
partnership interests or equivalents (however designated and whether voting or
non-voting) or such Person's capital stock, whether outstanding on the date
hereof or hereafter issued.
"Collateral" has the meaning given to such term in Section 1.8(A)
hereof.
"Commitment" means the obligation of Lender, subject to the terms and
conditions of this Agreement, to make Working Capital Loans to Borrower in an
aggregate amount not exceeding the Commitment Amount.
"Commitment Amount" means an aggregate unpaid amount of principal
outstanding under this Agreement not exceeding FIVE MILLION DOLLARS
($5,000,000).
"Debt" or "Indebtedness" of any Person means, without duplication, (i)
all obligations of such Person for borrowed money, (ii) all obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments issued
by such Person, (iii) all obligations of such Person to pay the deferred
purchase price of property or services, except trade accounts payable arising in
the ordinary course of business, (iv) all obligations of such Person under any
lease of property, real or personal, the obligations of the lessees in respect
of which are required in accordance with GAAP to be capitalized on a balance
sheet of the lessee, (v) all reimbursement obligations of such Person in respect
of letters of credit or other similar instruments, (vi) all liabilities and
obligations of others secured by a lien on any asset of such Person, whether or
not such liabilities and obligations are otherwise an obligation of such Person,
and (vi) all liabilities and obligations of others guaranteed by such Person.
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"Default" shall mean any event or occurrence which with the passing of
time, the giving of notice, or both, could become an Event of Default.
"Environmental Laws" means all statutes, laws, rules, regulations or
judicial rulings pertaining to health or the environment applicable to the
properties of Borrower, including, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as heretofore or
hereafter amended, the Resource Conservation and Recovery Act of 1976, as
heretofore or hereafter amended, and any other federal, state or local statute,
law, rule, regulation, or judicial ruling, whether now or hereafter in
existence, relating to, or imposing standards of conduct concerning the
existence, release, disposal or handling of any waste, substance, or material
(including, but not limited to, asbestos, petroleum products, radon and any
substances that are considered hazardous or toxic).
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, together with the rules and regulations promulgated
thereunder as in effect from time to time.
"Event of Default" means any of the events set forth in Section 8
hereof.
"First Call" has the meaning ascribed thereto in the Stock Purchase
Agreement.
"GAAP" means generally accepted accounting principles as in effect in
the United States on the date hereof applied on a consistent basis.
"Loan Documents" means, collectively, this Agreement, the Note and all
other documents, instruments or agreements hereafter executed and delivered to
Lender by Borrower or others, evidencing or otherwise relating to the Working
Capital Loan and the Collateral.
"Obligations" means all existing and future liabilities of Borrower to
Lender, including, without limitation, indebtedness evidenced under the Note
issued pursuant hereto, the Working Capital Loan, all fees and charges owing by
Borrower to Lender, and all other liabilities and obligations of every kind or
nature whatsoever of Borrower to
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Lender, whether hereunder or otherwise, whether now existing or hereafter
incurred, joint or several, matured or unmatured, direct or indirect, primary or
secondary, related or unrelated, due or to become due, including, but not
limited to, any extensions, modifications, substitutions, increases and renewals
thereof, and substitutions therefor; the payment of all amounts advanced by
Lender to preserve, protect, defend, and enforce its rights hereunder and in the
Collateral in accordance with the terms of this Agreement; and the payment of
all expenses incurred by Lender in connection therewith.
"Permitted Indebtedness" has the meaning given to that term in Section
6.2 hereof.
"Permitted Liens" has the meaning given to that term in Section 6.1
hereof.
"Person" means an individual, corporation, partnership, association,
limited liability company, joint-stock company, trust, unincorporated
organization or joint venture, or a court or government or any agency or
political subdivision thereof.
"Shareholders Agreement" has the meaning ascribed thereto in the Stock
Purchase Agreement.
"Stock Purchase Agreement" means that certain Stock Purchase Agreement
dated July 16, 1997 among Lender, Borrower and the shareholders of Borrower.
"UCC" means the Uniform Commercial Code as adopted in the Commonwealth
of Pennsylvania, as the same may be amended or supplemented from time to time.
"Working Capital Loan" means the loans made pursuant to Section 1
hereof.
8.2 Accounting and Other Terms. All accounting terms used in this
Agreement which are not otherwise defined herein shall be construed in
accordance with generally accepted accounting principles unless otherwise
expressly stated herein. All terms used in this Agreement which are defined in
Article 9 of the Uniform Commercial Code in effect in the State of
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Pennsylvania on the date hereof and which are not otherwise defined shall have
the same meanings herein as set forth therein.
9. Miscellaneous.
9.1 Notices, Etc. Except as otherwise provided herein, all notices,
requests, consents, demands, approvals and other communications hereunder shall
be deemed to have been duly given, made, served or received if in writing and on
the same day as sent when delivered personally or by telecopy, on the third day
after being sent when mailed by certified mail, return receipt requested,
postage prepaid, or on the next day after being sent when delivered by an
overnight delivery courier, charges prepaid, to the respective parties to this
Agreement as follows:
(A) If to Borrower:
Uplink Security, Inc.
1395 South Marietta Parkway
Building 200
Suite 228
Marietta, GA 30067
Attention: John Collings
Telecopy: 770-429-5533
With a copy to:
Wagner, Johnston & Rosenthal, P.C.
3343 Peachtree Road, N.E.
Atlanta Financial Center
Suite 800, East Tower
Atlanta, GA 30326-1044
Attention: Craig A. Wagner, Esquire
Telecopy: (404) 261-6779
(B) If to Lender:
Numerex Corp.
2360 Maryland Road
Willow Grove, Pennsylvania 19090
Attention: John J. Reis
Telecopy: (610) 892-0725
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with a copy to:
Blank Rome Comisky & McCauley
Four Penn Center
Philadelphia, Pennsylvania 19103
Attention: Barry H. Genkin, Esquire
Telecopy: (215) 569-5555
The designation of the person to be so notified or the address of such
person for the purposes of such notice may be changed from time to time by
similar notice in writing, except that any communication with respect to a
change of address shall be deemed to be given or made when actually received by
the party to whom such communication was sent. No other method of written notice
is precluded by this Section.
9.2 Amendments, Etc. No amendment of any provision of this Agreement or
the Note shall be effective unless it is in writing and signed by Borrower and
Lender, and no waiver of any provision of this Agreement or the Note, nor
consent to any departure by Borrower therefrom, shall be effective unless it is
in writing and signed by Borrower and Lender and then such waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given.
9.3 No Waiver; Remedies, Etc. No failure on the part of Lender to
exercise, and no delay in exercising, any right hereunder or under any other
Loan Document shall operate as a waiver thereof; nor shall any single or partial
exercise of any right under any Loan Document preclude any other or further
exercise thereof or the exercise of any other right. The rights and remedies of
Lender provided herein and in the other Loan Documents are cumulative and are in
addition to, and not exclusive of, any rights or remedies provided by law. The
rights of Lender under any Loan Document against any party thereto are not
conditional or contingent on any attempt by Lender to exercise any of its rights
under any other Loan Document against such party or against any other person.
9.4 Fees, Costs, Expenses and Taxes. Borrower will pay, on demand, all
fees, costs and expenses (including without limitation attorneys' fees and
costs) incurred by Lender in connection with the preparation, negotiation,
analysis,
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execution, consummation, delivery, filing, and recording, if applicable, of any
waiver or amendment of any Loan Document or in connection with the protection,
preservation enforcement or defense of any of Lender's rights under the Loan
Documents and the other documents to be delivered under the Loan Documents.
9.5 Indemnity. Borrower agrees to indemnify Lender and its directors,
its affiliates, officers, employees, agents and controlling Persons against, and
to hold Lender and each such person harmless from, any and all losses, claims,
damages, liabilities and related expenses, including reasonable counsel fees and
expenses, incurred by or asserted against Lender or any such Persons arising out
of, in any way in connection with, or as a result of (i) this Agreement, any of
the other Loan Documents and the other documents contemplated hereby or thereby,
the performance by the parties hereto and thereto of their respective
obligations hereunder and thereunder and consummation of the transactions
contemplated hereby and thereby, (ii) any claim, litigation, investigation or
proceeding relating to any of the foregoing, whether or not Lender or any such
Person is a party thereto, (iii) breach of any material representation, warranty
or covenant hereof or (iv) environmental conditions. Borrower agrees to respond
on Lender's behalf to any matter subject to subsections (iii) and (iv) above or,
at Lender's election, to pay the reasonable costs of Lender's response. Borrower
hereby waives and releases Lender from any and all losses, claims, damages, and
liabilities, known or unknown, foreseen or unforeseen, which exist or which may
arise in the future under common or statutory law. The provisions of this
Section shall remain operative and in full force and effect regardless of the
expiration of the term of this Agreement or any other of the Loan Documents, the
repayment of the Working Capital Loan, the invalidity or unenforceability of any
term or provision of this Agreement, the Note or any other Loan Document, or any
investigation made by or on behalf of Lender. All amounts due under this Section
shall be payable on written demand therefor. Notwithstanding the foregoing, the
Borrower shall not be liable to Lender under the foregoing indemnification
provision to the extent that any loss covered thereby is judicially determined
by a court of competent jurisdiction in a final non-appealable judgment to have
resulted solely by reason of Lender's gross negligence or willful misconduct.
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9.6 Severability of Provisions. Any provision of this Agreement, or of
any other Loan Document, which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or invalidity without invalidating the remaining portions
hereof or thereof or affecting the validity or enforceability of such provision
in any other jurisdiction.
9.7 Insured Losses. In the event the Company receives proceeds from an
insured loss, whereby Lender is designated as Lender Loss Payee and the proceeds
do not exceed $200,000 Lender agrees to allow such proceeds to be used by the
Company to restore or replace the property which was the subject of the insured
loss. Where the amount of proceeds related to the loss is in excess of $200,000
the parties agree to negotiate, in good faith, the allocation of such proceeds.
9.8 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of Borrower and Lender and their respective successors and
assigns, except that Borrower shall not have the right to assign its rights
hereunder or any interest herein, provided further however, that if such
assignment or transfer by Lender occurs before the two hundred and seventyth
(270th) day following the third anniversary of this Agreement, the assignee or
transferee of such rights and obligations of the Lender hereunder shall also be
the assignee or transferee of the rights of the Lender to exercise the First
Call pursuant to Section 2.5 of that certain Stock Purchase Agreement of even
date herewith.
9.9 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same instrument.
9.10 Headings. The captions herein have been inserted solely for
convenience of reference and in no way define, limit or describe the scope or
substance of any provision of this Agreement.
9.11 Entire Agreement. This Agreement and the other Loan Documents
represent the entire agreement between the parties with respect to the
transactions contemplated hereby and
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supersedes all prior agreements and understandings, written or oral.
9.12 Waiver of Jury Trial; Consent to Jurisdiction.
EACH PARTY HERETO WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN
RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN
CONNECTION WITH THIS AGREEMENT, ANY OF THE OTHER LOAN DOCUMENTS OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
BORROWER IRREVOCABLY SUBMITS AND CONSENTS TO THE JURISDICTION OF ANY
PENNSYLVANIA COMMONWEALTH COURT OR FEDERAL COURT SITTING IN PHILADELPHIA,
PENNSYLVANIA OVER ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THE
LOAN DOCUMENTS, AND BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN
RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH
PENNSYLVANIA COMMONWEALTH OR FEDERAL COURT. BORROWER AGREES THAT SERVICE OF
COPIES OF ANY SUMMONS AND COMPLAINT AND ANY OTHER PROCESS WHICH MAY BE SERVED IN
ANY SUCH ACTION MAY BE MADE AT THE ADDRESS SPECIFIED IN SECTION 9.1 IN THE
MANNER PROVIDED BY LAW.
9.12 Governing Law. This Agreement, the Note and any other Loan
Documents shall be governed by, and construed in accordance with, the law of the
Commonwealth of Pennsylvania.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
UPLINK SECURITY, INC.
By: /s/ John K. Collings
-------------------------------
Name: John K. Collings
Title: President
Attest: /s/ Peter J. Quinn
---------------------------
Name: Peter J. Quinn
Title: Secretary
NUMEREX CORP.
By: /s/ John J. Reis
-------------------------------
Name:
Title:
35
EXHIBIT 10.20
INCENTIVE COMPENSATION PROGRAM FOR FY 98
FOR EXECUTIVE LEVEL EMPLOYEES
Each executive will have the opportunity to earn incentive compensation as a
function of revenue and operating income attainment. The formula based program
will allow each participant to earn incentive compensation which ranges between
20-24% of base salary.
Fifty (50%) percent of the incentive pay will be distributed as earned on a
quarterly basis, consistent with Numerex's reporting cycles, with the remaining
50% being dependent on full year attainment.
Incentive compensation under this program is based entirely on revenue growth
and bottom line performance. This type of sharp focus is essential in a
multi-divisional corporation, as it clearly communicates our corporate goals to
each executive.
Operating company executives will earn incentive compensation as a function of
their respective operating company's performance, not Numerex performance.
Numerex executives will be paid based on Numerex's overall performance.
Both the quarterly and annual formulas provide for no bonus payment until 87.5%
of plan is attained. From 87.5% to 100%, bonuses are also calculated in a linear
fashion. The formula-based approach allows for increased incentive compensation
for over achievement.
The approach also permits the development of a negative balance in the
"incentive compensation" account, should quarterly performance fail to achieve
minimum performance. Negative balances will be carried forward and netted before
any subsequent payment is made.
EXHIBIT 10.23
LOAN AGREEMENT
THIS LOAN AGREEMENT (the "AGREEMENT"), is entered into as of February 12,
1997, between NUMEREX CORP. ("NUMEREX") AND ITS U.S. SUBSIDIARIES listed on the
signature pages hereto (NumereX and such Subsidiaries each individually a
"BORROWER" and collectively, the "BORROWERS"; NumereX and all of its
Subsidiaries, both U.S. and foreign, are sometimes collectively referred to as
"NUMEREX AND ITS SUBSIDIARIES"), and PNC BANK, NATIONAL ASSOCIATION (the
"BANK").
The Borrowers and the Bank, with the intent to be legally bound, agree as
follows:
1. LOAN AND SECURITY
1.1 LOAN. The following loans, lines of credit and credit facilities
(if one or more, collectively, the "LOAN"), made for the purpose indicated below
shall be subject to and governed by this Agreement:
Amount and Type Purpose
--------------- -------
$10,000,000 Convertible Line of Credit General working capital and
acquisitions
The Loan is or will be evidenced by a promissory note or notes of the Borrowers
(if one or more, collectively, the "NOTE") acceptable to the Bank, which shall
set forth the interest rate, repayment and other provisions, the terms of which
are incorporated into this Agreement by reference.
1.2 SECURITY. The security for repayment of the Loan shall consist
of equity interests of NumereX's direct and indirect foreign subsidiaries
pledged under stock pledge or similar agreements heretofore, contemporaneously
or hereafter executed and delivered to the Bank (the "SECURITY DOCUMENTS"),
which shall secure repayment of the Loan, the Note and all other loans,
advances, debts, liabilities, obligations, covenants and duties owing by the
Borrowers to the Bank of any kind or nature, present or future, whether or not
evidenced by any note, guaranty or other instrument, whether arising under any
agreement, instrument or document, whether or not for the payment of money,
whether arising by reason of an extension of credit, opening of a letter of
credit, loan or guarantee or in any other manner, whether arising out of
overdrafts on deposit or other accounts or electronic funds transfers (whether
through automatic clearing houses or otherwise) or out of the Bank's non-receipt
of or inability to collect funds or otherwise not being made whole in connection
with depository transfer check or other similar arrangements, whether direct or
indirect (including those acquired by assignment or participation), absolute or
contingent, joint or several, due or to become due, now existing or hereafter
arising, and any amendments, extensions, renewals or increases and all costs and
expenses of the Bank incurred in the documentation, negotiation, modification,
enforcement, collection or otherwise in connection with any of the foregoing,
including but not limited to reasonable attorneys' fees and expenses
(hereinafter referred to collectively as the "OBLIGATIONS"). Unless expressly
provided to the contrary in documentation for any other loan or loans, it is the
express intent of the Bank and the
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Borrowers that all Obligations including those included in the Loan be
cross-collateralized and cross-defaulted, such that collateral securing any of
the Obligations shall secure repayment of all Obligations and a default under
any Obligation shall be a default under all Obligations.
This Agreement, the Note, the Security Documents and all other related documents
are collectively referred to as the "LOAN DOCUMENTS".
2. REPRESENTATIONS AND WARRANTIES. Each Borrower hereby makes the
following representations and warranties, which shall be continuing in nature
and remain in full force and effect until the Obligations are paid in full, and
which shall be true and correct except as otherwise set forth on the Schedules
attached hereto and incorporated herein by reference:
2.1. EXISTENCE, POWER AND AUTHORITY. NumereX and each of its
Subsidiaries are duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation or organization and have the power
and authority to own and operate their assets and to conduct their business as
now or proposed to be carried on, and each is duly qualified, licensed and in
good standing to do business in all jurisdictions where its ownership of
property or the nature of its business requires such qualification or licensing.
NumereX and each of its Subsidiaries are duly authorized to execute and deliver
the Loan Documents, all necessary action to authorize the execution and delivery
of the Loan Documents has been properly taken, and each Borrower is and will
continue to be duly authorized to borrow under this Agreement. NumereX and each
of its Subsidiaries are duly authorized to perform all of the other terms and
provisions of the Loan Documents.
2.2. FINANCIAL STATEMENTS. The Borrowers have delivered or caused to
be delivered the most recent balance sheet, income statement and statement of
cash flows for NumereX and its Subsidiaries (the "HISTORICAL FINANCIAL
STATEMENTS"). The Historical Financial Statements are true, complete and
accurate in all material respects and fairly present the financial condition,
assets and liabilities, whether accrued, absolute, contingent or otherwise and
the results of the operations of NumereX and its Subsidiaries for the period
specified therein. The Historical Financial Statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") consistently
applied from period to period subject in the case of interim statements to
normal year-end adjustments and to any comments and notes acceptable to the Bank
in its sole discretion.
2.3. NO MATERIAL ADVERSE CHANGE. Since the date of the most recent
Financial Statements, NumereX and its Subsidiaries on a consolidated basis have
not suffered any damage, destruction or loss, and no event or condition has
occurred or exists, which has resulted or could result in a material adverse
change in their business, assets, operations, financial condition or results of
operation.
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2.4. BINDING OBLIGATIONS. Each Borrower has full power and authority
to enter into the transactions provided for in this Agreement and has been duly
authorized to do so by appropriate action of its Board of Directors as may be
required by law, charter, other organizational documents or agreements; and the
Loan Documents, when executed and delivered by NumereX or any of its
Subsidiaries which are parties to the Loan Documents, will constitute the legal,
valid and binding obligations of such obligor, enforceable in accordance with
their terms.
2.5. NO DEFAULTS OR VIOLATIONS. There does not exist any Event of
Default under this Agreement or any default or violation by NumereX or any of
its Subsidiaries of or under any of the terms, conditions or obligations of: (i)
its articles or certificate of incorporation, regulations or bylaws or its other
organizational documents as applicable; (ii) any indenture, mortgage, deed of
trust, franchise, permit, contract, agreement, or other instrument to which it
is a party or by which it is bound; or (iii) any law, regulation, ruling, order,
injunction, decree, condition or other requirement applicable to or imposed upon
it by any law, the action by any court or any governmental authority or agency;
and the consummation of this Agreement and the transactions set forth herein
will not result in any such default or violation.
2.6. TITLE TO ASSETS. NumereX and its Subsidiaries have good and
marketable title to the assets reflected on the most recent Financial
Statements, free and clear of all liens and encumbrances, except for (i) current
taxes and assessments not yet due and payable, (ii) liens and encumbrances, if
any, reflected or noted in the Historical Financial Statements, (iii) assets
disposed of by NumereX or its Subsidiaries in the ordinary course of business
since the date of the most recent Financial Statements, and (iv) those liens or
encumbrances specified on Schedule 2.6.
2.7. LITIGATION. There are no actions, suits, proceedings or
governmental investigations pending or, to the knowledge of the Borrowers,
threatened against NumereX or any of its Subsidiaries, which could result in a
material adverse change in its business, assets, operations, financial condition
or results of operations and there is no basis known to the Borrowers for any
action, suit, proceedings or investigation which could result in such a material
adverse change. All pending or threatened litigation against NumereX or any of
its Subsidiaries is listed on Schedule 2.7.
2.8. TAX RETURNS. NumereX and each of its Subsidiaries have filed
all returns and reports that are required to be filed by any of them in
connection with any federal, state or local tax, duty or charge levied, assessed
or imposed upon any of them or any of their properties or withheld by any of
them, including unemployment, social security and similar taxes and all of such
taxes, have been either paid or adequate reserve or other provision has been
made.
2.9. EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which
NumereX or any of its Subsidiaries may have any liability complies in all
material respects with all applicable
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provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"),
including minimum funding requirements, and (i) no Prohibited Transaction (as
defined under ERISA) has occurred with respect to any such plan, (ii) no
Reportable Event (as defined under Section 4043 of ERISA) has occurred with
respect to any such plan which would cause the Pension Benefit Guaranty
Corporation to institute proceedings under Section 4042 of ERISA, (iii) the
Borrower has not withdrawn from any such plan or initiated steps to do so, and
(iv) no steps have been taken to terminate any such plan.
2.10. ENVIRONMENTAL MATTERS. NumereX and its Subsidiaries are in
compliance, in all material respects, with all Environmental Laws, including,
without limitation, all Environmental Laws in jurisdictions in which NumereX or
any Subsidiary owns or operates, or has owned or operated, a facility or site,
stores Collateral, arranges or has arranged for disposal or treatment of
hazardous substances, solid waste or other waste, accepts or has accepted for
transport any hazardous substances, solid waste or other wastes or holds or has
held any interest in real property or otherwise. Except as otherwise disclosed
on Schedule 2.7, no litigation or proceeding arising under, relating to or in
connection with any Environmental Law is pending or, to the best of the
Borrowers' knowledge, threatened against any real property which NumereX or any
of its Subsidiaries holds or has held an interest or any past or present
operation of NumereX or any such Subsidiary. No release, threatened release or
disposal of hazardous waste, solid waste or other wastes is occurring, or to the
best of the Borrowers' knowledge has occurred, on, under or to any real property
in which NumereX or any of its Subsidiaries holds any interest or performs any
of its operations, in violation of any Environmental Law. As used in this
Section, "LITIGATION OR PROCEEDING" means any demand, claim notice, suit, suit
in equity, action, administrative action, investigation or inquiry whether
brought by a governmental authority or other person, and "ENVIRONMENTAL LAWS"
means all provisions of laws, statutes, ordinances, rules, regulations, permits,
licenses, judgments, writs, injunctions, decrees, orders, awards and standards
promulgated by any governmental authority concerning health, safety and
protection of, or regulation of the discharge of substances into, the
environment.
2.11. INTELLECTUAL PROPERTY. NumereX and each Subsidiary owns or is
licensed to use all patents, patent rights, trademarks, trade names, service
marks, copyrights, intellectual property, technology, know-how and processes
used in their businesses as currently conducted that are material to the
condition (financial or otherwise), business or operations of NumereX or its
Subsidiaries.
2.12. REGULATORY MATTERS. No part of the proceeds of the Loan will
be used for "purchasing" or "carrying" any "margin stock" within the respective
meanings of each of the quoted terms under Regulation U of the Board of
Governors of the Federal Reserve System as now and from time to time in effect
or for any purpose which violates the provisions of the Regulations of such
Board of Governors.
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2.13. SOLVENCY. As of the date hereof and after giving effect to the
transactions contemplated by the Loan Documents, (i) the aggregate value of the
assets of NumereX and its Subsidiaries will exceed their liabilities (including
contingent, subordinated, unmatured and unliquidated liabilities), (ii) NumereX
and its Subsidiaries will have sufficient cash flow to enable them to pay their
debts as they mature, and (iii) NumereX and its Subsidiaries will not have
unreasonably small capital for the businesses in which they are engaged.
2.14. DISCLOSURE. None of the Loan Documents contains or will
contain any untrue statement of material fact or omits or will omit to state a
material fact necessary in order to make the statements contained in this
Agreement or the Loan Documents not misleading. There is no fact known to any
Borrower which materially adversely affects or, so far as the Borrowers can now
reasonably foresee, might materially adversely affect the business, assets,
operations, financial condition or results of operation of NumereX or any
Subsidiary and which has not otherwise been fully set forth in this Agreement,
the Schedules hereto or in the Loan Documents.
2.15. SUBSIDIARIES. A complete listing of the Borrowers'
Subsidiaries, including information about their jurisdictions of formation and
their equity ownership is set forth on Schedule 2.15. As used in this Agreement,
a "SUBSIDIARY" of any Borrower at any time shall mean (i) any corporation,
Company or trust of which 50% or more (by number of shares or number of votes)
of the outstanding capital stock or shares of beneficial interest normally
entitled to vote for the election of one or more directors or trustees is at
such time owned directly or indirectly by such Borrower or one or more of such
Borrower's Subsidiaries, or any partnership of which such Borrower is a general
partner or of which 50% or more of the partnership interests is at the time
directly or indirectly owned by such Borrower or one or more of such Borrower's
Subsidiaries, or (ii) any corporation, company, trust, partnership or other
entity which is controlled or capable of being controlled by such Borrower or
one or more of such Borrower's Subsidiaries.
3. AFFIRMATIVE COVENANTS. Each Borrower agrees that from the date of
execution of this Agreement until all Obligations have been fully paid and any
commitments of the Bank to the Borrowers have been terminated, such Borrower
will, and will cause each of its Subsidiaries to:
3.1. BOOKS AND RECORDS. Maintain books and records in accordance
with GAAP and give representatives of the Bank access thereto at all reasonable
times, including permission to examine, copy and make abstracts from any of such
books and records and such other information as the Bank may from time to time
reasonably request, and NumereX and its Subsidiaries will make available to the
Bank for examination copies of any reports, statements or returns which NumereX
or any Subsidiary may make to or file with any governmental department, bureau
or agency, federal or state.
3.2. INTERIM FINANCIAL STATEMENTS; CERTIFICATE OF NO DEFAULT.
Furnish the Bank within 45 days after the end of each fiscal quarter the
Financial Statements of NumereX and its
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Subsidiaries for such period, in reasonable detail, certified by an authorized
officer of NumereX and prepared in accordance with GAAP applied from period to
period subject to normal year end adjustments, including footnotes and
explanations. NumereX shall also deliver a certificate, in the form of Exhibit A
attached hereto, as to compliance with applicable financial covenants for the
period then ended and whether any Event of Default exists, and, if so, the
nature thereof and the corrective measures the Borrower proposes to take.
"FINANCIAL STATEMENTS" means NumereX consolidated and consolidating balance
sheets, income statements and statements of cash flows of NumereX and its
Subsidiaries for the year, month or quarter together with year-to-date figures
and comparative figures for the corresponding periods of the prior year.
3.3. ANNUAL FINANCIAL STATEMENTS. Furnish annual Financial
Statements for NumereX and its Subsidiaries to the Bank within 120 days after
the end of each fiscal year. The annual consolidated Financial Statements will
be audited by an independent certified public accountant selected by the NumereX
and satisfactory to the Bank; the annual consolidating Financial Statements
shall be certified by an authorized officer of NumereX. The annual audited
Financial Statements shall contain the unqualified opinion of the independent
certified public accountant whose examination shall have been made in accordance
with GAAP consistently applied from period to period.
3.4. PAYMENT OF TAXES AND OTHER CHARGES. Pay and discharge when due
all indebtedness and all taxes, assessments, charges, levies and other
liabilities imposed upon NumereX and its Subsidiaries, their income, profits,
property or business, except those which currently are being contested in good
faith by appropriate proceedings and for which NumereX and its Subsidiaries
shall have set aside adequate reserves or made other adequate provision with
respect thereto acceptable to the Bank in its sole discretion.
3.5. MAINTENANCE OF EXISTENCE, OPERATION AND ASSETS. Do all things
necessary to maintain, renew and keep in full force and effect its
organizational existence and all rights, permits and franchises necessary to
enable it to continue its business; continue in operation in substantially the
same manner as at present; keep its properties in good operating condition and
repair; and make all necessary and proper repairs, renewals, replacements,
additions and improvements thereto.
3.6. INSURANCE. Maintain with financially sound and reputable
insurers, insurance with respect to its property and business against such
casualties and contingencies, of such types and in such amounts as is customary
for established companies engaged in the same or similar business and similarly
situated.
3.7. COMPLIANCE WITH LAWS. Comply, in all material respects, with
all laws applicable to it and to the operation of its business (including any
statute, rule or regulation relating to employment practices and pension
benefits or to environmental, occupational and health standards and controls).
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3.8. BANK ACCOUNTS. Establish and maintain at the Bank each
Borrower's primary depository and disbursement accounts.
3.9. FINANCIAL COVENANTS. Comply with all of the financial and other
covenants, if any, set forth on the Addendum.
3.10. ADDITIONAL REPORTS. Provide prompt written notice to the Bank
of the occurrence of any of the following (together with a description of the
action which the Borrower proposes to take with respect thereto): (i) any Event
of Default or potential Event of Default, (ii) any litigation filed by or
against NumereX or any of its Subsidiaries, (iii) any Reportable Event or
Prohibited Transaction with respect to any Employee Benefit Plan(s) (as defined
in ERISA) or (iv) any event which might result in a material adverse change in
the business, assets, operations, financial condition or results of operation of
NumereX or any of its Subsidiaries.
3.11. ANNUAL PROJECTIONS, ETC. Furnish annual projections and
additional financial information, as the Bank may request.
4. NEGATIVE COVENANTS. Each Borrower covenants and agrees that from the
date of execution of this Agreement until all Obligations have been fully paid
and any commitments of the Bank to the Borrowers have been terminated, such
Borrower will not, and will not permit any of its Subsidiaries to, without the
Bank's prior written consent:
4.1. INDEBTEDNESS. Incur any indebtedness for borrowed money other
than: (i) the Loan and any subsequent indebtedness to the Bank; (ii) existing
indebtedness disclosed on the Historical Financial Statements referred to in
Section 3.2; and (iii) indebtedness not to exceed $500,000 in the aggregate
outstanding for NumereX and its Subsidiaries at any time.
4.2. LIENS AND ENCUMBRANCES. Create, assume or permit to exist any
mortgage, pledge, encumbrance or other security interest or lien upon any assets
(including equity interests in any Subsidiary of NumereX) now owned or hereafter
acquired or enter into any arrangement for the acquisition of property subject
to any conditional sales agreement except (i) liens and encumbrances described
in Section 2.6 (ii) liens and encumbrances securing indebtedness permitted under
Section 4.1(iii) and (iii) liens and encumbrances in favor of Bank.
4.3. GUARANTEES. Guarantee, endorse or become contingently liable
for the obligations of any person, firm or corporation, except (a) as provided
in Section 4.1, and (b) in connection with the endorsement and deposit of checks
in the ordinary course of business for collection.
4.4. LOANS, ADVANCES, INVESTMENTS. Purchase or hold beneficially any
stock, other securities or evidences of indebtedness of any loans or advances
to, or make any investment or acquire any interest whatsoever in, any other
person, firm or corporation, except loans, advances
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and investments that are (i) disclosed on the Historical Financial Statements of
NumereX and its Subsidiaries, (ii) acceptable to the Bank in its sole
discretion, (iii) permitted under Section 4.8, (iv) from any Subsidiary of any
Borrower to a Borrower, and (v) from NumereX to its Canadian Subsidiary in the
total amount of not more than $250,000.
4.5. MERGER OR TRANSFER OF ASSETS. Merge or consolidate with or into
any person, firm or corporation or lease, sell, transfer or otherwise dispose of
all, or substantially all, of its property, assets and business whether now
owned or hereafter acquired; provided, however, that NumereX may sell Digital
Audio Limited (UK).
4.6. CHANGE IN BUSINESS. Make or permit any material change in the
nature of its business as carried on as of the date hereof.
4.7. DIVIDENDS. Declare or pay any dividends on or make any
distribution with respect to any class of its equity or ownership interest, or
purchase, redeem, retire or otherwise acquire any of its equity, if such action
would cause an Event of Default; nor shall any Subsidiary of any Borrower pay
any dividend or any distribution to anyone other than a Borrower.
4.8. ACQUISITIONS. Acquire any person, firm or corporation unless
(i) the acquisition fits within such Borrower's current strategic business
direction in its present lines of business, (ii) no Event of Default exists at
the time of the acquisition or would result from the acquisition, and (iii) the
consideration paid for the acquisition when added to the consideration paid for
all other acquisitions after the date of this Agreement for which written
approval is not required is valued at less than $1,500,000.
4.9. SUBSIDIARIES. Create or acquire any Subsidiary unless (i) such
Subsidiary joins this Agreement as a Borrower; or (ii) if the Subsidiary is a
foreign entity and NumereX so chooses, 65% of the equity of such foreign
Subsidiary is pledged to the Bank as collateral security for the Obligations.
4.10. NEGATIVE PLEDGES. Agree with any party to limit its ability to
provide collateral security to Bank.
5. EVENTS OF DEFAULT. The occurrence of any of the following will be
deemed to be an "EVENT OF DEFAULT":
5.1. COVENANT DEFAULT. The Borrowers shall default in the
performance of any of the covenants or agreements contained in this Agreement.
5.2. BREACH OF WARRANTY. Any Financial Statement, representation,
warranty or certificate made or furnished by the Borrowers to the Bank in
connection with this Agreement shall be false, incorrect or incomplete when
made.
-8-
<PAGE>
5.3. OTHER DEFAULT. The occurrence of an Event of Default as defined
in the Note or other Loan Documents.
5.4. CHANGE IN CONTROL OF NUMEREX. The occurrence of a change of
control in the beneficial ownership of NumereX. For purposes of this Section
5.4, a "change of control" shall occur if any person or group of persons (within
the meaning of Sections 13(a) or 14(a) of the Securities Exchange Act of 1934,
as amended) other than Gwynedd Resources, Ltd. shall have acquired beneficial
ownership (within the meaning of Rule 13d-3 promulgated by the Securities
Exchange Commission under said Act) of 20% or more of the voting capital stock
of NumereX.
Upon the occurrence of an Event of Default, the Bank will have all rights and
remedies specified in the Note and the Loan Documents and all rights and
remedies (which are cumulative and not exclusive) available under applicable law
or in equity.
6. CONDITIONS. The Bank's obligation to make any advance under the Loan is
subject to the conditions that as of the date of the advance:
6.1. NO EVENT OF DEFAULT. No Event of Default or event which with
the passage of time, provision of notice or both would constitute an Event of
Default shall have occurred and be continuing.
6.2. AUTHORIZATION DOCUMENTS. The Bank shall have been furnished
certified copies of resolutions of each Borrower's board of directors
authorizing the transactions contemplated hereby or other proof of authorization
satisfactory to the Bank.
6.3. RECEIPT OF LOAN DOCUMENTS. The Bank shall have received the
Loan Documents and such other instruments and documents which the Bank may
reasonably request in connection with the transactions provided for in this
Agreement, which may include an opinion of counsel for any party executing any
of the Loan Documents in form and substance satisfactory to the Bank.
7. EXPENSES. The Borrowers agree to pay the Bank, upon the closing of this
Agreement, and otherwise on demand, all costs and expenses incurred by the Bank
in connection with the (i) preparation, negotiation and delivery of this
Agreement and the other Loan Documents, and any modifications thereto, and (ii)
collecting the loan or instituting, maintaining, preserving, enforcing and
foreclosing the security interest in any of the collateral securing the Loan,
whether through judicial proceedings or otherwise, or in defending or
prosecuting any actions or proceedings arising out of or relating to this
Agreement, including reasonable fees and expenses of counsel (which may include
costs of in-house counsel) and foreign counsel, expenses for auditors,
appraisers and environmental consultants, lien searches, recording and filing
fees and taxes.
8. INCREASED COSTS. On written demand, together with the written evidence
of the justification therefor, the Borrowers agree to pay the Bank, all direct
costs incurred and any losses
-9-
<PAGE>
suffered or payments made by the Bank as a consequence of making the Loan by
reason of any change in law or regulation or its interpretation imposing any
reserve, deposit, allocation of capital or similar requirement (including
without limitation, Regulation D of the Board of Governors of the Federal
Reserve System) on the Bank, its holding company or any of their respective
assets.
9. MISCELLANEOUS.
9.1. NOTICES. All notices, demands, requests, consents, approvals
and other communications required or permitted hereunder must be in writing and
will be effective upon receipt if delivered personally to such party, or if sent
by facsimile transmission with confirmation of delivery, or by nationally
recognized overnight courier service, to the address set forth below or to such
other address as any party may give to the other in writing for such purpose:
TO THE BANK: PNC BANK, N.A.
1000 WESTLAKES DRIVE, SUITE 200
BERWYN, PA 19312
ATTENTION: KRISTEN E. TALABER
FACSIMILE NO.: (610) 725-5799
TELEPHONE NO.: (610) 725-5742
TO ANY BORROWER: NUMEREX CORP.
ROSE TREE CORPORATE CENTER II, SUITE 5500
1400 N. PROVIDENCE ROAD
MEDIA, PA 19063
ATTENTION: CHARLES L. MCNEW
FACSIMILE NO.: (610) 892-0725
TELEPHONE NO.: (610) 892-0316
9.2. PRESERVATION OF RIGHTS. No delay or omission on the part of the
Bank to exercise any right or power arising hereunder will impair any such right
or power or be considered a waiver of any such right or power or any
acquiescence therein, nor will the action or inaction of the Bank impair any
right or power arising hereunder. The Bank's rights and remedies hereunder are
cumulative and not exclusive of any other rights or remedies which the Bank may
have under other agreements, at law or in equity.
9.3. ILLEGALITY. In case any one or more of the provisions contained
in this Agreement should be invalid, illegal or unenforceable in any respect,
the validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby.
-10-
<PAGE>
9.4. CHANGES IN WRITING. No modification, amendment or waiver of any
provision of this Agreement nor consent to any departure by the Borrowers
therefrom, will in any event be effective unless the same is in writing and
signed by the Bank, and then such waiver or consent shall be effective only in
the specific instance and for the purpose for which given. No notice to or
demand on the Borrowers in any case will entitle the Borrowers to any other or
further notice or demand in the same, similar or other circumstance.
9.5. ENTIRE AGREEMENT. This Agreement (including the documents and
instruments referred to herein) constitutes the entire agreement and supersedes
all other prior agreements and understandings, both written and oral, between
the parties with respect to the subject matter hereof.
9.6. COUNTERPARTS. This Agreement may be signed in any number of
counterpart copies and by the parties hereto on separate counterparts, but all
such copies shall constitute one and the same instrument.
9.7. SUCCESSORS AND ASSIGNS. This Agreement will be binding upon and
inure to the benefit of the Borrowers and the Bank and their respective heirs,
executors, administrators, successors and assigns; provided, however, that the
Borrowers may not assign this Agreement in whole or in part without the prior
written consent of the Bank and the Bank at any time may assign this Agreement
in whole or in part.
9.8. INTERPRETATION. In this Agreement, unless the Bank and the
Borrowers otherwise agree in writing, the singular includes the plural and the
plural the singular; words importing any gender include the other genders;
references to statutes are to be construed as including all statutory provisions
consolidating, amending or replacing the statute referred to; the word "or"
shall be deemed to include "and/or", the words "including", "includes" and
"include" shall be deemed to be followed by the words "without limitation";
references to articles, sections (or subdivisions of sections) or exhibits are
to those of this Agreement unless otherwise indicated; and references to
agreements and other contractual instruments shall be deemed to include all
subsequent amendments and other modifications to such instruments, but only to
the extent such amendments and other modifications are not prohibited by the
terms of this Agreement. Section headings in this Agreement are included for
convenience of reference only and shall not constitute a part of this Agreement
for any other purpose. Unless otherwise specified in this Agreement, all
accounting terms shall be interpreted and all accounting determinations shall be
made in accordance with GAAP. If this Agreement is executed by more than one
party as Borrower, the obligations of such persons or entities will be joint and
several.
9.9. INDEMNITY. The Borrowers agree to indemnify each of the Bank,
its directors, officers and employees and each legal entity, if any, who
controls the Bank (the "INDEMNIFIED PARTIES") and to hold each Indemnified Party
harmless from and against any and all claims, damages, losses, liabilities and
expenses (including, without limitation, all fees of counsel with
-11-
<PAGE>
whom any Indemnified Party may consult and all expenses of litigation or
preparation therefor) which any Indemnified Party may incur or which may be
asserted against any Indemnified Party in connection with or arising out of the
matters referred to in this Agreement or in the other Loan Documents by any
person, entity or governmental authority (including any person or entity
claiming derivatively on behalf of the Borrowers), whether (a) arising from or
incurred in connection with any breach of a representation, warranty or covenant
by any Borrower, or (b) arising out of or resulting from any suit, action,
claim, proceeding or governmental investigation, pending or threatened, whether
based on statute, regulation or order, or tort, or contract or otherwise, before
any court or governmental authority, which arises out of or relates to this
Agreement, any other Loan Document, or the use of the proceeds of the Loan;
provided, however, that the foregoing indemnity agreement shall not apply to
claims, damages, losses, liabilities and expenses solely attributable to an
Indemnified Party's gross negligence or willful misconduct. The indemnity
agreement contained in this Section shall survive the termination of this
Agreement, payment of any Loan and assignment of any rights hereunder. The
Borrowers may participate at its expense in the defense of any such action or
claim.
9.10. ASSIGNMENTS AND PARTICIPATIONS. At any time, without any
notice to the Borrowers, the Bank may sell, assign, transfer, negotiate, grant
participations in, or otherwise dispose of all or any part of the Bank's
interest in the Loan. The Borrowers hereby authorize the Bank to provide,
without any notice to the Borrowers, any information concerning the Borrowers,
including information pertaining to the Borrowers' financial condition, business
operations or general creditworthiness, to any person or entity which may
succeed to or participate in all or any part of the Bank's interest in the Loan.
9.11. GOVERNING LAW AND JURISDICTION. This Agreement has been
delivered to and accepted by the Bank and will be deemed to be made in the State
where the Bank's office indicated above is located. THIS AGREEMENT WILL BE
INTERPRETED AND THE RIGHTS AND LIABILITIES OF THE PARTIES HERETO DETERMINED IN
ACCORDANCE WITH THE LAWS OF THE STATE WHERE THE BANK'S OFFICE INDICATED ABOVE IS
LOCATED, EXCLUDING ITS CONFLICT OF LAWS RULES. The Borrowers hereby irrevocably
consent to the exclusive jurisdiction of any state or federal court for the
county or judicial district where the Bank's office indicated above is located,
and consents that all service of process be sent by nationally recognized
overnight courier service directed to the Borrowers at the Borrowers' registered
addresses or Borrowers' commercial registered office provider and service so
made will be deemed to be completed on the business day after deposit with such
courier; provided that nothing contained in this Agreement will prevent the Bank
from bringing any action, enforcing any award or judgment or exercising any
rights against any Borrower individually, against any security or against any
property of the Borrowers within any other county, state or other foreign or
domestic jurisdiction. The Bank and the Borrowers agree that the venue provided
above is the most convenient forum for both the Bank and the Borrowers. The
Borrowers waive any objection to venue and any objection based on a more
convenient forum in any action instituted under this Agreement.
-12-
<PAGE>
9.12. WAIVER OF JURY TRIAL. EACH OF THE BORROWERS AND THE BANK
IRREVOCABLY WAIVES ANY AND ALL RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY
ACTION, PROCEEDING OR CLAIM OF ANY NATURE RELATING TO THIS AGREEMENT, ANY
DOCUMENTS EXECUTED IN CONNECTION WITH THIS AGREEMENT OR ANY TRANSACTION
CONTEMPLATED IN ANY OF SUCH DOCUMENTS. EACH BORROWER AND THE BANK ACKNOWLEDGE
THAT THE FOREGOING WAIVER IS KNOWING AND VOLUNTARY.
9.13. APPOINTMENT OF AGENT. The Borrowers shall appoint an agent
such as CT Corporation, acceptable to Bank, as its agent for the service of
process on any action or proceeding undertaken or prosecuted in connection with
this Agreement or any of the other Loan Documents. This appointment shall not
affect the Bank's right to serve legal process in any other manner permitted by
law.
9.14. JOINT AND SEVERAL LIABILITY. The Obligations of each Borrower
under this Agreement, the Note and other Loan Documents are joint and several.
9.15 CONFIDENTIAL INFORMATION. The Bank acknowledges that the
reports, documents and other information supplied or to be supplied by the
Borrowers to the Bank pursuant to this Agreement, including without limitation,
the reports, documents and other information to be supplied pursuant to Section
3.2, are confidential (all such reports, documents and other information are
hereinafter referred to as "CONFIDENTIAL INFORMATION"). Notwithstanding the
foregoing, Confidential Information shall not include any reports, documents and
other information which are, or become, generally available to the public other
than as a result of a breach of this Section 9.15 by the Bank or its respective
directors, officers, employees, representatives, agents, affiliates or
professional advisors. Without the prior written consent of the Borrowers, the
Bank shall not disclose any Confidential Information to any person or entity
other than (a) its respective directors, officers, employees, representatives,
agents, affiliates and professional advisors and then only on a "need to know"
basis (the "Permitted Persons") or (b) to, or in any filing with, any state of
federal regulatory agency to which the Bank is required to report by its charter
or by statute or regulation. The Bank shall cause all Permitted Persons to
comply with all the terms and covenants of this Section 9.15. The Bank shall
inform all Permitted Persons of the confidential nature of the Confidential
Information and shall, if requested by the Borrowers, obtain the written
agreement of all Permitted Persons to be bound by and comply with the provisions
of this Section 9.15 on the same terms and conditions as if specifically named a
party. Without limiting the generality of the foregoing, the Bank agrees that it
shall not trade in, or make recommendations concerning trades in, the common
stock or other securities of the Borrowers. The Bank acknowledges that any
breach of this Section 9.15 may cause irreparable injury to a Borrower for which
money damages could not adequately compensate. If there is such a breach, such
Borrower shall be entitled, in addition to any other rights and remedies they
may have at law or in equity, to have an injunction issued by any competent
court enjoining and restraining the breaching parties from continuing such
breach. The existence of any claim or
-13-
<PAGE>
cause of action which any of the breaching parties may have against the
Borrowers shall not constitute a defense or bar to the enforcement of this
Section 9.15. Notwithstanding the foregoing, if the Bank is required to disclose
any Confidential Information in a judicial, administrative or governmental
proceeding, the Bank will notify the Borrowers as promptly as practicable so
that the Borrowers may either seek an appropriate protective order or relief or
waive the provisions of this Section 9.15. If, in the absence of any such
protective order, relief or waiver, the Bank is required, in the written opinion
of its legal counsel, to disclose Confidential Information to any court,
governmental agency or tribunal or else stand liable for contempt or other
penalty, the Bank may disclose such Confidential Information without liability
hereunder.
Each Borrower acknowledges that it has read and understood all the provisions of
this Agreement, including the waiver of jury trial, and has been advised by
counsel as necessary or appropriate.
WITNESS the due execution hereof as a document under seal, as of the date
first written above.
[CORPORATE SEAL] NUMEREX CORP.
Attest: /s/ Robert Drennen By: /s/ Charles L. McNew
-------------------------- -----------------------------------
Print Name: Robert Drennen Print Name:
----------------------- ------------------------
Title: Senior Accountant Title:
---------------------------- -----------------------------
[CORPORATE SEAL] DCX SYSTEMS, INC.
Attest: /s/ Robert Drennen By: /s/ Charles L. McNew
-------------------------- -----------------------------------
Print Name: Robert Drennen Print Name:
----------------------- ------------------------
Title: Senior Accountant Title:
---------------------------- -----------------------------
[CORPORATE SEAL] DIGILOG INC.
Attest: /s/ Robert Drennen By: /s/ Charles L. McNew
-------------------------- -----------------------------------
Print Name: Robert Drennen Print Name:
----------------------- ------------------------------
Title: Senior Accountant Title:
---------------------------- -----------------------------
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<PAGE>
[CORPORATE SEAL] NUMEREX INVESTMENT CORP.
Attest: /s/ Robert Drennen By: /s/ Charles L. McNew
-------------------------- -----------------------------------
Print Name: Robert Drennen Print Name:
----------------------- ------------------------
Title: Senior Accountant Title:
---------------------------- -----------------------------
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Kristen Talaber
-------------------------------
Print Name: Kristen Talaber
------------------------
Title: Asst. Vice President
-----------------------------
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<PAGE>
ADDENDUM
FINANCIAL COVENANTS
DEBT SERVICE COVERAGE RATIO. Beginning with the fiscal quarter ending January
31, 1997, the Borrowers will not permit the ratio of Operating Cash Flow to Debt
Service, calculated on a rolling basis as of the end of each fiscal quarter for
the previous four quarters, to be less than 1.10 to 1.00; provided, however,
that for the fiscal quarters ending January 31, April 30, and July 31, 1997, the
Debt Service Coverage Ratio will be measured cumulatively at quarter end for
such quarters only and not any prior quarters ending in fiscal year 1996.
FIXED CHARGE COVERAGE RATIO. The Borrowers will cause NumereX and its
Subsidiaries to maintain a Fixed Charge Coverage Ratio of at least 1.00 to 1 as
of the end of each fiscal quarter, beginning with the fiscal quarter ending
January 31, 1997.
LEVERAGE RATIO. The Borrowers will not permit (i) the ratio of their
consolidated liabilities to their consolidated Tangible Net Worth to exceed 1.20
to 1.00 at any time or (ii) the ratio of consolidated liabilities to Tangible
Net Worth for NumereX and its Subsidiaries to exceed 1.00 to 2.00 at any time.
TANGIBLE NET WORTH. The Borrowers (i) will maintain at all times consolidated
Tangible Net Worth of at least $18,000,000 and (ii) will cause NumereX and its
Subsidiaries to maintain at all times consolidated Tangible Net Worth of at
least $32,500,000.
OPERATING INCOME. The Borrowers will not have an operating loss for any fiscal
quarter or year, except that the Borrowers may have operating losses during
fiscal 1997 so long as the cumulative amount of such losses does not exceed
$250,000 for the fiscal year ending October 31, 1997. The quarterly calculation
of operating income shall not take into account expenses of foreign Subsidiaries
of NumereX which are eliminated in the annual consolidated Financial Statements.
As used above:
"DEBT SERVICE" means the sum of scheduled principal payments of long term debt
plus interest expense, measured for Borrowers on a consolidated basis at the end
of each quarter.
"EBITDA" means consolidated net income plus non-recurring, non-cash
extraordinary items, income tax expense, interest expense, depreciation and
amortization, measured at the end of each fiscal quarter for the previous four
quarters.
"FIXED CHARGES" means the consolidated sum of principal payments of long term
debt, interest expense, capital expenditures, income tax expense and dividends,
measured at the end of each fiscal quarter for the previous four quarters.
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<PAGE>
"FIXED CHARGE COVERAGE RATIO" means the ratio of EBITDA to Fixed Charges.
"OPERATING CASH FLOW" means net income plus interest expense, depreciation and
amortization measured for Borrowers on a consolidated basis at the end of each
fiscal quarter.
"TANGIBLE NET WORTH" means total consolidated stockholders' equity (which shall
not include expenses of foreign Subsidiaries of NumereX which are eliminated in
the annual consolidated Financial Statements) less total consolidated net
intangible assets.
All accounting terms not otherwise defined shall be defined, and all
calculations and other determinations shall be made, in accordance with GAAP
consistently applied from period to period.
ADDITIONAL TERMS AND CONDITIONS
PLEDGE OF STOCK IN CANADIAN SUBSIDIARY. The equity interests in DCX
Systems Company, NumereX's existing Canadian Subsidiary, cannot be transferred
because of a provision in its charter which cannot be amended. Within ten days
after the date of this Agreement, however, NumereX will either (i) cause DCX
Systems Company to discontinue operations and form a new Canadian Subsidiary
whose shares can be transferred or (ii) amalgamate DCX Systems Company with
another Canadian Subsidiary so that the shares in the resulting company can be
transferred. In either event, within the same ten day period, NumereX will also
deliver to Bank Security Documents by which NumereX pledges 65% of the equity
interests in its ultimate Canadian Subsidiary, accompanied by a legal opinion
from Canadian counsel in form and substance satisfactory to Bank.
RELEASE OF CERTAIN LIENS. Within 30 days of the date of this
Agreement, NumereX shall provide the Bank with satisfactory evidence that Lloyds
Bank has released its charge against the property of Digital Audio Limited. In
addition, as a condition precedent to the initial advance of the Loan, NumereX
shall provide the Bank with satisfactory evidence that (a) Digital Audio Limited
has terminated its line of credit with Lloyds Bank and taken appropriate steps
to assure the release of Lloyd's charge within 30 days of the date of this
Agreement and (b) Joseph Mariano "and others" have released the charge they hold
on the property of Versus Technology Limited.
-4-
<PAGE>
EXHIBIT A
FORM OF COMPLIANCE CERTIFICATE
Submitted under the terms of the Loan Agreement dated February 10, 1997 between
NUMEREX CORP. AND ITS U.S. SUBSIDIARIES and PNC BANK, NATIONAL ASSOCIATION, the
undersigned, Chief Financial Officer of NumereX Corp., hereby certifies as
follows:
<TABLE>
<S> <C> <C>
As of Fiscal Quarter Ending ________________________:
(A) For NumereX Corp. and its U.S. Subsidiaries
(i) DEBT SERVICE COVERAGE RATIO: _____________
(ii) TANGIBLE NET WORTH: _____________
(iii) LEVERAGE RATIO: _____________
(iv) MINIMUM OPERATING INCOME: _____________
(B) For NumereX Corp. and its Subsidiaries (both U.S. and foreign)
(i) FIXED CHARGE COVERAGE RATIO: _____________
(ii) TANGIBLE NET WORTH: _____________
(iii) LEVERAGE RATIO: _____________
(C) The representations and warranties set forth in the Loan Agreement are
true and correct on and as of the date hereof. During such period no Event
of Default has occurred under the Loan Agreement, and no event has
occurred which, with the passage of time or the giving of notice, or both,
would become such an Event of Default. Borrowers are in compliance with
all terms, conditions and provisions of the Loan Agreement and the Note
between Borrowers and Bank.
(D) A review of the activities of each Borrower and each foreign subsidiary of
NumereX Corp. during the immediately preceding calendar quarter has been
made under the immediate supervision of the Chief Financial Officer of
NumereX Corp., and such officer has determined that all of the obligations
or covenants under the Loan Agreement and in connection therewith have
been fulfilled.
NUMEREX CORP.
CHARLES L. MCNEW
CHIEF FINANCIAL OFFICER DATE:____________
</TABLE>
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<PAGE>
AMENDMENT TO LOAN DOCUMENTS [LOGO]
THIS AMENDMENT TO LOAN DOCUMENTS (THIS "AMENDMENT") IS MADE AS OF JULY 1,
1997, BY AND BETWEEN NUMEREX CORP. ("NUMEREX") AND ITS U.S. SUBSIDIARIES LISTED
ON THE SIGNATURE PAGES HERETO (NUMEREX AND SUCH SUBSIDIARIES EACH INDIVIDUALLY A
"BORROWER" AND COLLECTIVELY, THE "BORROWERS"), AND PNC BANK, NATIONAL
ASSOCIATION (THE "BANK").
WITNESSETH:
WHEREAS, THE BORROWERS HAVE EXECUTED AND DELIVERED TO THE BANK, A
PROMISSORY NOTE, LOAN AGREEMENT, PLEDGE AGREEMENT, AND OTHER INSTRUMENTS,
CERTIFICATES AND DOCUMENTS, MORE FULLY DESCRIBED ON EXHIBIT A ATTACHED HERETO
AND MADE A PART HEREOF (COLLECTIVELY, THE "LOAN DOCUMENTS") WHICH EVIDENCE OR
SECURE SOME OR ALL OF THE BORROWERS' OBLIGATIONS TO THE BANK FOR ONE OR MORE
LOANS OR OTHER EXTENSION OF CREDIT (THE "OBLIGATIONS"); AND
WHEREAS, THE BORROWERS AND THE BANK DESIRE TO AMEND THE LOAN DOCUMENTS AS
PROVIDED FOR BELOW;
NOW, THEREFORE, IN CONSIDERATION OF THE MUTUAL COVENANTS HEREIN CONTAINED
AND INTENDING TO BE LEGALLY BOUND HEREBY, THE PARTIES HERETO AGREE AS FOLLOWS:
1. EACH OF THE LOAN DOCUMENTS IS AMENDED AS SET FORTH IN EXHIBIT A. ANY
AND ALL REFERENCES TO ANY LOAN DOCUMENT IN ANY OTHER LOAN DOCUMENT SHALL BE
DEEMED TO REFER TO SUCH LOAN DOCUMENT AS AMENDED HEREBY. ANY INITIALLY
CAPITALIZED TERMS USED IN THIS AMENDMENT WITHOUT DEFINITION SHALL HAVE THE
MEANINGS ASSIGNED TO THOSE TERMS IN THE LOAN DOCUMENTS.
2. THIS AMENDMENT IS DEEMED INCORPORATED INTO EACH OF THE LOAN DOCUMENTS.
TO THE EXTENT THAT ANY TERM OR PROVISION OF THIS AMENDMENT IS OR MAY BE DEEMED
EXPRESSLY INCONSISTENT WITH ANY TERM OR PROVISION IN ANY LOAN DOCUMENT, THE
TERMS AND PROVISIONS HEREOF SHALL CONTROL.
3. EACH BORROWER HEREBY REPRESENTS AND WARRANTS THAT (A) ALL OF ITS
REPRESENTATIONS AND WARRANTIES IN THE LOAN DOCUMENTS ARE TRUE AND CORRECT, (B)
NO DEFAULT OR EVENT OF DEFAULT EXISTS UNDER ANY LOAN DOCUMENT, OTHER THAN THE
BORROWERS' FAILURE TO COMPLY WITH (I) THE DEBT SERVICE COVERAGE RATIO; (II) THE
MINIMUM OPERATING INCOME COVENANT; AND (III) THE TANGIBLE NET WORTH COVENANT AS
OF FISCAL QUARTER ENDING APRIL 30, 1997, WHICH DEFAULTS ARE WAIVED BY THE BANK
HEREIN, AND (C) THIS AMENDMENT HAS BEEN DULY AUTHORIZED, EXECUTED AND DELIVERED
AND CONSTITUTES ITS LEGAL, VALID AND BINDING OBLIGATION, ENFORCEABLE IN
ACCORDANCE WITH ITS TERMS.
4. EACH BORROWER HEREBY CONFIRMS THAT ANY COLLATERAL FOR THE OBLIGATIONS,
INCLUDING BUT NOT LIMITED TO LIENS, SECURITY INTERESTS, MORTGAGES, AND PLEDGES
GRANTED BY SUCH BORROWER OR THIRD PARTIES (IF APPLICABLE), SHALL CONTINUE
UNIMPAIRED AND IN FULL FORCE AND EFFECT.
5. THIS AMENDMENT MAY BE SIGNED IN ANY NUMBER OF COUNTERPART COPIES AND BY
THE PARTIES HERETO ON SEPARATE COUNTERPARTS, BUT ALL SUCH COPIES SHALL
CONSTITUTE ONE AND THE SAME INSTRUMENT.
6. THIS AMENDMENT WILL BE BINDING UPON AND INURE TO THE BENEFIT OF THE
BORROWERS AND THE BANK AND THEIR RESPECTIVE HEIRS, EXECUTORS, ADMINISTRATORS,
SUCCESSORS AND ASSIGNS.
7. EXCEPT AS AMENDED HEREBY, THE TERMS AND PROVISIONS OF THE LOAN
DOCUMENTS REMAIN UNCHANGED AND IN FULL FORCE AND EFFECT. EXCEPT AS EXPRESSLY
PROVIDED HEREIN, THIS AMENDMENT SHALL NOT CONSTITUTE AN AMENDMENT, WAIVER,
CONSENT OR RELEASE WITH RESPECT TO ANY PROVISION OF ANY LOAN DOCUMENT, A WAIVER
OF ANY DEFAULT OR EVENT OF DEFAULT THEREUNDER, OR A WAIVER OR RELEASE OF ANY OF
THE BANK'S RIGHTS AND REMEDIES (ALL OF WHICH ARE HEREBY RESERVED). EACH BORROWER
EXPRESSLY RATIFIES AND CONFIRMS THE CONFESSION OF JUDGMENT AND WAIVER OF JURY
TRIAL PROVISIONS.
FORM 17F - PA REV. 12/95
<PAGE>
WITNESS THE DUE EXECUTION HEREOF AS A DOCUMENT UNDER SEAL, AS OF THE DATE FIRST
WRITTEN ABOVE.
[CORPORATE SEAL] NUMEREX CORP.
ATTEST: BY: /S/ AUTHORIZED OFFICER
--------------------------------- ----------------------------------
PRINT NAME: PRINT NAME:
----------------------------- ---------------------------
TITLE: TITLE:
---------------------------------- --------------------------------
[CORPORATE SEAL] DCX SYSTEMS, INC.
ATTEST: BY: /S/ AUTHORIZED OFFICER
--------------------------------- ----------------------------------
PRINT NAME: PRINT NAME:
----------------------------- ---------------------------
TITLE: TITLE:
---------------------------------- --------------------------------
[CORPORATE SEAL] DIGILOG INC.
ATTEST: BY: /S/ AUTHORIZED OFFICER
--------------------------------- ----------------------------------
PRINT NAME: PRINT NAME:
----------------------------- ---------------------------
TITLE: TITLE:
---------------------------------- --------------------------------
[CORPORATE SEAL] NUMEREX INVESTMENT CORP.
ATTEST: BY: /S/ AUTHORIZED OFFICER
--------------------------------- ----------------------------------
PRINT NAME: PRINT NAME:
----------------------------- ---------------------------
TITLE: TITLE:
---------------------------------- --------------------------------
[CORPORATE SEAL] BROADBAND NETWORKS, INC.
ATTEST: BY: /S/ AUTHORIZED OFFICER
--------------------------------- ----------------------------------
PRINT NAME: PRINT NAME:
----------------------------- ---------------------------
TITLE: TITLE:
---------------------------------- --------------------------------
FORM 17F - PA REV. 12/95
<PAGE>
PNC BANK, NATIONAL ASSOCIATION
BY: /S/ AUTHORIZED OFFICER
---------------------------------
PRINT NAME:
TITLE:
FORM 17F - PA REV. 12/95
<PAGE>
AMENDMENT TO LOAN DOCUMENTS
EXHIBIT A
A. THE LOAN DOCUMENTS THAT ARE THE SUBJECT OF THIS AMENDMENT INCLUDE THE
FOLLOWING:
1. LOAN AGREEMENT DATED FEBRUARY 12, 1997
2. CONVERTIBLE LINE OF CREDIT NOTE
3. PLEDGE AGREEMENTS DATED FEBRUARY 12, 1997
B. THE LOAN DOCUMENTS ARE HEREBY AMENDED AS FOLLOWS:
1. DEBT SERVICE COVERAGE RATIO: THE BANK HEREBY WAIVES THE DEFAULT
CAUSED BY THE BORROWERS' FAILURE TO MEET THE DEBT SERVICE COVERAGE RATIO FOR THE
FISCAL QUARTER ENDING APRIL 30, 1997.
2. OPERATING INCOME: THE BANK HEREBY WAIVES THE DEFAULT CAUSED BY
THE BORROWERS' FAILURE TO MEET THE MINIMUM OPERATING INCOME COVENANT FOR THE
FISCAL QUARTER ENDING APRIL 30, 1997.
3. TANGIBLE NET WORTH: THE BANK HEREBY WAIVES THE DEFAULT CAUSED BY
THE BORROWERS' FAILURE TO MEET THE TANGIBLE NET WORTH COVENANT FOR THE FISCAL
QUARTER ENDING APRIL 30, 1997. THE TANGIBLE NET WORTH COVENANT IN THE ADDENDUM
TO THE LOAN AGREEMENT IS HEREBY DELETED AND REPLACED IN ITS ENTIRETY AS FOLLOWS:
TANGIBLE NET WORTH. THE BORROWERS (I) WILL MAINTAIN AT ALL TIMES
CONSOLIDATED TANGIBLE NET WORTH OF AT LEAST $13,000,000 AND
(II) WILL CAUSE NUMEREX AND ITS SUBSIDIARIES TO MAINTAIN AT ALL
TIMES CONSOLIDATED TANGIBLE NET WORTH OF AT LEAST $32,500,000.
FORM 17F - PA REV. 12/95
<PAGE>
EXHIBIT 10.24
DATED May 5, 1997
---------------------------------
BRONZEBASE LIMITED
- and -
DETECTION SYSTEMS, INC.
TECHNOLOGY LICENCE
Nabarro Nathanson
50 Stratton Street
London W1X 6NX
Tel: 0171 493 9933
EA/GWH/V238/3 GWH1529A 07/05/97
<PAGE>
DATE: May 5, 1997
PARTIES:
(1) BRONZEBASE LIMITED (Company No. 2716839) whose registered office is at
Great Western House, Station Road, Reading, Berkshire, UK ("the
Licensor"); and
(2) DETECTION SYSTEMS, INC., a New York State corporation having its
principal office at 130 Perinton Parkway, Fairport, New York 14450, USA
("the Licensee").
RECITALS:
A. Licensor is the assignee of UK Patent No. 2115651 and UK Patent No.
2167625 ("the Patents") and is the beneficial owner of them. Each of
the Patents claims certain systems for providing communication between
a central location and instrumentalities other than a conventional
telephone located at the premises of telephone network subscribers
("the Systems").
B. The Licensor owns other intellectual property rights and a substantial
and secret body of know-how relating to the Systems, the individual
components thereof, and the use and exploitation thereof.
C. An essential component in each of the Systems is a subscriber terminal
unit ("STU") installed at each telephone network subscriber's premises,
to which are connected various instrumentalities to be monitored by the
System. The STU is electronically interrogated at appropriate intervals
as to the status of the said instrumentalities, and responds by means
of similar electronic signals. Critical to the operation of each STU is
a microprocessor contained therein which is pre-programmed to enable
the STU to function as part of the particular System in which it is
used.
D. The Licensee contemporaneously herewith acquires the entire issued
share capital in Digital Audio Limited ("DAL"), a company that has for
several years enjoyed, and until immediately prior to this Agreement
continued to enjoy, a licence of the same technology as forms the
subject-matter of this licence.
E. The Licensee has requested the Licensor to grant to the Licensee a
licence to make and sell STU's of a certain type, and the Licensor has
agreed to grant such a licence to the Licensee on the terms and
conditions set out in this Agreement.
NOW IT IS HEREBY AGREED as follows:-
1. INTERPRETATION
1.1 In this Agreement the words and phrases set out in the following table
of definitions shall bear the meanings respectively set against them in
the table:-
<PAGE>
"Ancillary Rights" means design rights, copyrights, and other
intellectual property rights (if any) held by
the Licensor in the STU or any part thereof;
"BLU STU" means a STU, the distinguishing features of
which are described in the Schedule hereto,
to any of the designs shown in DAL's drawings
no.'s D271-01, D271-02, D271-04 and D271-05;
"Commencement Date" means the date hereof;
"Connected Company" means a company controlled by, under the
control of or under common control with the
Licensee;
"European Community" means the member states from time to time of
the European Economic Area;
"Improvement" means any addition, improvement, variation,
revision, modification or development to or
of the STU or the manufacture thereof
(including without limitation new or modified
designs for any feature of the shape or
configuration of the STU or any internal or
external parts thereof);
"Initial Term" means the period of five (5) years commencing
on the Commencement Date;
"Interest Rate" means a rate of interest equal to the base
lending rate of Lloyds Bank plc plus 3%;
"Know-How" means so much of the technical knowledge and
information at the free disposal of the
Licensor relating to the manufacture of STU's
(based upon the use of Microprocessors
supplied by the Licensor) as is necessary for
the Licensee to use, and includes both the
whole body of such knowledge, experience,
skills and information and also any one or
more parts of the same;
"Licensed Property" means collectively the Patents, the Know-How,
the Licensor's Improvements, and the
Ancillary Rights;
"Licensee's Improvements" means Improvements made, developed or
acquired by the Licensee during the Term;
<PAGE>
"Licensor's Improvements" means Improvements made, developed or
acquired by the Licensor during the Term;
"Microprocessor" means the microprocessor referred to in
Recital C (which is the Licensor's part no.
44855) in the Licensor's current issue from
time to time;
"New Product" means an improved or revised STU developed
by the Licensor after the Commencement Date
which the Licensor wishes to market following
successful tests in the market;
"Party" means a party to this Agreement and "Parties"
means both the parties to this Agreement;
"Person" includes any natural person, firm,
partnership, trust, company, corporate body,
unincorporated body, governmental body or
administrative body (in each case, whether or
not having separate legal personality);
"Royalties" means royalties payable pursuant to Clause
12.1;
"Sales Tax" means sales tax, purchase tax, Value Added
Tax or any other tax performing an equivalent
or similar fiscal function;
"STU" means a subscriber terminal unit which shall
include a BLU STU or any New Product;
"Supply" means any disposition of STU's whether under
a contract of sale, hire, leasing or
otherwise, including the supply by the
Licensee to itself for its own use and
"Supplied" and the verb "Supply" shall be
construed accordingly;
"the Systems" means the systems described in Recital A and
"the System" means any one of them;
"Technical Documentation" means the manuals, drawings, designs, circuit
diagrams, specifications, computer programs
and other documentation, media and materials
in which the Know-How is recorded;
"Term" means the period of eight (8) years
commencing on the Commencement Date;
<PAGE>
"Termination Date" means the date on which this Agreement
terminates whether by the expiration of the
Term or by reason of the termination of this
Agreement under any of its provisions;
"Territory" means the United Kingdom and Eire; and
"Year of this
Agreement" or "Year" means each consecutive period of twelve (12)
months during the continuance of this
Agreement, and "quarters" shall be defined by
reference to such Year rather than by
reference to the calendar year.
1.2 In this Agreement:-
1.2.1 the Index and Clause headings are included for convenience
only and shall not affect the construction of this Agreement;
1.2.2 words denoting the singular shall include the plural and vice
versa; and
1.2.3 words denoting the neuter shall include the male and female.
1.3 References in this Agreement to Recitals and Clauses are references to
recitals to this Agreement and clauses of this Agreement.
2. LICENCE
2.1 In consideration of the undertakings of the Licensee hereunder the
Licensor grants to the Licensee with effect from the Commencement
Date:-
2.1.1 a licence during the Term under the Patents to manufacture
STU's, import STU's into the Territory, and Supply and offer
to Supply STU's manufactured by or on behalf of the Licensee
within the Territory for use in or in conjunction with
Systems; and
2.1.2 a licence during the Term to use the Know-How and exploit the
Ancillary Rights to the extent necessary in the aforesaid
manufacture of STU's and the Supply of STU's within the
Territory, on and subject to the terms and conditions of this
Agreement.
2.2 Subject to Clause 2.3, the Licensor shall not during the Initial Term
grant to any other Person a licence equivalent to that set out in
Clause 2.1, in relation to the manufacture, importation and/or Supply
of STU's in or into the Territory. However the Licensor shall itself
remain free to licence Versus Technology Limited to carry out the
activities and do the things referred to in Clause 2.1.
2.3 Subject as follows, the undertaking in Clause 2.2 shall apply until the
earliest to occur of the following: (a) the termination or expiry of
this Agreement; and (b) the date on which the STU ceases to be
protected by at least one of the following: the Patents and the
Know-How. (For
<PAGE>
such purposes, the Know-How shall be deemed to protect the STU until
such time as it is not secret and/or not substantial within the meaning
laid down in Article 10 of Commission Regulation (EC) No. 240/96.) The
Licensor may at any time (without prejudice to its other rights and
remedies), by written notice to the Licensee having immediate effect,
cancel the undertaking given in Clause 2.2, without liability on the
Licensor and without any further effect on this Agreement if, at the
time of the Licensor's said notice, the Licensee is in breach of Clause
3. Moreover, Clause 2.2 shall not prohibit the grant by the Licensor of
any licence as described in Clause 2.2 if required by any applicable
statute, laws, regulation, or ordinance, or the order of any Court or
regulatory authority pursuant thereto.
2.4 The Licensee shall not at any time during the Term without the
Licensor's express permission Supply or offer to Supply STU's in or
export STU's to any place outside the European Community.
2.5 The Licensee shall not at any time during the Term, Supply or offer to
Supply STU's in, export STU's to, specifically direct advertising on
STU's to, or establish any distribution depot or branch for STU's in,
any territory outside the Territory that is in the European Community
except any such territory in which, at that time, both of the following
factors apply: the Systems are not protected by any patent owned or
controlled by the Licensor, and the Know-How no longer protects the STU
(within the meaning laid down in Clause 2.3).
2.6 Neither party shall at any time during the Term, supply or offer to
supply STU's combined, bundled or incorporated with or into any other
product or device whatsoever.
2.7 Without prejudice to the foregoing provisions, the Licensor reserves
its right to exercise its patent rights within the European Community
and elsewhere to oppose the exploitation of the technology licensed
herein outside the Territory.
2.8 Notwithstanding Clause 2.7, the Licensee shall not be prohibited, at
any time after there shall have elapsed the five-year period referred
to in Article 1 paragraph 2 of the aforementioned Commission Regulation
in relation to the technology covered by this Agreement, from Supplying
STU's, in response to unsolicited orders, in any territory within the
European Community in which the Licensor has licensed such technology
to other licensees.
2.9 The Parties agree that the spirit and intention of this Agreement is
such that neither Party shall participate or engage in any conduct
which would or is likely to harm the business, goodwill or reputation
of the other Party.
3. SALES ENDEAVOURS
3.1 The Licensee shall throughout the Term use its best endeavours to
promote and maximise the use of the Systems throughout the Territory.
3.2 The Licensee shall forthwith inform the Licensor if for any reason it
is unable to meet any demand for BLU STU's in the Territory other than
due to the Licensor's failure to supply Microprocessors under Clause 8,
giving sufficient information to enable the Licensor to enable
Versus Technology Limited to supply customers whom the Licensee is
unable to Supply.
<PAGE>
3.3 Without prejudice to the foregoing, the Licensee shall manufacture and
Supply hereunder during Initial Term:-
3.3.1 at least 12,000 (twelve thousand) BLU STU's in each Year; and
3.3.2 (without prejudice to Clause 3.3.1) shall not manufacture and
supply less than 2,500 (two thousand five hundred) BLU STU's
per quarter in any two consecutive quarters.
3.4 The sole remedy of the Licensor for a failure by the Licensee to
manufacture and supply the number of STU's set forth in this Article 3
is to cancel the undertaking given in Clause 2.2 of this Agreement, and
the Licensee shall in no event be subject to damages, lost profits or
lost Royalties as a result of any such failure.
4. PROTECTION OF MICROPROCESSOR
4.1 The Licensee shall have no licence under applicable copyrights or
related forms of protection to (or to license or permit any other
Person to):-
4.1.1 disassemble, decompile or reverse engineer any Microprocessor
or any program (in whatever form it subsists) comprised in or
recorded on any Microprocessor;
4.1.2 copy, adapt, modify or translate any such program; or
4.1.3 Supply or provide any such program to any Person other than as
incorporated into STU, within the Microprocessor in which it
is supplied to the Licensee under this Agreement.
4.2 Clause 4.1 shall apply save to the extent (if any) that it may be
unlawful under applicable law for the Licensor to prevent the
activities by the Licensee referred to therein.
4.3 The Licensee shall not remove, obscure, supplement, alter or deface any
labelling on any Microprocessor, or attach any other labelling or marks
to the same.
5. ASSIGNMENT AND SUB-LICENSING
5.1 Subject to Clause 5.2 the Licensee shall not be entitled to grant to
any Person other than a Connected Company any licence, sub-licence,
sub-contract, permission or authorisation ("Sub-Licence") of or in
relation to any rights granted to it under this Agreement without the
prior written consent of the Licensor (not to be unreasonably withheld)
provided that:-
5.1.1. any such Sub-Licence is on the same terms and conditions
contained by this Agreement mutatis mutandis; and
5.1.2. upon such Connected Company ceasing to be a Connected Company,
any Sub-Licence granted by the Licencee will be terminated
forthwith and such Sub-Licence shall provide accordingly.
<PAGE>
5.2 The Licensee shall be entitled to grant Sub-Licences for manufacturing
purposes only provided that any such Sub-Licence is on the same terms
and conditions contained by this Agreement mutatis mutandis.
5.3 Notwithstanding the grant of any Sub-Licence pursuant to Clauses 5.1 or
5.2, the Licensee shall be responsible to the Licensor for the
performance of all obligations under this Agreement.
5.4 This Agreement is personal to the Licensee. The Licensee shall not
assign, transfer, charge or part with any of its rights under this
Agreement without the prior written consent of the Licensor (not to be
unreasonably withheld).
5.5 The Licensor shall be entitled to assign the benefits (or any of them)
that it enjoys under this Agreement. For the avoidance of doubt should
the Licensor seek to assign or transfer any or all of the Licensed
Property, it hereby undertakes that such assignment or transfer shall
be subject to the burden of this Agreement.
6. PROVISION OF THE KNOW-HOW
6.1 The Licensor shall as soon as reasonably practicable after the date of
this Agreement provide to the Licensee one complete copy of the
Technical Documentation, or request and permit DAL to provide the
Licensee with the copy thereof provided to DAL by the Licensor pursuant
to the licence referred to in Recital D.
6.2 All Technical Documentation provided by the Licensor or DAL under this
Clause 6 will be provided in its English language version, and the
copyright therein shall belong to and remain vested in the Licensor.
The Licensor hereby grants to the Licensee licence to make such number
of copies of the same as the Licensee may reasonably require in
connection with the manufacture of STU's and to make such number of
copies of any manuals as the Licensee may reasonably require in
connection with the Supply of STU's.
6.3 If at any time during the Term the Licensee requires any information
and assistance in relation to the manufacture of STU's, the Licensor
shall to the extent that it is reasonably able from its existing
experience and knowledge and subject to its other commitments provide
such information and assistance to the Licensee, subject to:-
6.3.1 the Licensee paying a consultancy fee to the Licensor in
respect of such assistance at the Licensor's standard rates
for consultancy services current from time to time (except in
the first Year, when the Licensor shall provide such
information and assistance as may reasonably be required free
of charge); and
6.3.2 the Licensee paying or reimbursing to the Licensor all
expenses properly incurred by the Licensor in providing such
assistance.
<PAGE>
6.4 The Licensee shall be solely responsible for ensuring that the STU's it
produces and its methods of manufacturing them comply in all respects
with all requirements of all competent governmental or other regulatory
authorities and the Licensor shall have no responsibility for
compliance with such requirements.
7. QUALITY CONTROL
During the continuance of this Agreement the Licensee shall:-
7.1. ensure that all STU's marketed by it are of good and merchantable
quality and comply with all applicable United Kingdom, Eire and EC laws
and regulations (including without limitation all laws and regulations
relating to EMC and voltage) and all relevant BABT and other
regulations and approvals;
7.2 provide the Licensor with a sample of each description of STU that it
proposes to Supply prior to making any Supply of STU's of that
description;
7.3 upon reasonable notice from the Licensor, give the Licensor or its
authorised representatives free access at any reasonable time to the
premises of the Licensee for the purpose of ensuring that the Licensee
is performing and observing the obligations of the Licensee under this
Agreement;
7.4 ensure that all literature prepared by the Licensee relating to STU's
it produces or has produced bears an acknowledgment in a form first
approved by the Licensor to the effect that the STU's are made and
Supplied under licence from the Licensor and details of the Patents
under which STU's are Supplied by the Licensee; and
7.5 not act as, or purport to be, the agent of the Licensor nor make any
representation that it is acting otherwise than as principal in
relation to the manufacture and/or Supply of STU's nor make any
representation or give any warranty in relation to STU's on behalf of
the Licensor or which would impose any liability on the Licensor.
8. USE AND PURCHASE OF THE MICROPROCESSORS
8.1 The Licensee accepts that the use of the Microprocessors is necessary
in order that the STU functions as part of the System in which it is
used, and that the Microprocessors are therefore necessary for a
technically satisfactory exploitation of the STU's and the System in
which they are used.
8.2 The Licensee undertakes to acquire the Microprocessors exclusively from
the Licensor or such Person as the Licensor may from time to time
designate and undertakes not itself to manufacture or have manufactured
or acquire from any Person (other than a Person designated by the
Licensor) any Microprocessors or any products in substitution for
Microprocessors.
8.3 The Licensor shall, subject to availability, supply or procure the
supply to the Licensee of such amounts of the Microprocessors as the
Licensee shall reasonably require, on the standard terms and conditions
of Supply of the Licensor or its designated supplier. The Licensee
shall not order or carry a greater stock of Microprocessors than may be
necessary to satisfy its reasonably
<PAGE>
foreseeable needs from time to time during the Term in producing STU's
hereunder, and shall provide the Licensor with reasonable evidence
thereof if so required from time to time.
8.4 Microprocessors supplied hereunder and used by the Licensee in the
manufacture of STU's shall be so supplied at the price of (pound)2.00
(two pounds sterling) plus Value Added Tax per Microprocessor.
Microprocessors supplied hereunder and used by the Licensee in the
manufacture of New Products shall be so supplied at a price equal to
the Licensor's total supply cost (as notified to the Licensee from time
to time). The Licensee shall pay for Microprocessors as and when
consignments thereof are supplied to the Licensee, making each such
payment prior to delivery of the consignment in question or within the
30 (thirty) days thereafter.
8.5 The Licensor undertakes to the Licensee to use all reasonable
endeavours to supply Microprocessors to the Licensee (if so ordered by
the Licensee), given the placement of an order therefor at least one
hundred and twenty (120) days in advance of the requested delivery
date. If the Licensor is unable to fulfil any such order the Licensor
shall supply to the Licensee at least one-third of all Microprocessors
as are available to the Licensor at the requested delivery date.
8.6 The Licensor's obligations under this Clause 8 are subject to the
Licensee's continued compliance in full with Clause 12 and Clause 8.4.
9. IMPROVEMENTS
9.1 The Licensee shall forthwith disclose to the Licensor in confidence, as
and when made, developed or acquired (and in such detail as the
Licensor may reasonably require) all the Licensee's Improvements.
9.2 Insofar as the Licensee is able to grant the same, the Licensor shall
have an irrevocable worldwide licence (free of any obligation to make
royalty or other payments) during the Term to use and exploit all
Improvements which the Licensee is required to disclose to the Licensor
under Clause.
9.1 and to use and exploit all intellectual property rights in respect
thereof owned by the Licensee and shall have the further right to grant
sub-licences out of such licence.
9.3 The Licensor shall forthwith disclose to the Licensee in confidence, as
and when made, developed or acquired (and in such detail as the
Licensee may reasonably require) all the Licensor's Improvements.
9.4 Insofar as the Licensor is able to grant the same, the Licensee shall
have a licence during the Term within the Territory in connection with
the manufacture and Supply of STU's on the terms of Clause 2.1 to use
all of the Licensor's Improvements and to use and exploit all
intellectual property rights in respect thereof owned by the Licensor.
10. LIABILITY OF LICENSOR FOR DEFAULTS
The Licensor and its employees, agents, consultants and contractors
shall not have (nor shall any of them have) any liability whatsoever to
the Licensee for (and the Licensee shall keep the Licensor and its
employees agents consultants and contractors and each of them
indemnified
<PAGE>
against) any losses, damages, claims, actions, proceedings, costs and
expenses suffered or incurred by the Licensee or brought against the
Licensee and any consequential loss or damage and any loss of profits
or other economic loss suffered by the Licensee and any claim made
against the Licensee by any third party to the extent due to or caused
(whether directly or indirectly) by or arising from:-
10.1 any defect or inaccuracy in, or inadequacy of, any of the Know-How,
procedures, plans, information, advice, or assistance provided by the
Licensor under this Agreement; or
10.2 any default of the Licensor or its employees in connection with or in
relation to the subject-matter of this Agreement.
11. PRODUCT LIABILITY AND INDEMNITY
11.1 The Licensee shall indemnify the Licensor and its directors
and employees, and keep them fully and effectively indemnified
against any and all losses, claims, damages, costs, charges,
expenses, liabilities, demands, proceedings and actions which
they (or any of them) may sustain or incur, or which may be
brought or established against them (or any of them) as a
result (whether direct or indirect) of or arising from :-
11.1.1 any action or omission of the Licensee or its
employees, agents or contractors in the performance
of its obligations or the exercise of any of its
rights under this Agreement; or
11.1.2 the death of or personal injury to any Person and/or
any loss or damage to any property and/or any other
loss or damage caused (whether directly or
indirectly) by reason of the Licensee manufacturing,
Supplying, offering to Supply, and/or agreeing to
Supply any STU or other article which:
(a) is not of merchantable quality; or
(b) is defective in any respect; or
(c) is or may be injurious to the health or
safety of any Person using or handling the
STU or article in question for any reasonably
foreseeable purpose; or
(d) is or may be injurious to the property of any
Person referred to in paragraph (c).
11.2 If so requested by the Licensor at any time, the Licensee shall use its
best endeavours to effect and maintain in force throughout the
continuance of this Agreement a policy of insurance in the joint names
of the Licensor and the Licensee with a reputable insurance company
approved by the Licensor at a level of cover first approved by the
Licensor (such approval not to be unreasonably withheld) against any
damages, liabilities, claims and costs arising from any of the causes
events or circumstances referred to in Clause 11.1 and with an
endorsement thereon that the insurer will not cancel the policy for any
reason whatsoever without first giving to the Licensor not less than
fourteen days notice in writing of its intention to cancel the policy
and
<PAGE>
also containing an endorsement that no act omission breach of warranty
misrepresentation or non-disclosure by the Licensee will enable the
insurer to avoid the policy in whole or in part against the Licensor.
11.3 The Licensor shall indemnify the Licensee and its directors and
employees, and keep them fully and effectively indemnified against any
and all losses, claims, damages, costs, charges, expenses, liabilities,
demands, proceedings and actions which they (or any of them) may
sustain or incur, or which may be brought or established against them
(or any of them) as a result (whether direct or indirect) of or arising
from :-
11.3.1 any action or omission of the Licensor or its employees,
agents or contractors in the performance of its obligations or
the exercise of any of its rights under this Agreement; or
11.3.2 the death of or personal injury to any Person and/or any loss
or damage to any property and/or any other loss or damage
caused (whether directly or indirectly) by reason of the
Licensor manufacturing, supplying, offering to supply, and/or
agreeing to supply any Microprocessor which:
(a) is not of merchantable quality; or
(b) is defective in any respect; or
(c) is or may be injurious to the health or safety of any
Person using or handling the Microprocessor for any
reasonably foreseeable purpose; or
(d) is or may be injurious to the property of any Person
referred to in paragraph (c).
12. ROYALTIES
12.1 In consideration of the rights and facilities hereby granted to the
Licensee, the Licensee shall pay to the Licensor a royalty, paid and
calculated as set out in Clauses 12.2 and 12.3.
12.2 Payment of the Royalty shall be made by reference to the Supply of
STU's by or on behalf of the Licensee, and shall be paid at the rate
(applicable throughout the Term) of 59.14% of the average sales price
of the Licensor for an equivalent STU excluding any Sales Tax and Value
Added Tax for the preceding completed quarter (such calculation not to
include the Licensor's prices for part exchange of STU's undertaken by
the Licensor in respect of STU's which no longer meet legal
requirements) ("Average Price"). The Licensor shall notify the Licensee
of the Average Price of the quarter immediately preceding the
Commencement Date within 21 days of the Commencement Date and for each
subsequent quarter, within 21 days of the end of each such quarter.
12.3 The Licensor shall permit the Licensee (or the Licensee's
representatives) within business hours during the Term and at any time
or times during the two years following the Termination Date and on not
less than forty-eight hours prior notice to inspect the Licensor's
records relating to the calculation of the Average Price referred to in
Clause 12.2 to the extent necessary and solely for the purpose of
verifying the Average Price.
<PAGE>
12.4 The Royalty shall be paid on a monthly basis throughout the Term,
payment to be made in respect of all STU's supplied during each month
within 30 (thirty) days after the end of that month. With each such
payment the Licensee shall provide a statement showing the Royalty due
and giving full details of its calculation.
12.5 Payment of Royalties, and payments due under Clause 8.4, shall be made
in Pounds Sterling to such account or place in the United Kingdom and
in such manner as the Licensor may from time to time direct.
13. OVERDUE PAYMENTS
In the event of default by the Licensee in payment within the relevant
period specified in this Agreement of any Royalties or any other sum
due to the Licensor under this Agreement then (without prejudice to the
Licensor's other rights and remedies) the Licensee shall on demand pay
to the Licensor interest at the Interest Rate on such sum from the date
of expiration of the relevant period up to the date of actual payment
(as well after as before any judgement).
14. REPORTING PROCEDURES
14.1 The Licensee shall supply to the Licensor in respect of each calendar
month a production, Supply and inventory analysis in the form required
by the Licensor in respect of STU's manufactured by or on behalf of the
Licensee, the analysis for each calendar month to be supplied within 30
days after the end of that calendar month.
14.2 The Licensee shall within three months after the end of each Year of
this Agreement deliver to the Licensor a statement in a form approved
by the Licensor and certified by two directors of the Licensee showing
the quantity of all STU's made and quantity of STU's Supplied by the
Licensee during the Year of this Agreement just ended.
14.3 The Licensee shall maintain at its principal place of business full and
accurate records relating to the manufacture and Supply of STU's by the
Licensee and shall retain all supporting records, invoices, vouchers,
receipts and other documents for the last two years at least, and for
at least two years after the Termination Date shall preserve the said
books of account and the supporting records, invoices, vouchers,
receipts and other documents relating to the two years preceding the
Termination Date.
14.4 The Licensee shall permit the Licensor (or the Licensor's authorised
representatives) within business hours during the Term and at any time
or times during the two years following the Termination Date and on not
less than forty-eight hours prior notice to inspect the records
referred to in Clause 14.3 to the extent necessary and solely for the
purpose of verifying the amount of Royalties payable by the Licensee
under Clause 12.
15. TAXES
15.1 The Licensee shall be entitled to deduct from the Royalties payable to
the Licensor under Clause 12 and pay over to the revenue authorities in
the Territory such taxes (if any) as the Licensee may be required under
UK or Eire law to deduct on remission of the Royalties to the Licensor.
<PAGE>
The Licensee shall provide such documentary evidence as the Licensor
may reasonably require that the amount so deducted has been paid over
to the relevant revenue authorities in the Territory, and to give the
Licensor all the assistance and information that the Licensor may
reasonably require in the Licensor's endeavours to obtain a set-off or
credit in respect of such deductions.
15.2 The Licensee shall permit the Licensor (or the Licensor's authorised
representatives) within business hours during the Term and at any time
or times during the two years following the Termination Date and on not
less than forty-eight hours notice to inspect its financial records to
the extent necessary and for the sole purpose of verifying the amounts
payable to or recoverable by the Licensor under this Clause 15.
16. MAINTENANCE OF PATENTS
The Licensor shall during the Term pay all renewal fees for the
Patents.
17. WARRANTIES
The Licensor hereby warrants and represents that it is not aware that
the Patents are invalid, or that the manufacture, use and/or Supply of
STU's, the use of the Know-How, and/or the exploitation of the Patents,
Ancillary Rights or any of them by the Licensee hereunder (and in
strict accordance with the terms and conditions hereof) would infringe
the rights of any third party, but no further or other warranty or
representation is given by the Licensor.
18. INFRINGEMENTS AND INDEMNITY
18.1 The Licensee shall forthwith notify the Licensor in writing of any
infringement or suspected or threatened infringement of the Patents (or
either of them) or any of the Ancillary Rights or any unauthorised use
of the Know-How which shall at any time come to its knowledge.
18.2 The Licensor shall be entitled in its sole discretion to decide whether
or not to take any steps (including any proceedings) as may be
necessary to prevent or restrain any infringement by a third party of
either Patent or any of the Ancillary Rights or any unauthorised use by
any third party of the Know-How. The Licensee shall provide or procure
the provision of such assistance in taking such steps (including any
proceedings) as the Licensor shall reasonably require (subject to the
Licensor reimbursing the Licensee for any costs and expenses it may
incur in providing such assistance). The Licensor shall be entitled to
retain any award of damages or other compensation obtained as a result
of any steps (including any proceedings) taken by the Licensor pursuant
to this Clause 18.2.
18.3 If any claim is made against the Licensee on the grounds that the use
or exploitation by the Licensee of the Patents (or either of them) or
any of the Ancillary Rights or any of the Know-How infringes the
rights of any third party, the Licensee shall forthwith notify the
Licensor of the same and the Licensor shall indemnify and keep
indemnified the Licensee against any and all losses, claims, damages,
costs, charges, expenses, liabilities, demands proceedings and actions
(including for the avoidance of doubt proper and reasonable legal fees
and expenses) which may be sustained or incurred by the Licensee or
which may be brought or established against it arising from any such
claim, provided that:-
<PAGE>
18.3.1 the Licensee allows the Licensor to control the defence and
settlement of the claim; and
18.3.2 the Licensee makes no admission or settlement in respect of
the claim without the Licensor's consent.
19. CONFIDENTIALITY AND OTHER PROTECTION
19.1 The Licensee undertakes :-
19.1.1 to keep secret and treat as confidential and to ensure that
its employees, agents, and sub-contractors keep secret and
treat as confidential all of the Know-How, all of the
Licensor's Improvements, all of the Technical Documentation,
all of the design verification procedures, test and trials
procedures and quality plans, and all other information,
documentation and advice supplied by the Licensor pursuant to
the terms of, or in the course of performance of, this
Agreement (including all of the same that has been supplied
prior to the date of this Agreement); and
19.1.2 not to use any of the Know-How, the Licensor's Improvements,
the Technical Documentation, procedures and plans or any other
information, documentation and advice referred to in Clause
19.1.1 except as permitted by this Agreement; and
19.1.3 only to disclose the Know-How, the Licensor's Improvements,
the Technical Documentation, procedures, plans and other
information, documentation and advice referred to in Clause
19.1.1 to those of the Licensee's employees who need to know
the same for the fulfilment of their duties to the Licensee
and have been made aware that the same is confidential
information of the Licensor.
19.2 The Licensee undertakes to keep secret and treat as confidential the
contents of this Agreement and the content of any records of the
Licensor inspected pursuant to Clause 12.3. If at any time during the
Term the Licensee disputes or directly or indirectly assists any third
party to dispute the validity of the Patents (or either or them) or any
of the claims thereof, or the secrecy or substantiality of the
Know-How, the Licensor shall be entitled at any time thereafter by
notice in writing to the Licensee forthwith to terminate this
Agreement.
19.3 The Licensor undertakes to keep secret and treat as confidential the
content of any records of the Licensee inspected pursuant to Clauses
14.4 and 15.2. The Licensor undertakes to keep secret and treat as
confidential all of the Licensee's Improvements communicated to the
Licensor and (save as aforesaid) not to use any of the same except as
permitted by this Agreement and to ensure that its employees, agents,
subsidiaries and sub-contractors do likewise.
19.4 The obligations under Clauses 19.1 and 19.3 shall not extend to any
Know-How, Improvements, Technical Documentation, procedures, plans or
other information, documentation or advice which the Party to whom the
same shall have been disclosed ("the recipient") can demonstrate:-
19.4.1 is in the public domain or has ceased to be secret (otherwise
than as a result of disclosure by the recipient or any of its
officers, employees, agents, contractors or representatives);
<PAGE>
19.4.2 is required to be disclosed pursuant to any Order of a Court
of competent jurisdiction (but only for the purpose of such
disclosure);
19.4.3 is contained in a published patent specification;
19.4.4 is required to be disclosed pursuant to any statute,
regulation or ordinance or under any laws or regulations of
the European Community (but only for the purpose of
disclosure);
19.4.5 is (at the time the recipient seeks to disclose or use the
same) already in the possession of the recipient free from any
obligation of confidentiality and has not been acquired by the
recipient in breach of any obligation of confidentiality; or
19.4.6 has been disclosed to the recipient under an express written
statement that it is not confidential.
19.5 The following acts shall not be deemed to be a breach of the
obligations contained in Clauses 19.1 and 19.3 in relation to the
disclosure of any Know-How, Improvements, Technical Documentation,
procedures, plans, or other information, documentation or advice by the
recipient:-
19.5.1 disclosure occurring in the ordinary course of manufacture of
STU's by the recipient;
19.5.2 disclosure occurring in the ordinary course of the Supply of
STU's by the recipient;
19.5.3 disclosure by the recipient to its customers for STU's; or
19.5.4 disclosure by reproduction of drawings in advertising
literature, instruction books and spare parts lists
Provided that (in each case) any disclosure is made bona fide and to no
greater degree than is necessary in the circumstances, is made under
conditions of confidence wherever commercially practicable, and is made
with a view to promoting the Supply or use of STU's.
19.6 Any information communicated to a Party under this Agreement may, with
the prior written permission of the Party which communicated that
information, be disclosed by the former to any sub-contractor appointed
by it to manufacture STU's or components for STU's provided that the
disclosing Party procures that such disclosure is limited to such
officers or employees of the sub-contractor as cannot properly fulfil
their duties to the sub-contractor without such disclosure and who
undertake in writing to keep such information confidential.
20. DURATION AND TERMINATION
20.1 This Agreement shall come into effect on the Commencement Date and,
unless terminated earlier in accordance with the provisions of this
Agreement, shall continue in force for the Term.
20.2 The Licensor shall be entitled to terminate this Agreement by notice in
writing to the Licensee having immediate effect :-
<PAGE>
20.2.1 if the Licensee fails to pay any amount due to the Licensor
under this Agreement within thirty (30) days after written
notice from the Licensor notifying the Licensee that a payment
is overdue and requiring that payment be made;
20.2.2 if a Court makes an administration order with respect to the
Licensee or any composition in satisfaction of the debts of,
or a scheme of arrangement of the affairs of, the Licensee or
if the Licensee undergoes any comparable procedure under the
laws of any competent jurisdiction;
20.2.3 if the Licensee enters into liquidation (not being a voluntary
liquidation for the purposes only of reconstruction or
amalgamation on terms first approved by the Licensor, such
approval not to be unreasonably withheld) or is declared
insolvent or bankrupt or makes an assignment or other
arrangement for the benefit of its creditors or has an
administrative receiver appointed to it or has a receiver or
manager of its assets or a material part thereof appointed, or
undergoes any comparable procedure under the laws of any
competent jurisdiction;
20.2.4 if control (as defined in Section 435(10) of the Insolvency
Act 1986) or the power to take control of the Licensee is
acquired by any person or group of associates (as defined in
that Section) not having control of the Licensee at the date
of this Agreement unless such event occurs with the prior
consent in writing of the Licensor; or
20.2.5 in the event of any material breach by the Licensee of any of
its obligations under a certain "Stock Purchase Agreement"
between Numerex Corporation (1) and the Licensee (2), of even
date herewith, which is not remedied with a period of thirty
(30) days after service of a written notice by Numerex
Corporation, requiring such remedy.
20.3 If either Party is :-
20.3.1 in breach of any material obligation binding on it under this
Agreement which is incapable of remedy; or
20.3.2 in breach of any other obligation binding on it under this
Agreement which has not been remedied by such Party within
thirty (30) days after written notice from the other Party
specifying the breach and requiring it to be remedied, the
Party not in breach may forthwith terminate this Agreement by
notice in writing to the other Party.
20.4.1 If at any time the Licensee is, in the Licensor's opinion,
operating in a manner which would give, or has given, rise to
a right of any Person to apply for and be granted a
compulsory licence under the Patents (or either of them), the
Licensor shall have the right (in addition to any other remedy
it may possess) to serve on the Licensee a notice in writing
requiring the Licensee within 28 days to take such steps as
may be necessary to prevent such right from arising or to
nullify such right.
20.4.2 A notice given under Clause 20.4.1 shall be deemed withdrawn
if the Licensee shall within 28 days after the date of such
notice produce evidence satisfactory to the Licensor
establishing that no such right to a compulsory licence has
arisen or (if it has arisen) that the Licensee has taken such
steps as may be necessary to nullify such right.
<PAGE>
20.4.3 If a notice given under Clause 20.4.1 is not deemed to be
withdrawn under Clause 20.4.2, the Licensor shall be entitled
at any time after the expiration of such notice by notice in
writing to the Licensee forthwith to terminate this Agreement.
20.5 Any termination of this Agreement shall be without prejudice to any
rights accrued in favour of either Party in respect of any breach
committed prior to the date of such termination by the other Party
including (without limitation) the breach giving rise to termination.
21. CONSEQUENCES OF TERMINATION
21.1 Termination of this Agreement for any reason shall not bring to an
end:-
21.1.1 the confidentiality obligations of the Parties; or
21.1.2 the Licensee's obligations to pay Royalties or any other sum
which may be or shall have accrued due under this Agreement;
or
21.1.3 the obligations of both Parties set out in this Agreement to
indemnify the other Party in relation to events giving rise to
the liability to indemnify occurring prior to the Termination
Date.
21.2 With effect from the Termination Date all the licences granted to the
Licensee hereunder or pursuant hereto shall be at an end and the
Licensee shall cease carrying on (and shall not thereafter carry on)
those activities permitted by this Agreement for which it would require
the licence or consent of the Licensor, save as provided in Clause
22.3.
21.3 Notwithstanding the expiration of the Term or the determination of this
Agreement under any of its provisions, all the provisions of this
Agreement which are expressed to have effect on and/or after the
expiration of the Term or determination of this Agreement shall survive
the expiration of the Term or the determination of this Agreement and
shall be deemed to remain in full force and effect.
22. DISPOSAL OF MATERIALS ON TERMINATION
22.1 Upon the expiration of the Term or sooner determination of this
Agreement, the Licensee shall:-
22.1.1 at its own cost promptly deliver up to the Licensor, or
otherwise dispose of as the Licensor may instruct, all
Technical Documentation and all other documentation and papers
supplied to the Licensee by the Licensor or DAL and all copies
thereof and notes and extracts taken therefrom by the
Licensee; and
22.1.2 destroy all catalogues, advertising and promotional material,
stationery and materials of any sort relating to STU's and
shall supply to the Licensor within twenty-eight days after
the Termination Date a certificate signed by two directors of
the Licensee as to the destruction of all such catalogues,
advertising and promotional material, stationery and other
materials.
<PAGE>
22.2 The Licensor shall have the right to purchase any unused
Microprocessors at a price equal to that paid therefor by the Licensee
to the Licensor under Clause 8.4.
22.3 The Licensee shall have the right to sell or otherwise dispose of all
its remaining stock of STU's, save as provided in Clause 22.4.
22.4 At the expiration of the period of 9 months following the Termination
Date, the Licensee shall at its own cost and in accordance with the
directions of the Licensor destroy all STU's then held in stock by it
and shall supply to the Licensor a certificate signed by two directors
of the Licensee as to the destruction of all such STU's.
22.5 The Licensee shall bear any loss which the Licensee may incur or suffer
by reason of the Supply, disposal and destruction of STU's and
Microprocessors in accordance with the provisions of this Clause 22.
23. VALUE ADDED TAX
All sums payable to the Licensor under this Agreement are stated
exclusive of Value Added Tax which shall (where applicable) be paid by
the Licensee in addition to such sums at the rate in force at the due
time for payment subject to the Licensor either supplying a VAT invoice
to the Licensee or informing the Licensee of its VAT registration
number.
24. FURTHER ASSURANCE
Each of the Parties shall do execute and perform and shall procure to
be done executed and performed all such further acts deeds documents
and things as the other Party may reasonably require from time to time
to give full effect to the terms of this Agreement.
25. NO PARTNERSHIP
Nothing in this Agreement shall be taken to constitute a partnership
between the Parties nor the appointment of one of the Parties as the
agent of the other.
26. FORCE MAJEURE
Neither Party shall be in breach of this Agreement if there is any
total or partial failure or performance by it of its duties and
obligations under this Agreement occasioned by any cause
beyond the control of either Party. If either Party is unable to
perform its duties and obligations under this Agreement as a direct
result of the effect of one or more of such causes such Party shall
give written notice to the other of such inability stating the cause in
question. The operation of this Agreement shall be suspended during the
period (and only during the period) in which the cause continues to
have effect. Forthwith upon the cause ceasing to have effect the Party
relying upon it shall given written notice thereof to the other. If the
causes continues to have effect for a period of more than 60 days the
Party not claiming relief under this Clause shall have the right to
terminate this Agreement upon giving 30 days written notice of such
termination to the other Party, but such notice shall not take effect
if the other Party gives notice within that period that the cause has
ceased to prevent the operation of this Agreement.
<PAGE>
27. SEVERANCE
If at any time any provision of this Agreement is or becomes invalid or
illegal in any respect:
27.1 such provision shall be deemed to be severed from this Agreement but
the validity, legality and enforceability of the remaining provisions
of this Agreement shall not be affected or impaired thereby; and
27.2 the Parties shall negotiate in good faith and use their best endeavours
to agree to the minimum necessary changes to this Agreement to replace
the invalid, illegal or unenforceable provisions. In the event that the
Parties are unable to arrive at a binding agreement as to any such
changes within 30 days of the said provisions being declared invalid,
illegal or unenforceable, a barrister of 10 years standing who is a
specialist in the field shall be chosen and appointed jointly by the
Parties (on a shared cost basis) to develop a substitute provision or
provisions which are valid, legal and enforceable and which have an
economic effect on the Parties as close to the economic effect of the
invalid, illegal or unenforceable provisions as is possible. The
barrister shall have the authority to modify other provisions of this
Agreement which are valid, legal and enforceable as necessary to
implement the foregoing changes. Such new provision or provisions and
any existing provisions so modified shall be binding on both the
Parties.
28. APPLICABLE LAW
28.1 This Agreement shall be deemed to have been made in England and English
law shall govern:-
28.1.1 its existence and validity;
28.1.2 its interpretation;
28.1.3 its performance;
28.1.4 within the limits of the powers of the Courts of England by
its procedural law, the consequences of its breach; and
28.1.5 the various ways of extinguishing obligations under it and
limitation of actions arising from it or its breach.
28.2 Each Party submits to the exclusive jurisdiction of the Supreme Court
of Judicature of England, waives personal service of any proceedings,
and agrees that service on it of proceedings may be effected by
registered mail to its address for service referred to in Clause 30 of
this Agreement.
28.3 Nothing contained in this Clause 28 shall affect the right to serve
process in any other manner permitted by law.
29. COUNTERPARTS
This Agreement may be executed in two counterparts, each of which shall
be deemed to be an original, and which together shall constitute one
and the same Agreement. Unless otherwise
<PAGE>
provided in this Agreement, this Agreement shall be dated (and each
counterpart shall be dated) on the date on which a counterpart of this
Agreement is signed by the last of the Parties to execute this
Agreement.
30. NOTICES
30.1 Any notice required to be given under this Agreement shall be
sufficiently given:-
30.1.1 if delivered personally; or
30.1.2 if sent by reputable air courier for next-day delivery; or
30.1.3 if sent by facsimile copier or other electronic means of
communication with confirmation by letter despatched by
reputable air courier for next-day delivery by the close of
business on the next following business day (in which case,
the effective notice shall be that sent by facsimile copier or
other electronic means; not the confirmatory letter).
The words "in writing" whenever contained in this Agreement shall be
deemed to include any communication sent by any of such means.
30.2 Any notice which is sent or dispatched in accordance with this
Clause 29 shall be deemed to have been received by the addressee:-
30.2.1 if delivered personally, at the time of delivery;
30.2.2 in the case of a notice sent by reputable air courier, 48
hours after the envelope containing the notice was delivered
to the courier company with appropriate instructions for
next-day delivery; and
30.2.3 in the case of a notice sent by facsimile copier or other
electronic means of communication, if the notice was sent
during the business hours of the addressee then on the day of
transmission; otherwise on the next following business day.
In proving service by post it shall be necessary to prove only that the
notice was sent or despatched and that the notice was contained in an
envelope properly addressed, stamped first class and delivered to the
postal authorities for the purpose of recorded delivery. In proving
service by facsimile copier or other electronic means of communication
it shall be necessary to prove only that the confirmatory letter was
sent or despatched in accordance with this Clause 30.
30.3 For the purposes of this Clause 30, a "business day" means a day (other
than a Saturday) on which the clearing banks in the United Kingdom are
open for business and "business hours" means the hours of 9 a.m. to
5.30 p.m. local time in United Kingdom.
30.4 Any notice required to be given under this Agreement shall be sent:-
<PAGE>
30.4.1 to the Licensor at:
Unit B7, Armstrong Mall,
Southwood Summit Centre,
Farnborough, Hants GU14 0NR
Facsimile No: (01252) 371166
For the attention of : Managing Director
30.4.2 to the Licensee at:
130 Perinton Parkway,
Fairport, New York 14450, USA
Facsimile No: (716) 421-4288
For the attention of: President
or to such other address or facsimile number as may be notified in
writing from time to time by either Party to the other.
31. WAIVERS
A failure by any Party to exercise and any delay forbearance or
indulgence by any Party in exercising any right, power or remedy under
this Agreement shall not operate as a waiver of that right, power or
remedy or preclude its exercise at any subsequent time or on any
subsequent occasion. The single or partial exercise of any right, power
or remedy shall not preclude any other or further exercise of that
right, power or remedy or the exercise of any other right, power or
remedy. No custom or practice of the Parties at variance with the terms
of this Agreement shall constitute a waiver of the rights of any Party
under this Agreement. The rights, powers and remedies provided in this
Agreement are cumulative and not exclusive of any rights, powers or
remedies provided by law.
32. ENTIRE AGREEMENT
32.1 This Agreement:-
32.1.1 constitutes the entire agreement and understanding between the
Parties with respect to the subject matter of this Agreement;
and
32.1.2 (in relation to such subject matter) supersedes all prior
discussions, understandings and agreements between the Parties
and their agents (or any of them) and all prior
representations and expressions of opinion by any Party (or
its agent) to any other Party (or its agent).
32.2 Except as expressly incorporated in this Agreement, all conditions,
warranties, guarantees, representations and understandings with respect
to the subject matter of this Agreement are hereby excluded.
<PAGE>
AS WITNESS the hands of the Parties or their duly authorised representatives on
the date written on page 1 of this Agreement.
THE SCHEDULE
The BLU STU family of Subscriber Terminal Units are distinguished by the use,
within the units, of mechanical switches incorporated into the input trigger
circuits. These switches permit the inversion of the electrical input to any
individual input port, irrespective of the data pre-programmed in the local
non-volatile memory device by the customer. The feature is of value in
facilitating on-site changes to be effected during the unit installation
process.
SIGNED by K.F. MANSER ) /s/ K. F. Manser
a Director duly authorised )
for and on behalf of )
BRONZEBASE LIMITED )
in the presence of):- )
Witness Name: /s/ Richard Watkins
Address:
Occupation:
SIGNED by KARL KOSTUSIAK ) /s/ Karl Kostusiak
the President duly authorised )
for and on behalf of )
DETECTION SYSTEMS, INC. )
in the presence of :- )
Witness Name:
Address:
Occupation:
<PAGE>
EXHIBIT 10.25
- --------------------------------------------------------------------------------
CONTRACT FOR
the supply of
TELECOM RED PRODUCTS
CONTRACT NO: 652902
(PSUEDO CONTRACT NO. 652903)
From
BT Supply Management
Swindon
August 1997
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Contract Number: 652902 (Psuedo Estimated Contract Value:(pound)6,881,675
Contract No. 652903)
Contract relating to: Telecom Red Products
- --------------------------------------------------------------------------------
CONTRACT dated 7 August 1997 between
(1) "BT" British Telecommunications plc registered office 81 Newgate Street
London EC1A 7AJ Company Number 1800000; and
(2) "the Supplier":
- --------------------------------------------------------------------------------
Name Registered Office Address Registered Number
- --------------------------------------------------------------------------------
Versus Technology Ltd Unit B7 2520164
Armstrong Mall
Southwood Summit Centre
Farnborough
GU14 0NR
- --------------------------------------------------------------------------------
For (pound)1 payable to it by BT, the Supplier shall complete and deliver to BT
such work and/or equipment and/or services (as the case may be) as BT may order
from time to time within the Contract Period in accordance with the Contract
which comprises:
- --------------------------------------------------------------------------------
Number Description
- --------------------------------------------------------------------------------
1 Requirements
- --------------------------------------------------------------------------------
2 Conditions
- --------------------------------------------------------------------------------
3 Technical Requirements
- --------------------------------------------------------------------------------
4 Generic Standards
- --------------------------------------------------------------------------------
5 Subcontractors
- --------------------------------------------------------------------------------
6 Working with BT Booklet
- --------------------------------------------------------------------------------
and which, in the case of conflict, have precedence in the order listed.
SIGNED for and on SIGNED for and on
Behalf of the Supplier behalf of BT
Name Name T. Pearson
Position Position Manager, Engineering Materials
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE 1
REQUIREMENTS
CONTRACT NO: 652902
- --------------------------------------------------------------------------------
<PAGE>
SCHEDULE 1 to CONTRACT NO: 652902 PAGE 1 of 17
- --------------------------------------------------------------------------------
CONTENTS
SCOPE
1. DEFINITIONS
2. DURATION OF CONTRACT
3. DESCRIPTION OF SUPPLIES
4. QUANTITY OF SUPPLIES
5. PRICING
6. PAYMENT AND INVOICE DETAILS
7. AVAILABILITY OF SUPPLIES
8. PLACE OF MANUFACTURE
9. WORKING WITH BT
MANAGEMENT
10. QUALITY, QUALITY ASSURANCE AND QUALITY IMPROVEMENT
11. CHANGE CONTROL PROCEDURE
12. ENQUIRY POINTS
IMPLEMENTATION
13. ORDERING ARRANGEMENTS
14. DELIVERY - DIRECT DISTRIBUTION
15. DESPATCH - DIRECT DISTRIBUTION
16. DELIVERY - DEPOT
17. DESPATCH - DEPOT
18. ELECTRONIC DATA INTERCHANGE (EDI)
19. CONTRACT MANAGEMENT
20. GRADE OF SERVICE
21. PACKAGING AND LABELLING
22. ORDER OF PRECEDENCE
APPENDIX A
<PAGE>
SCHEDULE 1 to CONTRACT NO: 652902 PAGE 2 of 17
- --------------------------------------------------------------------------------
1. DEFINITIONS
The definitions of expressions in the Condition headed 'Definitions' in
the Contract conditions shall unless the context requires otherwise,
apply in this Schedule 1.
In addition the following expressions shall, unless the context
requires otherwise, have the following meanings in the Schedule 1:
"the Contract Conditions"
- shall mean the provisions contained in Schedule 2 of the
Contract.
"the 'Working with BT' booklet"
- shall mean the booklet of that name referred to in the
Condition headed 'Working with BT' in this Schedule 1.
2. DURATION OF CONTRACT
The duration of the Contract shall be for the Contract Period from the
commencement date as stated in Schedule 2:1, unless terminated earlier
in accordance with its provisions or other right at law.
3. DESCRIPTION OF SUPPLIES
The Supplies for supply by the Supplier, in accordance with its
obligations under the Condition headed 'Quantity of Supplies' in this
Schedule 1, are of those listed in Appendix A to this Schedule.
Supplies may be modified by amendment during the contract period to
replace existing product and/or add new products, subject to the
agreement of both parties.
4. QUANTITY OF SUPPLIES
4.1 The Supplier agrees that the Contract is not for any specific
quantity of Supplies, but only for such quantities as may be
ordered by BT from time to time within the duration of the
Contract. Any estimated Contract value shown on or in the
Contract is for BT information purposes only and shall neither
be binding nor put any obligation of any kind on BT.
<PAGE>
SCHEDULE 1 to CONTRACT NO: 652902 PAGE 3 of 17
- --------------------------------------------------------------------------------
5. PRICING
5.1 Maximum Pricing
The prices to be paid for the Supplies supplied in accordance
with the Contract are as detailed in the Appendix A.
All prices detailed in Appendix A shall be maximum prices for
the Contract Period, subject to the provisions of this
Condition, in Pounds Sterling (exclusive of Value Added Tax).
The prices payable by BT are inclusive of all non-returnable
packing, delivery, any relevant licence fees and all other
charges associated with the Goods.
The Supplier shall not extend more favourable prices to any
other customer providing services within the U.K. for any item
covered by this Contract.
5.2 Price Review
A price review will take place during the Contract Period on
the following basis:-
5.2.1 The prices contained in the appendices are the maximum
prices applicable for the Contract Period.
5.3 Contract Rebate
5.3.1 1 April 1997 to 31 March 1998
It is agreed that should BT place orders for Supplies
against this Contract which reach (pound)3.0m in the
12 month period from 1 April 1997, BT will receive a
rebate of 5% from the Supplier against these
purchases. Should BT exceed a spend of (pound)3.0m
target in this period, a further 15% rebate will be
payable against all purchases in excess of
(pound)3.0m.
Should BT order GSM product against this Contract
within this period then the rebates will apply from a
level of (pound)3.2m.
5.3.2 1 April 1998 to 31 March 1999
It is agreed that the rebate structure, as set out in
Paragraph 5.3.1 above, will apply to orders for
Supplies made in this period, with the exception of
Item No 8a, the LinkGuard Board (Item Code 502434).
This item will be included in the calculation of
total spend, but will be excluded from the agreed
rebate structure.
<PAGE>
SCHEDULE 1 to CONTRACT NO: 652902 PAGE 4 of 17
- --------------------------------------------------------------------------------
5.3.3 It is agreed that Supplies shall include all items on
this contract, as listed in Appendix A to this
Schedule, and any other equipment that BT may
purchase.
5.3.4 Unless BT and the Supplier can agree a rebate
structure to apply for the period 1 April 1999 to 30
June 1999, the same rebate structure as detailed in
Paragraph 5.3.2 above will apply against the spend on
a pro rata basis.
6. PAYMENT AND INVOICE DETAILS
6.1 For each order for the Supplies made by BT, the Supplier
shall, following delivery in accordance with the Contract of
all (or, where agreed in writing by BT, each agreed instalment
of) the Supplies comprised in the order, submit an invoice for
the price of those Supplies.
6.2 Payment of a correct invoice submitted in accordance with this
Condition shall (subject to the following paragraph of this
Condition) be made, on average, within the Payment Period from
the date of its receipt.
6.3 BT reserves the right to refuse to pay any invoice which is
not submitted in accordance with this Condition, or if any
Supplies to which the invoice relates are not in accordance
with the Contract.
6.4 Payment for Depot (NDC) Stocked Items
The Supplier shall, on its own forms, render invoices to BT at
the Invoice Address.
British Telecommunications plc
Accounts Payable Centre
PO Box 998
Telecoms House
91 London Road
Manchester
M60 1RT
Tel: 0800 515465 (Suppliers have to state that they are on
the ATP system)
One invoice must be raised per delivery address for each Goods
Release Form.
6.5 Payment For Direct Delivery Items
Psuedo Contract No. 652903 has been allocated to cover the
delivery of items to Regional Distribution Centres, and direct
to site, and should be quoted on all relevant despatch/invoice
documentation.
Each week the Supplier is required to send: one copy of the
despatch advice with the Supplies and one copy to be sent to
BT Supply Management, Post Point C108, North Star House, North
Star Avenue, Swindon, SN2 1BS, and
<PAGE>
SCHEDULE 1 to CONTRACT NO: 652902 PAGE 5 of 17
- --------------------------------------------------------------------------------
individual invoices relevant to that despatch to British
Telecommunications plc, Accounts Payable Centre, PO Box 998,
Telecoms House, 91 London Road, Manchester, M60 1RT.
6.6 The information on the Supplier's invoice shall conform with
the requirements specified in the `Working with BT' booklet.
Both despatch advices to contain the following information:-
British Telecommunications plc Contract Number (Psuedo
Contract 652903)
British Telecommunications plc Document Reference
British Telecommunications plc Requisition Number
British Telecommunications plc Item Code
British Telecommunications plc Item Description
Quantity Despatched
Delivery Address
Date of Despatch
6.7 The information on the Contractor's invoice shall conform with
the requirements specified in the `Working with BT' booklet.
NB: During the Contract period the Method of Payment is likely to
be altered to Payment on Receipt.
<PAGE>
SCHEDULE 1 to CONTRACT NO: 652902 PAGE 6 of 17
- --------------------------------------------------------------------------------
NDC DELIVERY
GOODS RELEASE FORM
ATTENTION OF: ........................ FROM:.................................
TELEPHONE No:......................... TELEPHONE No:.........................
FAX No:............................... FAX No:...............................
- --------------------------------- ----------------------------------------------
CONTRACTOR: VERSUS TECHNOLOGY LTD CONTRACT NUMBER: 652902
- --------------------------------- ----------------------------------------------
SERIAL NUMBER:
- --------------------------------- ----------------------------------------------
DOCUMENT REFERENCE:
- --------------------------------- ----------------------------------------------
DATE:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
ITEM CODE DESCRIPTION TOTAL TOTAL CRD NED
RELEASED RELEASED
TO DATE
<S> <C> <C> <C> <C> <C>
- ------------ ----------------------------------- ---------------- ---------------- --------------- ----------------
- ------------ ----------------------------------- ---------------- ---------------- --------------- ----------------
- ------------ ----------------------------------- ---------------- ---------------- --------------- ----------------
- ------------ ----------------------------------- ---------------- ---------------- --------------- ----------------
- ------------ ----------------------------------- ---------------- ---------------- --------------- ----------------
- ------------ ----------------------------------- ---------------- ---------------- --------------- ----------------
- ------------ ----------------------------------- ---------------- ---------------- --------------- ----------------
- ------------ ----------------------------------- ---------------- ---------------- --------------- ----------------
- ------------ ----------------------------------- ---------------- ---------------- --------------- ----------------
- ------------ ----------------------------------- ---------------- ---------------- --------------- ----------------
- ------------ ----------------------------------- ---------------- ---------------- --------------- ----------------
- ------------ ----------------------------------- ---------------- ---------------- --------------- ----------------
- ------------ ----------------------------------- ---------------- ---------------- --------------- ----------------
</TABLE>
SIGNED: ............................
<PAGE>
SCHEDULE 1 to CONTRACT NO: 652902 PAGE 7 of 17
- --------------------------------------------------------------------------------
DIRECT DELIVERY
GOODS RELEASE FORM
ATTENTION OF: ........................ FROM:.................................
TELEPHONE No:......................... TELEPHONE No:.........................
FAX No:............................... FAX No:...............................
- --------------------------------- ----------------------------------------------
CONTRACTOR: VERSUS TECHNOLOGY LTD CONTRACT NUMBER: 652903
- --------------------------------- ----------------------------------------------
SERIAL NUMBER:
- --------------------------------- ----------------------------------------------
DOCUMENT REFERENCE:
- --------------------------------- ----------------------------------------------
DATE:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ITEM CODE DESCRIPTION TOTAL TOTAL
RELEASED RELEASED
TO DATE
- ------------ ----------------------------------- ---------------- --------------
- ------------ ----------------------------------- ---------------- --------------
- ------------ ----------------------------------- ---------------- --------------
- ------------ ----------------------------------- ---------------- --------------
- ------------ ----------------------------------- ---------------- --------------
- ------------ ----------------------------------- ---------------- --------------
- ------------ ----------------------------------- ---------------- --------------
- ------------ ----------------------------------- ---------------- --------------
- ------------ ----------------------------------- ---------------- --------------
- ------------ ----------------------------------- ---------------- --------------
- ------------ ----------------------------------- ---------------- --------------
- ------------ ----------------------------------- ---------------- --------------
- ------------ ----------------------------------- ---------------- --------------
SIGNED: ............................
<PAGE>
SCHEDULE 1 to CONTRACT NO: 652902 PAGE 8 of 17
- --------------------------------------------------------------------------------
7. AVAILABILITY OF SUPPLIES
7.1 The Supplier shall at its own expense, maintain sufficient
stock of the Supplies as is reasonable to meet such quantities
as may be ordered by BT. BT will provide the Supplier with 3
month rolling forecasts for all the items on the Contract. The
ordering pattern shall be on the basis of 1 month firm
requirement, months 2 and 3 forecast (provisional) requirement
only.
7.2 BT considers it to be the responsibility of the Supplier to
determine such stock levels and BT does not wish to be
prescriptive on this issue. However, recognising the
volatility of demand patterns, BT believes that reasonable
stock levels should be available.
7.3 During the continuance of the Contract BT shall have the right
to audit the Supplier to ensure reasonable stocks or processes
are in place and effective.
7.4 The Supplier shall give BT 2 months notice of any `shut-down'
period. During any `shut-down' period the Supplier shall
provide sufficient resources to enable the continuation of the
required delivery service. What constitutes a reasonable
delivery service shall be agreed between both parties.
8. PLACE OF MANUFACTURE
The Supplies will be manufactured and assembled at:-
Versus Technology Ltd, Unit B7, Armstrong Mall, Southwood Summit
Centre, Farnborough, Hampshire, GU14 0NR
apart from the manufacture of components and materials bought in, in
accordance with normal trade practice. The Supplier shall not
manufacture or assemble the Supplies at any other address without the
prior written agreement of BT, which agreement shall not be
unreasonably withheld.
9. WORKING WITH BT
The provisions of the booklet 'Working with BT' edition 3 dated 1
August 1994 (a copy of which the Supplier has received) shall apply to
the Contract to the extent specified in the Contract.
10. QUALITY, QUALITY ASSURANCE AND QUALITY IMPROVEMENT
10.1 The Supplies shall be manufactured in accordance with the
quality requirements as stipulated via the contracted
specifications and Generic Standards (Schedule 3).
<PAGE>
SCHEDULE 1 to CONTRACT NO: 652902 PAGE 9 of 17
- --------------------------------------------------------------------------------
10.2 Incumbent within the above requirement will be for the
Supplier to manage the Contract in a controlled quality
manner, in accordance with an ISO 9000 or equivalent Quality
Management System and appropriate Quality Plans. Any changes
to the Suppliers' Quality Management System or Quality Plans
shall be notified to the BT Procurement Team.
10.3 The Supplier shall demonstrate compliance to the contracted
requirements.
10.4 The Supplier shall declare their testing strategy for all
stages of the production processes from incoming goods to
finished product.
10.5 The Supplier shall employ a suitable level of Quality
Assurance.
10.6 The Supplier shall assist BT in measuring the efficiency of
processes as required, with an aim to optimise process yield.
10.7 The Supplier is wholly responsible for ensuring compliance to
the above requirements for any Supplies sub-contracted.
10.8 The Supplier shall demonstrate a commitment to continual
Quality Improvement, addressing shortfalls in the BT Vendor
Rating Scores, and to seek improvements in their quality,
technical and commercial deliverables. Visibility of such
progress will be requested via suitable Quality Improvement
Programmes, these shall be reviewed at the regular BT/Supplier
interface meetings.
11. CHANGE CONTROL PROCEDURE
11.1 The Supplier shall notify BT of any proposed changes, to the
form, fit or function of the Supplies. BT requires four weeks
notice of proposed changes for authorisation to be considered.
No changes are to be made without written authorisation from
BT Supply Management (using an agreed change procedure form),
such authorization shall not be unreasonbly withheld.
11.2 All requests for changes from BT shall be forwarded to the
Supplier by BT Supply Management (using an agreed change
procedure form). The Supplier shall respond to this request
within ten days of its receipt.
11.3 In the event of changes proposed by either party being agreed,
a formal Contract amendment shall be signed by the parties.
11.4 Any requests for concessions raised by the Supplier, against
the agreed specifications, shall be forwarded to BT Supply
Management (using an agreed change procedure form). Two weeks
notice is required by BT for consideration of the request. No
Supplies may be supplied against the concession until written
agreement has been given by BT Supply Management.
11.5 All concessions may be subject to a discount to the prices of
the Supplies concerned and which must be agreed prior to the
granting of such concession by BT.
<PAGE>
SCHEDULE 1 to CONTRACT NO: 652902 PAGE 10 of 17
- --------------------------------------------------------------------------------
12. ENQUIRY POINTS
The following persons are appointed to answer enquiries in relation to
the Contract as designated:
---------------------------- ----------------------------------------
BT Supplier
---------------------------- ----------------------------------------
Commercial: Niall McDonald Greg Goodall
PP C108 NumereX Corp.
North Star House 2360 Maryland
North Star Avenue Willows Grove
Swindon PA 19090
SN2 1BS USA
Tel: 01793 547241 Tel: (610) 892-0316
Fax: 01793 547175 Fax: (610) 892-0725
---------------------------- ----------------------------------------
Technical: Andy Whitfield Geoff Sellick
Telecom Red Versus Technology Limited
PP703M Unit B7
7th Floor Armstrong Mall
Dial House Southwood Summit Centre
21 Chaple Street Farnborough
Salford M3 7BA Hampshire GU14 0NR
Tel: 0161 600 5152 Tel: 01252 378822
Fax: 0161 839 5860 Fax: 01252 371166
---------------------------- ----------------------------------------
Enquiries relating to particular orders placed under the Contract shall
be referred in the case of BT to the address specified on the relevant
order and in the case of the Supplier to:
Name: Debbie Drummond
Address: Unit B7
Armstrong Mall
Southwood Summit Centre
Farnborough
Hampshire GU14 0NR
Tel: 01252 378822
Fax: 01252 371166
<PAGE>
SCHEDULE 1 to CONTRACT NO: 652902 PAGE 11 of 17
- --------------------------------------------------------------------------------
13. ORDERING ARRANGEMENTS
13.1 The Supplier is to have available sufficient stock to meet
such quantities as may be ordered from time to time, against
estimated quantities detailed in the Contract by British
Telecommunications plc, Supply Management, North Star House,
North Star Avenue, Swindon, SN2 1BS, during the Contract
period.
13.2 The Contract is to allow for 2 types of order:-
(i) Direct Delivery
For all Items, except Item 7, delivery by the
Supplier within 5 working days. For Item 7 (Scanner
Assembly) delivery by the Supplier within 6 weeks.
Receipt of order by the Supplier is construed as day
one of the process. The process must also allow for
an emergency delivery where the Supplier will use his
best endeavour to deliver inside the lead time.
(ii) Depot
Call-offs will be issued by Supply Management for
delivery within 2 weeks from date of order.
14. DELIVERY - DIRECT DISTRIBUTION (Psuedo Contract No 652903)
14.1 The Supplier shall deliver the Supplies ordered by BT to BT at
the address or addresses in the United Kingdom that BT may
specify. For all Items, except Item 7, all orders to be
delivered within 5 working days. For Item 7 all orders to be
delivered within 6 weeks from receipt of order by the
Supplier, unless otherwise specified.
The Supplier shall not, without the prior permission of BT,
deliver any part order (by quantity or by item). In the event
that the Supplies are not available for delivery at the agreed
time, the Supplier shall (without prejudice to BT's rights
under the Contract) immediately inform BT by telephone or
facsimile using Late Order form or telex and confirm such
communication by post.
14.2 Notice of Delivery
Deliveries to Regional Distribution Centres, other staffed or
unstaffed premises, will require the Supplier to give at least
24 hours notice or such deliveries by telephone to the
appropriate District Manager's office. Relevant orders will be
annotated to this effect.
<PAGE>
SCHEDULE 1 to CONTRACT NO: 652902 PAGE 12 of 17
- --------------------------------------------------------------------------------
15. DESPATCH ADVICES - DIRECT DISTRIBUTION (Pseudo Contract No 652903)
------------------------------------------------------------------
One copy to be sent to BT plc, Supply Management, PP C108, North Star
House, North Star Avenue, SWINDON, SN2 1BS on the day the Supplies are
despatched and one copy to be sent with the Supplies either securely
fastened to the outside of the consignment, or handed to the District
Stores on delivery.
16. DELIVERY - DEPOT
16.1 Delivery instructions will be given within 3 working days of
British Telecommunications plc, Supply Management, receiving
details of the Supplies passing inspection at Contractor's
Works. Supplies to be delivered as soon as possible after
receipt of such instructions, but in any event no later than 5
working days therefrom.
The Supplies to be delivered to either or both of the
following BT plc depots: Crayford and Northallerton. (See
"Working with BT" booklet for details of addresses).
16.2 Depot Appointment System and Security
All deliveries must be made on a day specified by the depot.
The Supplier, subcontractors or their agents should give prior
notification of delivery, including the following information:
item description, quantity and Contract number, also the
vehicle registration number, if known. Telephone numbers and
delivery times available are:-
CRAYFORD Tel: 0800 672521. Deliveries may be made
between 7.00 am and 1.45 pm.
NORTHALLERTON Tel: 01609 780091. Deliveries may be made
between 8.00 am and 3.00 pm.
Deliveries will only be accepted on the specified date and
between the hours shown. British Telecommunications plc
Security staff shall, if they so decide, have access at any
time to vehicles of Contractors, subcontractors or their
agents while such vehicle/s are entering, leaving or both any
BT depot to stop and search any such vehicle/s.
16.3 Personal Protective Equipment (PPE)
With effect from 1 May 1997, where deliveries are made to BT
Distribution Sites it is the Supplier's responsibility to
ensure that drivers wear appropriate PPE (high visibility
jerkins, safety shoes, and a safety helmet). From 1 May 1997,
all incorrectly attired drivers will be refused entry to BT
Distribution Sites.
<PAGE>
SCHEDULE 1 to CONTRACT NO: 652902 PAGE 13 of 17
- --------------------------------------------------------------------------------
17. DESPATCH ADVICES: DEPOT DELIVERY
One copy to be enclosed with the Supplies and one copy to be sent to:
BT plc, Supply Management, at the depot to which the Supplies are
consigned. Both Despatch Advices to contain:-
British Telecommunications plc Contract Number
British Telecommunications plc Item Description
British Telecommunications plc Item Code
Contractor's Document Reference
Quantity
Requisition Number and Document Reference Number
Date and Method of Despatch
Consignment Note, Where Applicable
Packaging Details
Delivery Address
18. ELECTRONIC DATA INTERCHANGE (EDI)
At the option of BT, the Supplier agrees to implement an EDI link for
the transmission of documents including SD67s and invoices.
19. CONTRACT MANAGEMENT
19.1 LATE ORDERS FORM - see attached form `a' for late orders which
must be completed and faxed to 01793 547175 for all orders
which will not be delivered by the due date. Any outstanding
orders MUST be reported weekly.
19.2 SELF-MONITORING FORM - See attached form `b'.
The Supplier is to have suitable Monitoring Systems to provide
well structured, accurate and timely reports to BT. The form
is to be completed and returned to BT Supply Management by the
3rd working day of each month.
The table overleaf outlines the input requirements for the
Self Monitoring Form.
<PAGE>
SCHEDULE 1 to CONTRACT NO: 652902 PAGE 14 of 17
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------- ---------------------------------------------------------------------
Data Field Input Requirements
- ------------------------------------------- ---------------------------------------------------------------------
<S> <C>
Supplier Company Name.
- ------------------------------------------- ---------------------------------------------------------------------
Month Enter the month in which the orders were due for delivery.
- ------------------------------------------- ---------------------------------------------------------------------
Contract Number Enter BT Contract number. One form per Contract.
- ------------------------------------------- ---------------------------------------------------------------------
Item Code/Description Insert BT item code followed by description.
- ------------------------------------------- ---------------------------------------------------------------------
Quantity Ordered (Due for delivery in Total quantity on order by BT due for delivery in the reporting
reporting month) month e.g. 100 units were ordered by BT beginning of October, the
lead-time is 2 weeks therefore all
100 are due in October (within the 2
week lead-time), BUT if the
lead-time is 8 weeks then the order
should be recorded in the month it
is due to be delivered.
- ------------------------------------------- ---------------------------------------------------------------------
Quantity Delivered to Depot/Site Total quantity delivered to depot or site within the contractual
lead time, e.g.
100 units = 100% 90 units = 90% ( no arrears)
- ------------------------------------------- ---------------------------------------------------------------------
Value of Quantity Ordered Contract unit price multiplied by the volume of
quantity ordered.
- ------------------------------------------- ---------------------------------------------------------------------
Cumulative Quantity Ordered (Units) Cumulative order quantity from 1 April 1997.
- ------------------------------------------- ---------------------------------------------------------------------
Value Cumulative(pound) Cumulative value of order from 1 April 1997.
- ------------------------------------------- ---------------------------------------------------------------------
Arrears from previous month(s) Quantity of order in arrears to BT from previous
month(s).
- ------------------------------------------- ---------------------------------------------------------------------
% Delivery Performance Quantity delivered divided by Quantity ordered in month plus
Quantity Delivered / (Quantity previous month's arrears*100,
Order + Arrears)*100 e.g. 200 delivered /(100 ordered +250 arrears)*100=57%
- ------------------------------------------- ---------------------------------------------------------------------
Liquidated Damages Applicable for Month The % of Liquidated Damages applicable are outlined in your current
contract. The % is to be applied to the value of the order which
is late, e.g. the order value = (pound)100, the order is late by one
week the LDR = 5%, therefore the value of LDR = (pound)5 (5% of
(pound)100).
- ------------------------------------------- ---------------------------------------------------------------------
Cumulative Liquidated Damages Total damages applicable to each item from 1 April 1997.
- ------------------------------------------- ---------------------------------------------------------------------
Quantity of finished stock held Volume of finished stock held at manufacturers.
- ------------------------------------------- ---------------------------------------------------------------------
</TABLE>
<PAGE>
SCHEDULE 1 to CONTRACT NO: 652902 PAGE 15 of 17
- --------------------------------------------------------------------------------
Form `a'
LATE ORDERS REPORT
<TABLE>
<CAPTION>
- ------------------------ ------------------------------------------------------------- ---------------------------------------------
COMPANY: VERSUS TECHNOLOGY LIMITED CONTRACT NO:
- ------------------------ ----------------- --------------------- --------------------- ---------------------------------------------
PROPOSED
REQ NO./ ITEM DUE DELIVERY REASON LATE/
CALL OFF REF CODE DATE DATE ACTION TAKEN
- ------------------------ ----------------- --------------------- --------------------- ---------------------------------------------
<S> <C> <C> <C> <C>
- ------------------------ ----------------- --------------------- --------------------- ---------------------------------------------
- ------------------------ ----------------- --------------------- --------------------- ---------------------------------------------
- ------------------------ ----------------- --------------------- --------------------- ---------------------------------------------
- ------------------------ ----------------- --------------------- --------------------- ---------------------------------------------
- ------------------------ ----------------- --------------------- --------------------- ---------------------------------------------
- ------------------------ ----------------- --------------------- --------------------- ---------------------------------------------
- ------------------------ ----------------- --------------------- --------------------- ---------------------------------------------
- ------------------------ ----------------- --------------------- --------------------- ---------------------------------------------
- ------------------------ ----------------- --------------------- --------------------- ---------------------------------------------
- ------------------------ ----------------- --------------------- --------------------- ---------------------------------------------
- ------------------------ ----------------- --------------------- --------------------- ---------------------------------------------
- ------------------------ ----------------- --------------------- --------------------- ---------------------------------------------
- ------------------------ ----------------- --------------------- --------------------- ---------------------------------------------
</TABLE>
<PAGE>
SCHEDULE 1 to CONTRACT NO: 652902 PAGE 16 of 17
- --------------------------------------------------------------------------------
Form `b'
SUPPLIER DELIVERY PERFORMANCE
SELF MONITORING FORM
SUPPLIER: VERSUS TECHNOLOGY LIMITED
<TABLE>
<CAPTION>
CONTRACT No: ....................... MONTH:......................
- ----------------------------- -------------- --------------- -------------- ----------------- ---------------- -------------
ITEM CODE/ QUANTITY QUANTITY VALUE OF CUMULATIVE VALUE ARREARS
DESCRIPTION ORDERED (DUE DELIVERED TO QUANTITY QUANTITY CUMULATIVE FROM
FOR DELIVERY DEPOT/ SITE ORDERED ORDERED (UNITS) (pound) PREVIOUS
IN REPORTING MONTH(S)
MONTH)
- ----------------------------- -------------- --------------- -------------- ----------------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------- -------------- --------------- -------------- ----------------- ---------------- -------------
- ----------------------------- -------------- --------------- -------------- ----------------- ---------------- -------------
- ----------------------------- -------------- --------------- -------------- ----------------- ---------------- -------------
- ----------------------------- -------------- --------------- -------------- ----------------- ---------------- -------------
- ----------------------------- -------------- --------------- -------------- ----------------- ---------------- -------------
- ----------------------------- -------------- --------------- -------------- ----------------- ---------------- -------------
- ----------------------------- -------------- --------------- -------------- ----------------- ---------------- -------------
- ----------------------------- -------------- --------------- -------------- ----------------- ---------------- -------------
- ----------------------------- -------------- --------------- -------------- ----------------- ---------------- -------------
- ----------------------------- -------------- --------------- -------------- ----------------- ---------------- -------------
- ----------------------------- -------------- --------------- -------------- ----------------- ---------------- -------------
- ----------------------------- -------------- --------------- -------------- ----------------- ---------------- -------------
- ----------------------------- -------------- --------------- -------------- ----------------- ---------------- -------------
- ----------------------------- -------------- --------------- -------------- ----------------- ---------------- -------------
- ----------------------------- -------------- --------------- -------------- ----------------- ---------------- -------------
TOTAL
- ----------------------------- -------------- --------------- -------------- ----------------- ---------------- -------------
<CAPTION>
- --------------------- --------------- ---------------- ---------------
% DELIVERY LIQUIDATED CUMULATIVE QUANTITY OF
PERFORMANCE DAMAGES LIQUIDATED FINISHED
Quantity Delivered APPLICABLE DAMAGES STOCK HELD
/ (Quantity Order FOR MONTH
+ Arrears)*100
- --------------------- --------------- ---------------- ---------------
<S> <C> <C> <C>
- --------------------- --------------- ---------------- ---------------
- --------------------- --------------- ---------------- ---------------
- --------------------- --------------- ---------------- ---------------
- --------------------- --------------- ---------------- ---------------
- --------------------- --------------- ---------------- ---------------
- --------------------- --------------- ---------------- ---------------
- --------------------- --------------- ---------------- ---------------
- --------------------- --------------- ---------------- ---------------
- --------------------- --------------- ---------------- ---------------
- --------------------- --------------- ---------------- ---------------
- --------------------- --------------- ---------------- ---------------
- --------------------- --------------- ---------------- ---------------
- --------------------- --------------- ---------------- ---------------
- --------------------- --------------- ---------------- ---------------
- --------------------- --------------- ---------------- ---------------
</TABLE>
<PAGE>
SCHEDULE 1 to CONTRACT NO: 652902 PAGE 17 of 17
- --------------------------------------------------------------------------------
20. GRADE OF SERVICE
20.1 The Supplier is required to meet 100% Grade of Service.
20.2 The Grade of Service is defined as the number of times the
Supplier achieves delivery of individual orders within the
lead time for each calendar month, expressed in terms of a
percentage.
21. PACKAGING AND LABELLING
As detailed in the Schedule 5.
22. ORDER OF PRECEDENCE
To the extent which the following documents form part of or apply to
the Contract, they shall in the case of conflict have the order of
precedence in which they are listed below:
(i) Schedule 1 - Requirements
(ii) Contract Conditions
(iii) Technical Requirements
(iv) Generic Standards
(v) Subcontractors
<PAGE>
SCHEDULE 1 to CONTRACT NO: 652902 PAGE 1 of 1
APPENDIX A
- --------------------------------------------------------------------------------
FIXED PRICES FOR THE DURATION OF CONTRACT
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
ITEM DESCRIPTION ESTIMATED DELIVERY TO DEPOT OR ANYWHERE IN UK EX-WORKS
ITEM CODE QUANTITY
- ---- ------ --------------------------- --------------- ---------------------------------------- --------------------------------
<S> <C> <C> <C> <C>
1 502270 Dual Link Board * * *
- ---- ------ --------------------------- --------------- ---------------------------------------- --------------------------------
2 502319 Dual Microscanner Chassis
- ---- ------ --------------------------- --------------- ---------------------------------------- --------------------------------
3 502279 Processor
- ---- ------ --------------------------- --------------- ---------------------------------------- --------------------------------
4 502280 PSIM
- ---- ------ --------------------------- --------------- ---------------------------------------- --------------------------------
5 502298 X-R Pair
- ---- ------ --------------------------- --------------- ---------------------------------------- --------------------------------
6 502299 X-Sim
- ---- ------ --------------------------- --------------- ---------------------------------------- --------------------------------
7 502323 Scanner Assembly
- ---- ------ --------------------------- --------------- ---------------------------------------- --------------------------------
8a 502434 LinkGuard Board
- ---- ------ --------------------------- --------------- ---------------------------------------- --------------------------------
8b 502434 LinkGuard Board
- ---- ------ --------------------------- --------------- ---------------------------------------- --------------------------------
9 502435 PSIM Modification
- ---- ------ --------------------------- --------------- ---------------------------------------- --------------------------------
10 502436 Processor Modification
- ---- ------ --------------------------- --------------- ---------------------------------------- --------------------------------
11 502437 LinkGuard Management System
- ---- ------ --------------------------- --------------- ---------------------------------------- --------------------------------
12 502438 PSIM V24 0.25M Cord
- ---- ------ --------------------------- --------------- ---------------------------------------- --------------------------------
13 502439 PSIM V24 1.0M Cord
- ---- ------ --------------------------- --------------- ---------------------------------------- --------------------------------
14 502440 PSIM V24 2.0M Cord
- ---- ------ --------------------------- --------------- ---------------------------------------- --------------------------------
15 502441 PSIM V24 3.0M Cord
- ---- ------ --------------------------- --------------- ---------------------------------------- --------------------------------
16 502442 Processor V24 0.25M Cord
- ---- ------ --------------------------- --------------- ---------------------------------------- --------------------------------
17 502443 Processor V24 1.0M Cord
- ---- ------ --------------------------- --------------- ---------------------------------------- --------------------------------
18 502444 Processor V24 2.0M Cord
- ---- ------ --------------------------- --------------- ---------------------------------------- --------------------------------
19 502445 Processor V24 3.0M Cord
- ---- ------ --------------------------- --------------- ---------------------------------------- --------------------------------
20 502446 De-bug Cable 5.0M
- ---- ------ --------------------------- --------------- ---------------------------------------- --------------------------------
</TABLE>
Note: Item 8a. The price for this item is based on the placement of a single
order for 5000 items for supply over an agreed period
* Confidential information which has been omitted pursuant to Rule 24b-2
under the Securities Exchange Act of 1934 and filed separately with the SEC.
<PAGE>
------------------------------------------------------------------------
SCHEDULE 2
CONDITIONS OF CONTRACT
CONTRACT NO: 652902
------------------------------------------------------------------------
<PAGE>
SCHEDULE 2 to CONTRACT NO: 652902 PAGE 1 of 21
- --------------------------------------------------------------------------------
CONTENTS
1. DEFINITIONS
2. QUALITY OF SUPPLIES
3. COMPLIANCE WITH LAWS AND REGULATIONS
4. PRICING
5. PAYMENT AND INVOICING
6. ASSIGNMENT AND SUBCONTRACTING
7. ACCESS, ASSISTANCE AND PROGRESS REPORTS
8. MISTAKES IN INFORMATION
9. BT SUPPLIED ITEMS AND PROPERTY
10. GUARANTEE
11. TITLE AND RISK
12. INFORMATION
13. CONFIDENTIALITY
14. FORCE MAJEURE
15. DEFAULT
16. RIGHT TO REJECT
17. LICENCE TO USE INFORMATION
18. DELIVERY
19. REPAIRABILITY
20. SUPPORT AND SPARES
21. INTERFACE WITH OTHER EQUIPMENT
22. TERMINATION
23. INDEMNITY - INTELLECTUAL PROPERTY
24. INDEMNITY - GENERAL
25. LIMITATION OF LIABILITY
26. INSURANCE
27. CONTRACT CHANGE PROCEDURE
28. NOTICES
29. GENERAL
30. DOCUMENTATION
31. USE, TRANSFERABILITY, MAINTENANCE AND MODIFICATION OF SOFTWARE
32. VIRUSES AND ELECTRONIC REPOSSESSION
<PAGE>
SCHEDULE 2 to CONTRACT NO: 652902 PAGE 2 of 21
- --------------------------------------------------------------------------------
GENERAL CONDITIONS
1. DEFINITIONS
In the Contract, the following expressions shall have the meanings, if
any, ascribed to them:
- ------------------------------- ----------------------------------------------
Expression Meaning
- ------------------------------- ----------------------------------------------
Commencement Date Date of Contract
- ------------------------------- ----------------------------------------------
Contract Period 24 months
- ------------------------------- ----------------------------------------------
Payment Period 30 working days on average
- ------------------------------- ----------------------------------------------
Liquidated Damages Rate (LDR) 5% per week or part of delay
- ------------------------------- ----------------------------------------------
Maximum LDR (MLDR) 20%
- ------------------------------- ----------------------------------------------
Invoice Address Accounts Payable Centre
PO Box 998
Telecoms House
91 London Road
MANCHESTER M60 1RT
- ------------------------------- ----------------------------------------------
Guarantee Period 24 months
- ------------------------------- ----------------------------------------------
Supplier's Commercial Contact As detailed in Schedule 1
- ------------------------------- ----------------------------------------------
Supplier's Technical Contact As detailed in Schedule 1
- ------------------------------- ----------------------------------------------
BT's Commercial Contact Niall McDonald
PP C108
North Star House
North Star Avenue
SWINDON SN2 1BS
Tel: 01793 547241
Fax: 01793 547175
- ------------------------------- ----------------------------------------------
BT's Technical Contact As detailed in Schedule 1
- ------------------------------- ----------------------------------------------
BT's Quality Contact Niall McDonald
address as above
- ------------------------------- ----------------------------------------------
Support Period 7 years for Items 1, 2, 3, 4, 5, 6 and 7
5 years for Items 8 to 20
- ------------------------------- ----------------------------------------------
<PAGE>
SCHEDULE 2 to CONTRACT NO: 652902 PAGE 3 of 21
- --------------------------------------------------------------------------------
1. DEFINITIONS (continued)
"Booklet"
- The Working with BT Booklet issue number 3.
"BT"
- British Telecommunications plc, its successors and assigns
and, where appropriate, companies within the BT Group of
companies.
"BT Network"
- All exchange equipment, transmission equipment, network
terminating equipment, line plant, power plant and ancillary
equipment, owned or operated by BT.
"BT Supplied Items"
- All items provided by BT to the Supplier in connection with
this Contract.
"Contract"
- This Contract.
"Contract Price"
- The total sum payable to the Supplier by BT for Supplies.
"Contract Personnel"
- The Supplier's employees, subcontractors and agents (and their
employees, subcontractors and agents) engaged in the
performance of the Contract.
"Design Information"
- Any Information furnished by BT concerning the purpose,
function, design or manufacture of Supplies.
"Equipment"
- All components, materials, plant, tools, test equipment,
documentation, hardware, firmware, Software and things
comprised in Supplies.
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SCHEDULE 2 to CONTRACT NO: 652902 PAGE 4 of 21
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"Foreground Information"
- All information generated in the course of or arising from the
performance of the Contract.
"Information"
- Information whether written or oral or any other form,
including, but not limited to, documentation, specifications,
reports, data, notes, drawings, models, patterns, samples,
software, computer outputs, designs, circuit diagrams,
inventions, whether patentable or not and know-how.
"Intellectual Property Right"
- Any patent, petty patent, registered design, copyright, design
right, semiconductor topography right, know-how, or any
similar right exerciseable in any part of the world and shall
include any applications for the registration of any patents
or registered designs or similar registrable rights in any
part of the world.
"Site"
- Premises specified by BT, upon which the Supplier is to
install and/or deliver Supplies.
"Software"
- All computer programs including but not limited to all source
code and object code whether in machine readable, optically
readable or any other format comprised in Supplies and the
media on which it is supplied.
"Specification"
- Any specification of Supplies provided by BT.
"Subcontractor"
- Any person, partnership or corporation with whom the Supplier
places a contract and/or an order for the supply of any
equipment, item, service or for any work in relation to the
Contract, and "subcontract" shall be construed accordingly.
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SCHEDULE 2 to CONTRACT NO: 652902 PAGE 5 of 21
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"Supplies"
- All Equipment, Information, Work and, where applicable,
Repairable Equipment the Contract requires to be supplied to
or performed for BT.
"Tooling"
- Any equipment and software developed, produced or utilised at
any time for the manufacture of Supplies and owned or paid for
or to be paid for or supplied by BT.
"Work"
- Work the Contract requires to be undertaken for BT.
2. QUALITY OF SUPPLIES
a) Supplies shall be to BT's reasonable satisfaction, comply with
the latest applicable issue of European and International
Standards and other documents referred to in the Contract and,
unless required by the Contract, shall be brand new and not
used, reconditioned, repaired or refurbished.
b) Millennium Warranty: The Supplier warrants that the Supplies
are, where applicable, fully compatible (without modification,
loss of performance, loss of use, or work or expense on the
part of BT) with changes to inputs, outputs or other
information in relation to dates arising in the year 2000 and
beyond.
3. COMPLIANCE WITH LAWS AND REGULATIONS
The Supplier and Supplies shall comply with:
a) the requirements of the Booklet, all applicable legislation,
regulations or by-laws of a Local or other Authority; and
b) any BT site regulations that may be notified to the Supplier.
4. PRICING
The Contract Price and all other prices payable by BT shall be
inclusive, where relevant, of all non-returnable packing, delivery to
Site, unless otherwise stated, any licence fees, installation, testing
and commissioning and all other charges associated with Supplies but
shall exclude VAT.
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SCHEDULE 2 to CONTRACT NO: 652902 PAGE 6 of 21
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5. PAYMENT AND INVOICING
5.1 BT will pay invoices submitted in accordance with paragraph 6
of Schedule 1 within the Payment Period commencing on the date
of receipt of a valid invoice. Payment of 100% of the Contract
Price shall become due upon complete performance of the
Contract.
6. ASSIGNMENT AND SUBCONTRACTING
6.1 The Supplier shall not, without BT's written consent, which
shall not be unreasonably withheld, assign or subcontract the
whole or any part of the Contract. Any consent, if given,
shall not affect the Supplier's obligations or liabilities
under the Contract. At the outset of the Contract the list of
agreed sub-contractors is detailed in Schedule 5 to this
Contract.
6.2 The Supplier shall allow BT access to its subcontractors for
the purpose of validating compliance with the terms of this
contract. BT would intend to do this via general audit, and/or
through individual quality and capability assessments.
7. ACCESS, ASSISTANCE & PROGRESS REPORTS
The Supplier shall:
a) ensure that BT (or any person authorised by BT) shall have
access at all reasonable times to the premises of the
Supplier, and those of any subcontractor, as BT may require to
assess the progress of the Contract; and
b) render such reports to BT on the performance of the Contract,
and attend such meetings, as may be reasonably required by BT;
and
c) nominate a suitable representative to attend all such
meetings. The representative shall be fully conversant at all
times with the performance of the Contract.
8. MISTAKES IN INFORMATION
8.1 The Supplier shall inform BT in writing of any mistakes in
Design Information within a reasonable time of receipt.
8.2 Any mistakes in Information owned or controlled by the
Supplier and in any Foreground Information shall be the
Supplier's responsibility to remedy at its cost whether such
Information has been approved by BT
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or not. Where any such remedial work is undertaken by BT the
Supplier shall bear all costs, provided that BT shall first
have notified the Supplier in writing of its intention to
perform such remedial work and provided the Supplier the
option of performing the work itself. Should BT proceed to
perfom the remedial work without having provided the Supplier
said option and the Supplier not having declined in writing to
perform said work, BT shall bear all costs.
9. BT SUPPLIED ITEMS AND PROPERTY
9.1 All BT Supplied Items shall remain the property of BT. The
Supplier shall return them to BT upon completion or
termination of the Contract or earlier reasonable request by
BT. The Supplier shall keep the BT Supplied Items, and (before
their delivery to BT) any Supplies, items or things that are
or have become BT's property ("BT property"), in safe custody
and good condition, set aside and clearly marked as BT
property.
9.2 Upon receipt of the BT Supplied Items, the Supplier shall
satisfy itself that they are not defective or deficient for
the purpose for which they are being provided, and within 14
days of receipt shall notify BT of any defects or
deficiencies.
9.3 The Supplier shall not, without the prior written consent of
BT, use BT Supplied Items for any purpose other than is
necessary for the performance of the Contract, or allow any
other party to use, take possession of, or have any rights or
lien over BT Supplied Items or BT property.
9.4 Without limiting the generality of the Supplier's obligations,
the Supplier shall not have, and shall ensure that Contract
Personnel shall not have, a lien on the BT Supplied Items or
BT property for any sum due. The Supplier shall take all
reasonable steps to ensure the title of BT and the exclusion
of such lien are brought to the notice of all Contract
Personnel dealing with any BT Supplied Items or BT property.
9.5 In the event of any threatened seizure of any BT Supplied
Items or BT property or in the event of the Supplier (or any
Contract Personnel in possession of such BT Supplied Items or
property) going into receivership, administration or
liquidation (or the equivalent of any of these) the Supplier
shall:
a) notify BT immediately; and,
b) draw to the attention of the relevant official that
BT Supplied Items and BT property are the property of
BT and do not form part of the Supplier's assets;
and,
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SCHEDULE 2 to CONTRACT NO: 652902 PAGE 8 of 21
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c) allow BT to enter the Supplier's premises or those of
any Contract Personnel where BT Supplied Items or BT
property are stored and take possession of them.
10. GUARANTEE
10.1 Without prejudice to any rights or remedies available to BT,
the Supplier shall at its own cost promptly remedy (by repair,
replacement or modification, at BT's option), any defects in
Supplies notified by BT and which become apparent during the
Guarantee Period, due to:
a) defective workmanship or materials; or,
b) faulty design, (other than a design made or furnished
or specified by BT and for which the Supplier has
previously disclaimed responsibility in writing
within a reasonable time of receipt): or,
c) any act, neglect or omission by the Supplier or
Contract Personnel.
10.2 The Supplier shall:
a) ensure that any remedied part of Supplies is
compatible with all Supplies; and
b) complete the remedy to the satisfaction of BT within
10 working days of receipt from BT of the defective
Supplies; and
c) ensure that defective Supplies are not remedied on BT
premises without BT's consent, unless, for
operational or technical reasons they can only be
removed or replaced with difficulty; and
d) cause the minimum of disruption to BT and/or its
customers in effecting any remedy. The time at which
any remedy is to be effected out shall be agreed with
BT and BT may at its discretion direct the Supplier
to work outside normal working hours at no cost to
BT.
10.3 The unexpired period of the Guarantee Period or, if longer, a
further guarantee period of 6 months, and the provisions of
this Condition, shall apply to all repaired or replacement
Supplies and parts.
The Supplier shall, upon receipt of Supplies returned under
this Condition, immediately investigate those Supplies and
take all necessary corrective action to prevent recurrence of
the defects in any
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SCHEDULE 2 to CONTRACT NO: 652902 PAGE 9 of 21
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Supplies to be supplied under the Contract. The Supplier shall
on a monthly basis report in writing to BT's Technical Contact
the outcome of all such investigations not previously so
reported. The information required in this report shall be as
follows:-
a) a summary of the quantities of each type of Supplies
returned to BT under this Condition, the quantities
investigated the results of the investigation and the
quantities awaiting investigation.
b) a full defect analysis including:
- the BT item description
- the serial number
- the manufacturing date
- the reported fault
- the results of any tests carried out,
including (without limitation) any simulated
tests such as simulated customer tests,
factory functional tests and soak tests
- failed component analysis
- failure mechanisms
- corrective action necessary
c) the details of any corrective action taken to prevent
a recurrence of defects.
d) without prejudice to the rights of BT under this
Condition, the reasons for any Supplies returned not
being accepted under the terms of this guarantee and
a breakdown of those Suppliers by the code number
quoted on any applicable fault label supplied.
10.4 The obligation set out in this clause shall not apply to
defects in the Supplies caused by the negligence or wilful
damage by BT.
11. TITLE AND RISK
11.1 Without prejudice to BT's right to reject under the Contract,
the title in Supplies shall pass to BT upon the earlier of
delivery or the passing of risk or payment (including any part
payment) and shall be free from any claims or encumbrance
whatsoever.
11.2 If any Supplies are rejected by BT or the Contract is
terminated, title to any Supplies not accepted by BT and any
materials or things which have not been incorporated in any
part of accepted Supplies, shall re-vest in the Supplier on
the expiration of 30 days from the date on which such
termination or rejection takes effect unless BT gives notice
to the Supplier within such period that it intends to either
issue a certificate of Commercial Service in respect of the
rejected Supplies or otherwise retain title in them.
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11.3 Any payment made by BT for Supplies, materials or things which
re-vest in the Supplier is a sum due to BT from the Supplier.
11.4 The Supplier shall deliver to BT any Supplies the title in
which BT has elected to retain under this Condition and if it
shall fail to do so BT may enter the Supplier's premises and
remove such Supplies and recover the cost of so doing from the
Supplier, subject to BT paying a fair and reasonable price for
such Supplies.
11.5 The risk of loss of or damage to Supplies shall pass to BT
upon delivery.
12. INFORMATION
12.1 Either party that has in the course of the Contract received
information in a recorded form from the other (or has recorded
received information) shall return these records upon
a) expiry or termination of the Contract; or
b) earlier upon reasonable request
unless such records are part of the Supplies.
13. CONFIDENTIALITY
13.1 Either party receiving Information ("the Recipient") from the
other shall not without the prior written consent of the other
use the Information other than for the purposes of the
Contract or disclose the Information to any person other than
BT employees or Contract Personnel who have a need to know.
13.2 Paragraph 1 of this Condition shall not apply to Information
that is:
a) published or becomes so otherwise than by a breach of
the Contract; or
b) lawfully known to the recipient at the time of
disclosure and is not subject to any obligations of
confidentiality; or
c) lawfully disclosed to the recipient without any
obligations of confidentiality by a third party; or
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SCHEDULE 2 to CONTRACT NO: 652902 PAGE 11 of 21
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d) replicated by development independently carried out
by or for the recipient by an employee or other
person without access or knowledge of the
Information.
13.3 The Supplier shall ensure that any subcontractor is bound by
similar confidentiality terms to those in the Condition.
13.4 Without prejudice to any prior obligations of confidentiality
it may have, the Supplier shall ensure that no publicity,
relating to the Contract, shall take place without the prior
written consent of BT.
13.5 Paragraph 13.4 of this condition shall not apply to the extent
that it conflicts with any legal obligations of the Supplier
or its ultimate parent company. The Supplier shall give BT
advance notice of any intended publications, together with
evidence of the Supplier's legal obligation to publish the
material.
14. FORCE MAJEURE
14.1 Neither party shall be liable to the other party for any delay
in the performance of the Contract directly caused by any
event beyond its reasonable control ("the Force Majeure
Period") provided such party shall have first given the other
party written notice within seven days after becoming aware
that such delay was likely to occur.
14.2 If the Supplier is so delayed and the Force Majeure period
exceeds 25 days, BT shall have the option by written notice to
the Supplier to terminate the Contract forthwith in whole or
in part and have no liability for the whole or part so
terminated.
14.3 For the avoidance of doubt, the provisions of this Condition
shall not affect BT's right to terminate the Contract under
Paragraph 4 of the Condition headed "Termination".
15. DEFAULT
15.1 Subject to the provisions of the Condition headed "Force
Majeure", if the Supplier does not deliver, install, or
complete (as the case may be) any Supplies by the due date,
the Supplier shall be in breach of the Contract and shall pay
to BT on request an amount of liquidated damages in respect of
such delay at the LDR up to the MLDR of the price of the
delayed Supplies.
15.2 BT may, at its option, at any time deduct any amount of
liquidated damages then due from the Supplier to BT from any
sums then due from BT to the Supplier and any not so deducted
may be recovered by BT from the Supplier as a debt.
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SCHEDULE 2 to CONTRACT NO: 652902 PAGE 12 of 21
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15.3 Payment of, or BT's right to, liquidated damages under this
Condition shall not affect any of BT's rights under the
Condition headed "Termination".
16. RIGHT TO REJECT
16.1 BT shall have the right to reject the whole or any part of the
Supplies that it reasonably considers are not in accordance
with the Contract.
16.2 The Supplier shall at its own risk and expense, replace
rejected Supplies with Supplies that accord with the Contract
within 14 days of notice of rejection from BT.
16.3 Initial receipt of Supplies at the delivery point may be
signed for as unexamined and this shall not affect BT's rights
subsequently to reject those Supplies. Where subsequent
checking shows a deficiency in the quantity of Supplies
delivered, the Supplier shall make good the deficiency within
14 days of notice from BT of the deficiency.
17. LICENCE TO USE INFORMATION
Notwithstanding any other Condition, the Supplier hereby grants to BT
non-exclusive, royalty free, world-wide rights, by or on behalf of BT,
to copy and use information supplied under the Contract or derived by
BT from the Supplies as necessary for the purpose of interfacing with
other equipment as may form part of the BT Network or any other
telecommunications network of those countries listed in Appendix A to
this Schedule.
BT will seek the agreement of the Supplier to extend the license to
such other countries as BT may require. The Supplier shall not
unreasonably withhold such agreement. The extension of the licence will
be subject to BT and the relevant party within the country. Any such
information disclosed to a third party will be performed under a
mutually acceptable non-disclosure agreement.
For such purpose, the Supplier shall promptly provide such additional
Information as BT may request. BT shall pay the costs of the collation,
reproduction and despatch of the Information.
BT shall not deploy any Supplies purchased against this Contract in
any country outside of the UK without the prior agreement of the
Supplier. Such agreement shall not be unreasonably withheld.
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SCHEDULE 2 to CONTRACT NO: 652902 PAGE 13 of 21
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18. DELIVERY
18.1 The Supplier shall deliver Supplies in accordance with the
Contract for time of delivery. If no time is so specified, the
Supplier shall deliver Supplies in accordance with such
timescales as the parties may agree or as BT may specify.
18.2 The Supplier shall deliver Supplies ordered by BT to BT at the
addresses in the United Kingdom of Great Britain and Northern
Ireland that BT may specify.
19. REPAIRABILITY
19.1 The Supplier agrees to apply no more than a 20% Gross Margin
on the cost of materials and labour for the repair of any
items supplied against this Contract (that are not subject to
warranty). The Supplier agrees that BT shall have the right to
audit material and labour costs to satisfy themselves that
they are reasonable. If BT does not agree that such costs are
reasonable then the Supplier shall supply to BT as soon as is
reasonably practicable after a request from BT such
Information (including all revisions and updates) in such
format as BT shall reasonably require to enable BT to repair
Supplies or have them repaired by a competent supplier.
19.2 In respect of all components comprised or to be comprised in
Supplies, the Supplier shall:
a) ensure they can be obtained from more than one source
or notify BT accordingly; and
b) ensure they or their specification can be supplied to
BT at any time on request so as to enable manufacture
by any competent supplier.
c) inform BT at least six months before a component
supplier will cease to be able to supply; and,
d) ensure availability of those that are custom-designed
to BT or its suppliers on fair and reasonable terms
or ensure availability of specifications so as to
enable manufacture by any competent supplier; and
e) ensure that any such provisions and undertakings in
any subcontract referred to in this Condition are
fully observed and performed by the subcontractor;
and,
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SCHEDULE 2 to CONTRACT NO: 652902 PAGE 14 of 21
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f) notify BT immediately a fault is identified at any
time in their manufacture and in particular, but
without limitation, where BT has already purchased
affected components.
19.3 No separate licence fees shall be payable by BT for the use of
Information supplied in accordance with this Condition. The
Supplier warrants that BT, and any manufacturer or other
supplier nominated by BT, are and shall remain free to use
such Information for the manufacture and supply of components
for use by BT or any third parties in repairing and
maintaining Supplies.
20. SUPPORT AND SPARES
20.1 The Supplier shall ensure availability of such spares and
support as BT may require for the Support Period commencing on
the Commencement Date.
20.2 The Supplier shall by prompt written notice, offer BT such new
or amended versions of Supplies and parts, as may be developed
throughout the Contract Period for the Support Period, but BT
shall not be obliged to accept them.
21. INTERFACE WITH OTHER EQUIPMENT
21.1 The Supplier shall ensure the successful interworking of
Supplies in or with the BT Network, or any other network
specified by BT, existing at the Commencement Date and that
Supplies do not impair or degrade the performance or operation
of the BT Network.
21.2 Within 2 months of any request by BT the Supplier shall
supply, at its own cost such Information as BT may reasonably
require to enable BT to interface and fully interwork Supplies
with the BT Network or any other telecommunications network.
22. TERMINATION
22.1 If the Supplier commits a material breach or persistent
breaches of the Contract, and in the case of a breach which is
capable of remedy, fails to remedy the breach within 14 days
(or such longer period as BT may at its option agree in
writing) of written notice from BT to do so then BT shall have
the right:
a) at any time to terminate the Contract forthwith as a
whole or (at BT's option) in respect of any part of
the Contract to be performed; and
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SCHEDULE 2 to CONTRACT NO: 652902 PAGE 15 of 21
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b) to recover from the Supplier all directly resulting
losses and expenses (including, without limitation,
the additional cost of completing Supplies, or having
Supplies completed by another supplier, to a similar
standard).
22.2 BT shall have the right at any time to terminate the Contract
forthwith and to recover from the Supplier all directly
resulting losses and expenses (including, without limitation,
the additional cost of completing the Supplies, or having the
Supplies completed by another supplier, to a similar standard)
if the Supplier shall become insolvent or ceases to trade or
compound with its creditors; or a bankruptcy petition or order
is presented or made against the Supplier; or where the
Supplier is a partnership, against any one partner, or if a
trustee in sequestration is appointed in respect of the assets
of the Supplier or (where applicable) any one partner; or a
receiver or an administrative receiver is appointed in respect
of any of the Supplier's assets; or a petition for an
administration order is presented or such an order is made in
relation to the supplier; or a resolution or petition or order
to wind up the Supplier is passed or presented or made or a
liquidator is appointed in respect of the Supplier (otherwise
than for reconstruction or amalgamation).
22.3 BT may at any time on written notice terminate the Contract
forthwith if the ownership or control of the Supplier is
materially changed to (in BT's reasonable opinion) BT's
detriment.
22.4 BT may at any time on written notice terminate the Contract
forthwith. Where BT terminates the Contract under this
paragraph 4 and does not have any other right to terminate the
Contract, the following shall apply:
a) BT shall subject to subparagraph (b) below, pay the
Supplier such amounts as may be necessary to cover
its reasonable costs and outstanding and unavoidable
commitments (and reasonable profit thereon)
necessarily and solely incurred in properly
performing the Contract in relation to Applicable
Supplies (as defined below) prior to termination.
b) BT shall not pay for any such costs or commitments
that the Supplier is able to mitigate and shall only
pay costs and commitments that BT has validated to
its satisfaction. BT shall not be liable to pay for
any Applicable Supplies that, at the date of
termination, BT is entitled to reject (including any
Supplies for which BT may have issued a Certificate
of Commercial Service) or has already rejected. BT's
total liability under sub-paragraph (a) above shall
not in any circumstances exceed the
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SCHEDULE 2 to CONTRACT NO: 652902 PAGE 16 of 21
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price that would have been payable by BT for
Applicable Supplies if the Contract had not been
terminated.
c) In this paragraph 4, "Applicable Supplies" means
Supplies in respect of which the Contract has been
terminated under this paragraph, which were ordered
by BT under the Contract before the date of
termination, and for which payment has not at that
date become due from BT.
d) Sub-paragraphs (a) and (b) above encompass the total
liability of BT for termination pursuant to this
Paragraph 4, and BT shall be liable for no other
costs, claims, damages, or expenses consequent upon
such termination.
22.5 Each right of BT under this Condition is without prejudice to
any other right of BT under this Condition or otherwise.
23. INDEMNITY - INTELLECTUAL PROPERTY
23.1 The Supplier indemnifies BT against all actions, claims,
proceedings, damages, costs and expenses arising from any
actual or alleged infringement of Intellectual Property Rights
or breach of confidentiality by BT's possession or use of any
of the Supplies anywhere licensed to BT in the United Kingdom.
23.2 BT shall notify the Supplier in writing of any such allegation
received by BT and shall not make any admissions unless the
Supplier gives prior written consent.
23.3 At the Suppliers request and expense, BT shall permit the
Supplier to conduct all negotiations and litigation. BT shall
give all reasonable assistance and the Supplier shall pay BT's
costs and expenses so incurred.
23.4 The Supplier may, at its expense, modify or replace the
Supplies to avoid any alleged or actual infringement or
breach. The modification or replacement must not affect the
performance of the Supplies.
23.5 This indemnity shall not apply to infringements or breaches
arising directly from:
a) compliance with the Design Information where such
compliance inevitably results in the infringement.
This exception does not apply to infringements
resulting from a BT requirement that the Supplies
comply with a national or international standard; or
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SCHEDULE 2 to CONTRACT NO: 652902 PAGE 17 of 21
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b) the combination of the Supplies with other items not
supplied under the Contract.
23.6 Without prejudice to paragraph 5 (a) of this Condition, BT
warrants that compliance with any such design provided under
the Contract will not cause infringement or breach.
23.7 This Condition shall survive the expiry or termination of the
Contract.
24. INDEMNITY - GENERAL
Without prejudice to any other rights or remedies available to BT, the
Supplier shall indemnify BT against all loss of or damage to any BT
property to the extent arising as a result of the negligence or wilful
acts or omissions of the supplier or Contract Personnel in relation to
the performance of the Contract; and all claims and proceedings,
damages, costs and expenses arising or incurred in respect of:
a) death or personal injury of any Contract Personnel in relation
to the performance of the Contract, except to the extent
caused by BT's negligence; or
b) death or personal injury of any other person to the extent
arising as a result of the negligence or wilful acts or
omissions of the Supplier or Contract Personnel in relation to
the performance of the Contract; or
c) loss of or damage to any property to the extent arising as a
result of the negligence or wilful acts or omissions of the
Supplier or Contract personnel in relation to the performance
of the Contract;
d) or under Part 1 of the Consumer Protection Act 1987 in
relation to Supplies.
25. LIMITATION OF LIABILITY
25.1 Subject to Paragraph 3 of this Condition, neither party shall
be liable to the other under the Contract for any indirect or
consequential loss or damage.
25.2 Subject to Paragraph 3 of this Condition the liability of
either party to the other under this Contract shall not exceed
(pound)2,000,000 per unrelated incident or the greater of
(pound)6,000,000 or the Contract Price in aggregate.
25.3 Paragraphs 1 and 2 of this Condition shall not apply to loss
or damage arising out of or in connection with:
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(i) death or personal injury; or
(ii) the wilful failure of either party to perform its
contractual obligations; or
(iii) paragraph d) of the Condition headed "Indemnity"; or
(iv) the payment of liquidated damages; or
(v) BT's obligation to pay the Contract Price.
(vi) the condition headed `Intellectual Property'
26. INSURANCE
26.1 The Supplier shall at its own expense effect and maintain for
the Contract Period such insurance as required by any
applicable law and as appropriate in respect of its
obligations under the Contract. Such insurances shall include
third party liability insurance with an indemnity limit of not
less than (pound)2,000,000 for each and every claim.
26.2 If the Supplier cannot provide evidence of such insurance to
BT on request, BT may arrange such insurance and recover the
cost from the Supplier.
26.3 The Supplier shall notify BT as soon as it is aware of any
event occurring in relation to the Contract which may give
rise to an obligation to indemnify BT under the Contract, or
to a claim under any insurance required by the Contract.
26.4 This Condition shall not be deemed to limit in any way the
Supplier's liability under the Contract.
27. CONTRACT CHANGE PROCEDURE
The Contract may only be varied by written agreement between each
party's Commercial Contact who shall each respond in writing within ten
days of receipt of a proposal for a variation from the other.
28. NOTICES
Notices required under the Contract to be in writing shall be delivered
by hand, post or facsimile transmission to the Commercial Contact of
the recipient and shall be deemed to be given upon receipt (except
notices sent by facsimile transmission, which shall be deemed to be
given upon transmission).
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29. GENERAL
29.1 The invalidity or unenforceability for any reason of any
provision of the Contract shall not prejudice or affect the
validity or enforceability of its other provisions.
29.2 The headings to the Contract provisions are for reference only
and shall not affect their interpretation.
29.3 a) No delay, neglect or forbearance by either party in
enforcing any provision of the Contract shall be
deemed to be a waiver or in any way prejudice any
rights of that party.
b) No waiver by either party shall be effective unless
made in writing or constitute a waiver of rights in
relation to any subsequent breach of the Contract.
29.4 The Contract governs the relationship between the parties to
the exclusion of any other terms and conditions on which any
quotation or tender response has been given to BT.
29.5 The Contract is governed by English law and subject to the
non-exclusive jurisdiction of the English courts.
29.6 The Supplier shall not be, nor in any way represent itself as,
an agent of BT and shall have no authority to enter into any
obligation on behalf of BT or to bind BT in any way.
29.7 Except as expressly set out in the Contract, no assignment of
or licence under any Intellectual Property Right or trade mark
or service mark (whether registered or not) is granted by the
Contract.
29.8 The following provisions of the Contract shall survive its
termination or expiry in addition to those provisions relating
to intellectual property and those which by their content or
nature will so survive:
BT Supplied Items and Property
Guarantee
Information
Confidentiality
Indemnity
Intellectual Property
Limitation of Liability
Millennium Warranty
<PAGE>
SCHEDULE 2 to CONTRACT NO: 652902 PAGE 2 of 21
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30. DOCUMENTATION
30.1 In this Condition, "Documentation" means the installation,
user and maintenance guides to be supplied under the Contract.
30.2 The Supplier hereby grants to BT non-exclusive, royalty free
rights to:
a) copy and disclose to BT personnel, and personnel
within the BT Group;
b) make adaptations of; and
c) copy and disclose such adaptations of the
Documentation for the purposes of the sale, lease or
hire of the Supplies.
31. USE, TRANSFERABILITY, MAINTENANCE AND MODIFICATION OF SOFTWARE
31.1 In this Condition, "lawful user" is as defined in the
Copyright (Computer Programs) Regulations 1992.
31.2 Notwithstanding any other Condition, the Supplier grants to
BT non-exclusive, royalty free worldwide rights to any
Software supplied under the Contract to the effect that BT
has:
a) all the rights of a lawful user of the Software; and
b) the rights to copy, disclose and use for any purpose
any Information which:
c) has been derived by BT from observing, studying or
testing the functioning of the Software;
d) relates to the ideas and principles which underline
any element of the Software; and
e) is not subject to theSuppliers (or its licensor's)
copyrights in the United Kingdom.
32. VIRUSES AND ELECTRONIC REPOSSESSION
32.1 The Supplier shall use reasonable endeavours ensure that
adequate detection software is used to test the Software and
all updates for viruses and shall take all reasonable steps to
ensure that Software infected by viruses is not supplied under
the Contract. For the purposes of this Paragraph "viruses"
shall include "logic-bombs" as the
<PAGE>
SCHEDULE 2 to CONTRACT NO: 652902 PAGE 21 of 21
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same may be generally understood within the computing industry
from time to time.
32.2 The Supplier warrants that all Software is free of charges,
bias or other encumbrance affecting title or right to deliver
the Software free of encumbrances. Without prejudice to its
other liabilities under the Contract, the Supplier indemnifies
BT against all claims, demands, damages, costs and expenses
suffered by BT and all damage or loss to BT property arising
from any Electronic Repossession. For the purpose of this
Condition, "Electronic Repossession" shall mean any function
in the Software which prevents BT from Continuing to use the
Software.
<PAGE>
APPENDIX A
Australia Taiwan
Austria Thailand
Belgium USA
Canada
China
Czech Republic
Denmark
France
Germany
Greece
Hungary
India
Indonesia
Israel
Italy
Japan
Kenya
Lebanon
Malaysia
Netherlands
New Zealand
North East Asia
Norway
Portugal
Romania
Russia
Saudi Arabia
Singapore
Slovakia
South Africa
South Korea
Spain
Sweden
Switzerland
EXHIBIT 10.26
CONFIDENTIAL
TEAMING AGREEMENT
================================================================================
THIS AGREEMENT made the 19th day of August, 1997
BETWEEN: DCX SYSTEMS LTD., a corporation incorporated under the laws of Canada,
having its principal place of business at 8162 Pinellas Park Drive,
Niagara Falls, Ontario, L2H 3B1,
(hereinafter referred to as "DCX")
AND: BELL CANADA, a corporation incorporated under the Canada Business
Corporations Act, having its principal place of business at 1050
Beaver Hall Hill, Montreal, Quebec, Canada, H2Z 1S4,
(hereinafter referred to as "BELL")
WHEREAS BELL has issued a Request for Quotation # 121960719 dated July 12th,
1996 (hereinafter the "Request for Quotation");
WHEREAS DCX has presented a Proposal dated August 13th, 1996 with respect to the
Request for Quotation (hereinafter the "Proposal");
WHEREAS the parties have signed a Letter of Agreement dated January 30th, 1997
(the Letter of Agreement) attached hereto as Appendix "A" under which they
have agreed to proceed with a Field Trial to test the Derived Channel System
(the Field Trial);
WHEREAS the parties have subsequently entered into negotiations with respect to
the implementation of a Derived Channel Multiplex Network used to provide data
over voice services in BELL's territory in Quebec and Ontario;
WHEREAS the parties wish to establish their respective rights and obligations
and the method of sharing the financial benefit that may arise from the
recurring revenues generated by the Derived Channel Multiplex Network as stated
herein.
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TEAMING AGREEMENT
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NOW THEREFORE WITNESSETH that, in consideration of the premises and the terms,
conditions and mutual covenants and agreements herein contained, and for other
good and valuable consideration the receipt and adequacy of which is hereby
acknowledged, the parties hereto agree as follows:
1 INTERPRETATION
1.1 Definitions
1.1.1 The following terms used in this Agreement shall have
the definitions respectively assigned to them
hereunder unless the subject matter or context of
this Agreement otherwise requires:
1.1.1.1 "AGREEMENT" shall mean this Agreement.
1.1.1.2 "CUSTOMER OF BELL" shall mean the person
or entity that is subscribing to the
Services, said Services as are further
described in Section 2.3.
1.1.1.3 "DERIVED CHANNEL CONNECTION" shall mean
each port used in the scanner comprised in
the Equipment provided by DCX and owned by
BELL and used by a customer of BELL within
Quebec and Ontario.
1.1.1.4 "DERIVED CHANNEL MULTIPLEX NETWORK" shall
mean the message switches, scanners and
other related equipment, including software,
used to provide alarm and other data over
voice transport services.
1.1.1.5 "INTELLECTUAL PROPERTY" shall mean
anything protected or that may be protected
by Intellectual Property Rights and
includes, without limitation, inventions,
methodologies, software, processes, know-how
and technical information.
1.1.1.6 "RECURRING REVENUE" shall mean the monthly
amount invoiced by BELL to its Customers for
each Derived Channel Connection, excluding
taxes and one time service charges.
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TEAMING AGREEMENT
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1.1.1.7 "NPV" shall mean the Net present value
(evaluated at day one of the Term of this
Agreement) of the amount where indicated and
is calculated using a discount factor of
11.1 % of capital cost.
1.2 All amounts stipulated in this Agreement are in Canadian (CDN)
dollars.
2 OBJECT
2.1 The Preamble forms part of this Agreement.
2.2 DCX hereby agrees to sell to BELL and BELL hereby agrees to
buy from DCX, Derived Channel Multiplex Network software and
firmware as further described in Section 3.1, the whole under
the terms and conditions and for the consideration stipulated
herein.
2.3 BELL shall use Derived Channel Multiplex Network to provide
alarm and other data over voice transport services
(hereinafter referred to as the "Services").
2.4 The Services will be offered to BELL's Customers located in
its operating territory, in Quebec and Ontario.
2.5 The Services will be provided over BELL's network and
equipment.
2.6 This Agreement is strictly conditional upon the successful
completion of the Field Trial by DCX in accordance with the
terms and conditions of the Letter of Intent. Following such
successful completion, the provisions of the Letter of Intent
shall become inapplicable and will be deemed replaced by this
Agreement. Should the Field Trial not meet the criteria
specified in the Letter of Intent, this Agreement shall become
null and void and of no further effect.
3 OBLIGATIONS OF DCX
3.1 DCX hereby agrees to sell to BELL the Derived Channel
Multiplex Network software and firmware listed in Appendix
"B" attached hereto and all other additional components as
BELL may require from time to time during this Agreement to
provide the Services (the equipment listed in Appendix "B",
together with any additional components being collectively
referred to herein as the "Equipment").
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TEAMING AGREEMENT
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3.2 DCX hereby grants to BELL a non-exclusive, transferable,
ongoing, paid up license to use the programs and the software
(in object-code only) installed or comprised in the Equipment,
regardless of whether DCX is providing the maintenance support
services or not. This license shall survive the termination or
expiry of the Term of this Agreement.
3.3 DCX will stock an adequate supply of Equipment, parts and
components to fully support BELL's demand.
3.4 DCX will ship the Equipment at its own risks and expenses to
BELL as per the deployment schedule of Appendix "C" attached
hereto (the Deployment Schedule) and as reasonably ordered
from time to time by BELL in a Purchase Order specifying the
exact quantity, delivery date and location. Should DCX fail to
timely deliver Equipment as ordered by BELL, such failure
shall constitute material breach under the provisions Section
18.1 below.
3.5 As stated in Section 3.1 above, DCX will provide equipment in
addition to that listed in Appendix "B" and will also effect
delivery thereof as may be required from time to time by BELL.
Such additional equipment shall be governed by the terms and
conditions of this Agreement.
3.6 DCX warrants that the Equipment will be free from defects in
material and workmanship upon delivery and will perform
according to the specifications detailed in the Proposal
throughout the Term of this Agreement.
3.7 DCX warrants it is the rightfull owner of the Equipment with
the right to license the software and warrants that Equipment
will be free and clear form any lien and encumbrances.
3.8 DCX will provide at no additional cost, "Premium
Network/Support Package" maintenance services for the
Equipment as specified Appendix "D" attached hereto. When
access to BELL's premises or third parties premises is
required by DCX to effect maintenance services, it shall be
strictly in accordance with all procedures established from
time to time by BELL, namely, BELL reserves the right to limit
access to specific individuals, to request appropriate
identification and to schedule such activities at certain
times such as during off normal hours designated by BELL.
3.9 DCX represents to BELL that it has developed and will
constantly update a modernization plan for future developments
of the Derived Channel Multiplex
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TEAMING AGREEMENT
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Network, including a plan to modernize the current main
scanner technology within two (2) years from the signature
of this Agreement. If deemed appropriate by BELL and DCX,
DCX will replace or upgrade the current scanner technology
with the new scanner technology, when it is available, the
whole, at its own costs and expenses, except that
installation will be assumed by BELL but paid for by DCX.
3.10 DCX warrants all Equipment shall comply with all applicable
laws, regulations and standards, namely, but without
limitation, U.L.C., C.S.A. and NFPA-72.
3.11 DCX will provide twenty-five (25) training sessions and all
necessary documentation as specified in the Proposal.
3.12 DCX will provide BELL with all documentation and
manufacturer's specifications (in French and English)
necessary for the installation and operation of the Equipment.
3.13 DCX will provide a standard solution acceptable to BELL by the
end of July 1998 to provide the Services with the DMS-IU; in
order to do so, DCX will need data and information from
Nortel, the details of which it will provide to BELL by the
end of September 1997. BELL will take reasonable steps to
ensure Nortel is cooperating in providing such requirements to
DCX. Should the DMS-IU solution not be made available to BELL
by the end of July 1998, in spite of Nortel's collaboration,
the number of Derived Channel Connections contemplated in
Section 5.1 will be modified from 52,000 to 32,000.
3.14 DCX will make available from alarm panel suppliers (including
DSC Sur-Gard) the STU's and Line Card receivers on the later
of ninety (90) days following signature of this Agreement, or
thirty (30) days following the last day of the Field Trial.
3.15 DCX also grants BELL the right to rent ports or otherwise
allow use of ports on the switches comprised in the Equipment
to any Canadian Telephone Company who has purchased network
equipment from DCX. Such rental or use shall be under terms
and conditions as BELL may determine appropriate from time to
time, it being understood that the revenues (if any) that BELL
may receive therefrom are not to be considered for the purpose
of calculating the Retribution described in Section 7 herein.
3.16 DCX represents and warrants that each equipment and software
delivered or developed under this Agreement is designed to be
used prior to, during, and after the calendar year 2000 A.D.
and that the Equipment delivered or developed under
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TEAMING AGREEMENT
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this Agreement will operate during such time period without
error relating to date data, specifically including any
error relating to, or the product of, date data which
represents or references different centuries or more than a
century.
Without limiting the generality of the foregoing, DCX further
represents and warrants that the Equipment:
A) will not abnormally end or provide invalid or
incorrect results as a result of date data,
specifically including date data which represents or
references different centuries or more than one
century;
B) has been designed to ensure year 2000 compatibility,
including, but not limited to, date data century
recongnition, calculations which accomodate same
century and multi-century formulas and date values,
and date data interface values that reflect the
century; and
C) includes "year 2000 capabilities". "Year 2000
capabilities" means the Equipment:
i) will manage, calculate, sequence, compare
and manipulate data involving dates,
including single century formulas and
multi-century formulas, including leap years
and will not cause an abnormally ending
scenario within the application or generate
incorrect values or invalid results
involving such dates; and
ii) provides that all date-related user
interface functionalities and data fileds
include the indication of century; and
iii) provides that all date-related data
interface functionalities include the
indication of century.
If requested to do so by BELL, DCX will, from time to time
provide BELL with the results of testing done by DCX on the
Equipment to verify that the Equipment is Year 2000 compliant
in accordance with the terms of this warranty. Should the
results of testing reveal that the Equipment is not Year 2000
compliant in accordance with the terms of this warranty, DCX
shall, without charge to BELL, repair or replace the
non-compliant Equipment within the period of time to be
specified by BELL; should such repair or replacement be not
completed within the time specified, BELL shall have the right
to have any necessary changes or repairs performed itself and
the DCX shall reimburse BELL for any expense incurred thereby.
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TEAMING AGREEMENT
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In the event of a breach of the Year 2000 warranty herein, and
notwithstanding anything to the contrary in this Agreement,
DCX shall assume all risks and responsibilities inherent to
such warranty and shall indemnify and save harmless BELL and
its customers from and against any and all claims, demands,
suits, actions, or causes of actions, of any kind whatsoever,
for direct or indirect damages, losses, costs, injuries,
death, property damage, claims and/or expenses resulting from
this Agreement, and shall also include all judiciary and
extra-judiciary costs incurred by BELL arising from such
breach.
4 OBLIGATIONS OF BELL
4.1 BELL shall provide Central Office or other space as required
for the installation and operation of Equipment.
4.2 The size and location of the area in the Central Offices or
elsewhere is within the sole discretion of BELL and BELL may
relocate or rearrange the Equipment from time to time at its
discretion and for any reason.
4.3 BELL shall provide the necessary electrical power to operate
the Equipment and the necessary cabling between the scanner
and BELL's frame. Power requirements are as specified in the
Proposal.
4.4 BELL shall test, configure, install and operate the Equipment.
4.5 Subject to the provisions of Section 3.8, BELL shall maintain
the Equipment.
4.6 BELL will act as the only interface for the Services with its
Customers and will be responsible for Services ordering, and
Services billing.
4.7 In a manner consistent with the strategy conveyed in the
Deployment Schedule, BELL will file to the CRTC, no later than
the end of 1997, a request to discontinue its Class A and B
offerings or to remove the alarm application from class A and
B offerings, and it will file to the CRTC, no later than the
end of 1998, a request to raise the tariffs of the S-3T3 Data
Services (DVAC S). However, BELL does not make any warranty or
representation to DCX as to the issue of such requests to the
CRTC.
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TEAMING AGREEMENT
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5 TERM
5.1 Subject to the provisions of Section 3.13, this Agreement
shall be for a term starting upon its execution by both
parties and terminating on the last day of the 48th month
following the moment a total of 52,000 Derived Channel
Connections are achieved, (the Term);
5.2 For the purpose of calculating the number of achieved Derived
Channel Connections in Section 5.1 above, in addition to the
number effectively achieved, a number of 1,000 Derived Channel
Connections will be deemed to have been achieved for each week
during which the STU's and Line card receivers are not
available from alarm panel suppliers (including DSC Sur-Gard)
on the later of ninety (90) days following signature of this
Agreement or thirty (30) days following the last day of the
Field Trial. However, the number of Derived Channel
Connections deemed achieved hereunder shall not be considered
for the purpose of payments to DCX under Section 7.
5.3 Sixty (60) days prior to the expiry of the Term, the parties
shall either:
5.3.1 enter into good faith negotiations to determine the
terms and conditions applicable to an eventual
renewal thereof and revenue sharing arrangement on a
basis that fairly acknowledges the respective
contribution of each of the parties. or,
5.3.2 mutually agree not to renew this Agreement, in which
case this Agreement will terminate at the expiry of
the Term and BELL will remain the absolute owner of
the Equipment.
5.4 Should the parties fail to reach an agreement on mutually
acceptable renewal terms and conditions at least ten (10) days
prior to the expiry of the Term (or at a later date agreed to
in writing), the matter will be referred to arbitration as per
the provisions of Section 14.2 herein whereby, however, the
arbitrators will only act as "amiable compositeurs" and
issue a non-binding recommendation (the Recommendation)
accompanied by an agreement reflecting the Recommendation.
5.5 Within ten (10) days from the date of the Recommendation,
should one of the parties not have executed the agreement
reflecting said Recommendation, it shall be deemed to have
rejected renewal and the following shall apply:
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TEAMING AGREEMENT
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5.5.1 If rejection is attributable to DCX, then this
Agreement will terminate at the expiry of the Term
and BELL shall remain the absolute owner of the
Equipment.
5.5.2 If rejection is attributable to BELL, then, BELL
shall remain the absolute owner of the Equipment and:
5.5.2.1 If a total of $ * Millions NPV or more has
been paid to date to DCX under the
provisions of Section 7 of this Agreement,
BELL will, at its discretion, either:
i) pay *% of the Recurring
Revenue for one additional term
of one year, up to a maximum of
$ * Millions for that year; or,
ii) pay *% of the Recurring Revenue
for five (5) additional terms
of one year, and DCX shall
provide, free of charge to
BELL, maintenance services and
support as per the "Premium
Network/Support Package"
(Appendix "D") herein and
shall contribute in R. & D.
Activities as described in
Section 9, in the amount of $1
Million per year.
5.5.2.2 If the total of $ * Millions NPV has not
been paid to DCX to date under the
provisions of Section 7 of this Agreement
and DCX has supplied at least a value of $ *
Millions NPV in Equipment, maintenance
services, administration, sales support and
training, then the provisions of said
Section 7 shall continue to apply until the
amount of $ * Millions NPV is reached and,
after, BELL will continue to pay *% of the
Recurring Revenue for one additional term of
one year, up to a maximum of $ * Millions
for that year.
5.5.2.3 If the total of $ * Millions NPV has not
been paid to DCX to date under the
provisions of Section 7 of this Agreement
and DCX has supplied less than a value of
$* Millions NPV in Equipment, maintenance
services, administration, sales support and
training, then the amount of $ * Millions
NPV to be reached will be reduced to a new
amount according to the following formula:
* Confidential information which has been omitted pursuant to Rule 24b-2
under the Securities Exchange Act of 1934 and filed separately with the
SEC.
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$Value of Equipment, maintenance
Services, administration, sales support
And training supplied by DCX
_______________________________________ X $ * Millions NPV = new amount
$ * Millions NPV
and the provisions of Section 7 shall
continue to apply until such time as
this new amount is reached and after,
BELL will continue to pay *% of the
Recurring Revenue for one additional
term of one year, up to a maximum of $ *
Millions for that year.
5.6 Notwithstanding the provisions of Sections 5.3, 5.4 and 5.5
above, it is expressly understood that, at the end of the
Term, should BELL determine that the Derived Channel Network
technology offered by DCX will not meet its future
requirements, then BELL may go to tender to identify a
preferred supplier capable of providing the Services
throughout the entire BELL territory and, if BELL selects
another supplier, then, provided DCX has been invited to
tender and further provided that the other supplier offers
technology able to coexist with voice over any kind of
transport medium; then:
5.6.1 BELL will remain the absolute owner of the Equipment;
and
5.6.2 BELL's only obligation shall be to pay the following
percentages of Recurring Revenue to DCX up to and
until the time BELL decides to disconnect the
Equipment:
Year 6 = *%
Year 7 = *%
Year 8 = *%
Year 9 = *%
Year 10 = *%
but in the aggregate, not to exceed a maximum amount
of $ * Millions NPV; or the "new amount", as
defined in Section 5.5.2.3, if DCX has supplied less
than a value of $ * Millions NPV in Equipment,
maintenance services, administration, sales support
and training.
* Confidential information whch has been omitted pursuant to Rule 24b-2
under the Securities Exchange Act of 1934 and filed separately with the
SEC.
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5.7 For the purpose of calculating the value in Equipment,
maintenance services, administration, sales support and
training supplied by DCX under Sections 5.5.2.2., 5.5.2.3 and
5.6.2., the prices shown in the Proposal shall remain
applicable throughout the Term and, within thirty (30) days
following the end of each fiscal year of BELL, DCX shall
provide BELL with a statement showing the dollar value
respectively attributable to Equipment, maintenance services,
administration, sales support and training supplied during
that year.
5.8 Subject to the provisions of 5.5.2.1 ii), DCX agrees to
provide maintenance services as may be required by BELL for
the prices shown in Appendix "D", during any additional term
of this Agreement where BELL continues paying a Revenue to DCX
under this Section 5.
6 EQUIPMENT TITLE AND RISKS
6.1 Title to the Equipment shall pass to BELL upon delivery.
6.2 Risks of loss or damage to the Equipment shall be assumed by
BELL upon transfer of title.
7 PAYMENTS TO DCX
7.1 In consideration for the benefits derived from this Agreement,
BELL shall pay DCX an amount equal to * (*%) of the Recurring
Revenue (less PST and GST) received from its customers for
each Derived Channel Connection (the Retribution) during the
term of this Agreement.
7.2 The parties acknowledge and agree that the following
percentages represent a fair allocation of the Retribution for
accounting and tax purposes:
i) Equipment 77%
Maintenance Services 7%
Administration, sales
support and training 16%
---
Total 100%
* Confidential information which has been omitted pursuant to Rule 24b-2
under the Securities Exchange Act of 1934 and filed separately with the
SEC.
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7.3 The Retribution will be payable quarterly in arrears, less all
applicable withholding for payments to non-residents of Canada
as determined by Canadian and provincial legislation.
7.4 The parties will put in place a mutually acceptable connection
tracking system using a software provided by DCX and able to
identify separately two types of connection: i) residence ii)
business. The Retribution will be calculated quarterly based
on the numbers shown by such system.
7.5 Within thirty (30) days from the end of each quarter of the
term, BELL shall send to DCX copy of a report originating from
the tracking system, indicating the basis for calculation of
the Retribution and the corresponding Retribution payment.
7.6 BELL will apply a monthly rate of $11.95/connection for
residential customers and of $14.95/connection for business or
commercial customers. BELL may modify these rates, at its
discretion, at any time during the Term or renewal of this
Agreement, in which case, BELL will advise DCX thirty (30)
days in advance.
8 SALES AND MARKETING SUPPORT
8.1 BELL and DCX will actively cooperate and participate in the
promotion and marketing of the Services as follows:
8.1.1 DCX will hire and keep the necessary number of
employees dedicated on a full time basis to market
the Services in BELL's territory. At least one of
these employees will speak french for Quebec
customers.
8.1.2 BELL and DCX shall equally share the expenses related
to expositions seminars and trade shows; however DCX
will provide the kiosk.
8.1.3 BELL and DCX shall jointly approach potential
customers for all Derived Channel Network
applications but BELL shall be the sole supplier of
the Services.
9 ONGOING RESEARCH AND DEVELOPMENT
9.1 DCX agrees to provide the resources to meet with customers to
evaluate applications opportunities other than alarms.
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9.2 DCX shall invest into Research and Development (R & D) an
amount sufficient to develop multiple applications (allowing
more than one application to be rerouted to more than one
control or monitoring center) and to make them available to
BELL's customers for field trial within one hundred and eighty
(180) days following the moment BELL and DCX agree on a
defined application.
9.3 DCX will invest in other R & D activities such as the
elimination of the 2.8 kHz tone generated by a transaction as
a priority project; "100 bytes" transaction and "switch
increased productivity" will be prioritized according to
development plans to be separately agreed upon between BELL
and DCX.
9.4 Should BELL decide to financially participate with DCX in R &
D Activities, the terms and conditions governing such
participation will be agreed upon between BELL and DCX in a
separate agreement and BELL shall be entitled to share
revenues therefrom with DCX and to exploit the results of the
R & D Activities.
10 TECHNOLOGY COMMITTEE
10.1 Each party shall appoint at least one representative to
participate in regular technology meetings held no less than
every six (6) months throughout the Term (the Technology
Committee).
10.2 The Technology Committee will work on a regular basis to
explore the technology requirements for the future.
11 FIRST RIGHT OF REFUSAL
11.1 Before accepting an offer by a third party (other than a
corporation which is an affiliate within the meaning of the
now current Business Corporations Act) to acquire the whole
of its business of providing the Services to its Customers,
BELL shall offer DCX to acquire the same, under the same
terms and conditions as offered by such third party, by
sending a notice to that effect to DCX. Failure by DCX to
accept such offer within ten (10) days of its date shall
constitute conclusive evidence of its rejection by DCX and
DCX will have no further first right of refusal.
11.2 The above first right of refusal is strictly conditional upon
its compliance, now and in the future, with all applicable
laws, rules and regulations, namely, but without limitation,
the orders of the CRTC.
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12 OWNERSHIP OF INTELLECTUAL PROPERTY
12.1 All Intellectual Property developed by a party prior to this
Agreement belongs to that party.
12.2 It is understood and agreed that any Intellectual Property
developed by one of the parties under this Agreement, shall
belong to the party that developed it.
13 SUBCONTRACTING
13.1 Provided it has obtained the other party's approval, which
shall not be unreasonably withheld and shall not be necessary
for BELL with regards to the installation of the Equipment,
each party may subcontract to a third party the performance of
all or a part of the obligations to be performed by such party
under this Agreement, but this party shall at all times remain
liable towards the other parties for all its obligations under
this Agreement.
13.2 Each subcontractor that may become so involved shall sign a
statement in writing satisfactory to the parties to the effect
that it agrees to be bound by the Confidential Information
provisions of this Agreement.
14 DISPUTES RESOLUTION
14.1 Negotiation of the parties
The parties agree that they shall use their best efforts to
settle amicably disagreements arising from or in connection
with this Agreement. To this effect, they shall submit such
disagreements to a committee constituted by the parties to be
comprised of an equal number of senior management
representatives or their duly appointed nominees, from each
party (the "Executive Committee"), the members of which
shall consult and negotiate with one another in good faith an
understanding to reach a just and equitable solution.
14.2 Arbitration
Subject to the provisions of Section 5.4, any dispute which
cannot be resolved through negotiation between the parties,
will be definitely resolved through binding arbitration to the
exclusion of the Courts, submitted to an arbitration panel of
three members, in the following manner.
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14.2.1 at the request of one party, each party shall appoint
one arbitrator, and the two such appointed shall
appoint a third arbitrator.
14.2.2 if one of the parties fails to appoint an arbitrator
within thirty (30) days of having been notified by
the other party to do so, or if the arbitrators fail
to agree on the choice of the third arbitrator within
thirty (30) days after their appointment, a judge
having jurisdiction shall make the appointment on the
motion of one of the parties;
14.2.3 the arbitrators shall proceed to the arbitration
according to the procedure they shall determine. They
shall have all the necessary powers for the exercise
of their jurisdiction, including the power to appoint
an expert and the power to act as amiable
compositeurs;
14.2.4 the arbitrator shall settle any procedural matter in
the dispute according to the rules of law agreed by
the parties or, failing which, according to the rules
of Civil Procedure applicable in the Province of
Quebec;
14.2.5 an arbitration will only take place in the City of
Montreal, in the Province of Quebec;
14.2.6 the arbitrators shall have jurisdiction to determine
the award, including payment of damages, interest and
costs;
14.2.7 every decision of the arbitrators, including the
final award, shall be rendered by the majority of
votes;
14.2.8 unless permitted by the court having jurisdiction, no
arbitral ruling or decision made by the majority of
arbitrators shall be questioned, reviewed or
restrained by any proceeding, under any act, unless
as otherwise permitted under the law, and both
parties agree to be bound by any such decision or
award; and
14.2.9 the parties agree to comply with any final award
within thirty (30) days after it is rendered.
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Notwithstanding anything provided above, nothing shall prevent any party to
petition or otherwise apply to a judge or a court having jurisdiction to seek
injunctive relief in the event of any breach of this Agreement as to provision
dealing with Intellectual Property or confidentiality, without prejudice to any
other remedy available to such a party.
15 REPRESENTATIONS AND WARRANTIES
15.1 Each of the parties represents and warrants that:
i) it has the rights to enter into this Agreement;
and,
ii) it will not, to its best knowledge, infringe upon the
Intellectual Property Rights of any person or entity
by fulfilling its obligations under this Agreement.
16 INSURANCE
16.1 DCX shall, at its sole cost and expense procure, maintain, pay
for and keep in force insurance as specified in paragraphs
16.2 and 16.3, placed with insurance companies acceptable to
BELL.
16.2 Comprehensive general liability coverage on an occurrence
basis in an amount of $10 millions combined single limit for
bodily injury and property damage. Said coverage shall include
contractual, owners and contractors protective,
products/completed operations, occurrence property damage,
personal injury and contingent employer's liability
endorsements, a cross liability clause, name BELL as an
additional named insured and contain a severability of
interests clause.
16.3 Umbrella/Excess Liability coverage in an amount of $5 millions
excess of coverage specified in 16.2 above.
16.4 The limits set forth in paragraphs 16.2 and 16.3 may be
increased by BELL from time to time during the term of this
Agreement to at least such minimum limits as shall then be
customary in respect of comparable situations.
16.5 All policies purchased by DCX shall be deemed to be primary
and not contributing to or in excess of any similar coverage
purchased by BELL.
16.6 All insurance must be in effect on or before the beginning of
the Term and shall remain in force throughout the Term and
renewal thereof. If DCX fails to maintain
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the coverage, BELL may pay the premiums therein and obtain
reimbursement of same from DCX.
16.7 DCX shall submit certificates of insurance and/or copies of
policies reflecting the coverages specified in paragraphs 16.2
and 16.3 above prior to the beginning of the Term, to the
address shown below. DCX shall arrange for BELL to receive
thirty (30) days advance notice of cancellation or any
material change to DCX insurance policies from its insurance
company.
16.8 DCX must also conform to the recommendation(s) made by BELL's
insurers and Fire & Safety protection consultants which DCX
has already agreed to or to such recommendations it shall
hereafter agree to.
16.9 Failure by DCX to comply with the provisions of this Section
will be deemed a material breach of this Agreement.
17 REGULATORY APPROVAL
17.1 This Agreement and all rates, charges, terms and conditions
are subject to all applicable regulatory approvals and
requirements.
18 TERMINATION
18.1 In the event that one of the parties becomes insolvent or
bankrupt, the other party shall be entitled to terminate this
Agreement.
18.2 Upon termination of this Agreement under Section 18.1, BELL
will remain the absolute owner of the Equipment.
18.3 In the event that one of the parties to this Agreement is in
breach of a material provision of this Agreement and such
breach is not adequately remedied within thirty (30) days of
receipt of written notice of the material breach, then final
rdesolution of the breach shall be submitted to binding
arbitration.
19 WARRANTY AND INDEMNIFICATION
19.1 Neither party shall be liable to the other for any indirect,
incidental, consequential or special damages arising out of or
in connection with this Agreement even if notified of the
possibility of such damages.
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19.2 Each party indemnifies the other party in respect of any
claims for personal injury or death, or property damage
(including damage to property of the indemnified party)
arising from any act or omission of the indemnifying party,
its servants, agents, or employees.
19.3 Without restricting the generality of Section 19.2, and
notwithstanding any other provisions in this Agreement, and
unless such is the direct result of BELL's negligence or
willful act or that of its employees, agents or
representatives, DCX shall:
19.3.1 Indemnify and save harmless BELL, its directors,
officers, employees and agents from and against any
and all manner of liabilities awards, claims,
demands, suits, proceedings, actions, causes of
actions or other claims which may be brought or made
against BELL or such persons, or which BELL or such
persons may become subject to;
19.3.2 be liable to BELL, its directors, officers, employees
and agents for any and all losses, costs, damages and
expenses whatsoever (and without limiting the
generality of the foregoing any direct losses, costs,
damages and expenses of BELL or such persons,
including costs as between a solicitor and its own
client) which BELL or such persons may sustain, pay
or incur;
as a result of, arising out of, or in connection with:
19.3.3 the performance of this Agreement or the use or
maintenance of the Equipment;
19.3.4 any breach, violation or non-performance of any
condition, covenant, obligation, representation or
warranty on the part of DCX pursuant ot this
Agreement, any act or omission of DCX in connection
with the performance of its obligations under this
Agreement,
19.4 DCX will defend, at its expense, any legal action brought
against BELL, a customer or any third party, based on a claim
that the Equipment, any part thereof or any other materials
provided by DCX infringe upon any patent, copyright, trade
secret, or any other proprietary right, provided that DCX is
promptly notified once such a claim comes known. DCX is,
hereby given the authority to defend any such claim on behalf
of BELL but in agreement with BELL's policies. DCX agrees to
satisfy any judgment as may be obtained in any such legal
action and to indemnify and save BELL harmless against any
such judgment. If such a claim arises, or if
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in DCX's opinion, is likely to arise, BELL agrees to permit
DCX or a third party at DCX's expense, and option, to
procure for BELL the right to continue using the Equipment
or to replace the Equipment or part thereof with an
equivalent non-infringing product. DCX will have no
obligation or liability whatsoever arising out of
infringement claims based on the use of any part of the
Equipment which was modified by another than DCX in a manner
which constitutes an infringement.
20 NOTICES
20.1 The parties hereby agree that any notice, request, demand,
consent, approval, correspondence or other communication
required or permitted to be given hereunder, shall be in
writing and be sent registered mail, telex, telegram,
facsimile, or other agreeable electric means addressed as
follows:
DCX: BELL:
if of a legal nature, to:
c/o President
DCX Systems Inc. Corporate Secretary
2360 Maryland Road 1050 Beaver Hall Hill
Willow Grove, Pensylvania Montreal
19090 (Quebec) H2Z 1S4
if of administrative nature, to:
Director - Product Line Management
700 La Gauchetiere Street West
Room 7O1
Montreal (Quebec) H3B 4L1
All notices or communications provided by this Section shall
be considered effective when received.
21 TRANSFER RIGHTS
21.1 Neither of the parties shall assign, nor in any manner
transfer its interest, or any part thereof in this Agreement
without the prior written consent of the other party which
shall not be necessary for BELL to transfer its rights to a
corporation which is an affiliate within the meaning of the
now current Business Corporations Act.
21.2 Any sale or sales aggregating fifty percent (50 %) or more of
the capital or voting stock of DCX shall be deemed to be an
assignment of this Agreement.
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21.3 Unauthorized assignment shall be deemed to constitute a
material breach.
22 ENTIRE AGREEMENT
22.1 This Agreement and its Appendices contain the entire agreement
between the parties hereto relating to the subject matter
herein and supersedes any prior agreements, obligations,
statements, representations, understandings, communications
and negotiations between the parties, whether oral or written.
Except as otherwise provided in this Agreement, this Agreement
shall bind the parties from and after its signature and the
parties hereby agree that there are no terms and obligations,
covenants, representations, statements or conditions, oral or
written, other than those contained herein.
23 SEVERANCE
23.1 In the event that any of the provisions of this Agreement are
held to be illegal, invalid or unenforceable, any such
provision shall, to the extent permitted by law, be severed
and the remaining provisions of the Agreement remain in full
force and effect.
24 BUSINESS RELATIONSHIP
24.1 The parties agree that this Agreement does not constitute or
otherwise establish any form of joint venture or partnership
between them and neither party has any right or authority to
act as an agent or in any other manner on behalf of or as a
representative of the other party for any purpose whatsoever.
24.2 The obligations of the parties under this Agreement are
divisible in all respects and, subject to any other express
clause to the contrary, the parties expressly exclude solidary
liability.
25 SUCCESSORS AND ASSIGNS
25.1 This Agreement shall inure to the benefit of the parties and
their successors and assigns and shall be binding upon BELL,
DCX and NUMEREX CORP. and their authorized successors and
assigns.
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26 PUBLICITY
26.1 BELL and DCX agree to submit to one another all advertising,
sales, promotions and other publicity matters relating to any
services and products furnished by either of them, wherein the
other's name is mentioned or language used from which the
connection of the other's name therewith may, in its judgment,
be inferred or implied. Each party further agrees not to
publish or use any such advertising, sales promotion or
publicity without the written consent of the other, consent
which shall be given or denied at the party's discretion.
26.2 BELL and DCX shall exercise the best of their abilities in
every respect and shall use their best effort to ensure the
Services are promoted and marketed in a professional manner
that protects the good name and reputation of the other.
26.3 The terms of this Agreement shall remain confidential unless
its disclosure is rendred necessary by any applicable law.
27 CONFLICT OF INTEREST
27.1 DCX and NUMEREX CORP. must guard against prejudicial interests
and avoid any situation likely to create a conflict of
interest between this Agreement and any other situation,
occupation or business.
28 CONFIDENTIALITY
28.1 Confidential Information
It is anticipated that with respect to any matter related to
this Agreement, it may be necessary for the parties to
exchange "Confidential Information". Confidential
Information is information of the parties or of their
suppliers, whether written or in any other tangible form, or
oral including, but not limited to, plans drawings and
information related to design, technical, performance, sales,
financial, personnel, contractual and marketing matters,
including contracts, ideas and concepts, as well as software,
belonging to either of the parties or to their suppliers and
which is provided in relation to this Agreement. Confidential
Information shall remain the property of the disclosing party
or of its suppliers as the case may be, and will be returned
to the disclosing party upon written request together with all
copies that could have been made, unless otherwise agreed upon
in writing.
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28.2 Protection of Confidential Information
Confidential Information shall:
28.2.1 be protected by the receiving party, using the same
degree of care as used to protect similar valuable
information;
28.2.2 be used and reproduced by the receiving party
solely for the purposes of this Agreement; and
28.2.3 be disclosed only to those persons having a need to
know, the whole subject to appropriate
confidentiality undertaking reproducing at a minimum
the content of this Section 28.
28.3 Non-Confidential Information
The following shall not be deemed Confidential Information:
28.3.1 information already known to the receiving party as
evidenced by documentation of said party;
28.3.2 information which is or becomes publicly known
through no fault of the receiving party;
28.3.3 information rightfully received from a third party
without similar restrictions and without breach of
this Agreement;
28.3.4 information approved by the disclosing party in
writing for release or use by the receiving party.
28.4 Notwithstanding, the preceding, all information BELL holds
concerning a customer, except for the customer's name, address
and listed telephone number, is confidential. Any such
information BELL discloses for the sole purpose of enabling
DCX to perform its obligations fully hereunder and is
therefore disclosed to it in confidentiality, and DCX
undertakes to use it solely for the purposes hereof; DCX also
undertakes not to disclose it to anyone whatsoever, including
any of its employees not requiring this information, unless
such disclosure is required by legal authorities; generally,
DCX undertakes to take all possible care and measures
necessary to protect the confidentiality of this information
and to use it only in the manner prescribed by BELL for the
purposes hereof.
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29 WAIVER
29.1 No waiver by any party or any breach by any other party of any
terms, condition, or other provision of this Agreement shall
be deemed a waiver of any breach whether of the same or any
other provision.
30 AMENDMENT
30.1 This Agreement shall not be modified, varied, amended, or
supplemented except by an instrument in writing executed by
both parties.
31 TIME OF ESSENCE
31.1 Time is of the essence in any matter relating to the
performance of this Agreement.
32 LANGUAGE
32.1 The parties hereto have requested that this Agreement as well
as any other documents pertaining to this Agreement be drafted
in the English language. Les parties aux presentes ont requis
que cet accord ainsi que tout document s'y rapportant soient
rediges en anglais.
33 LAW AND DOMICILE
33.1 This Agreement shall be governed, construed and interpreted in
all respects in accordance with the laws of the province of
Quebec and the applicable laws of Canada.
33.2 The parties elect domicile for all matters relating to this
Agreement in the judiciary district of Montreal (Quebec).
34 INTERVENTION
34.1 To these presents intervened NUMEREX CORP., a corporation
incorporated under the laws of Pennsylvania, having its
principal place of business at 2360 Maryland Rd., Willow Grove
PA 19090, represented and acting by John J. Reis, its
President after having taken communication of these presents
and declaring to be satisfied therewith, binds itself as
surety for each and every obligation contracted hereinabove by
DCX, hereby binding itself solidarily with DCX,
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making of the whole its personal affair and consequently
renouncing the benefits of division and discussion.
35 TAXES
35.1 DCX declares that his registration numbers under the Act
respecting the Quebec Sales Tax and the Excise Tax Act are
as follows and that the registrations have not been
cancelled and are not in the process of being cancelled:
i) Quebec Sales Tax (QST): Applied for
ii) Goods and Services Tax (GST): Applied for
iii) Ontario Sales Tax (OST): Applied for
35.2 BELL declares that its registration numbers under the Act
respecting the Quebec Sales Tax and the Excise Tax Act are
as follows and that the registrations have not been
cancelled and are not in the process of being cancelled:
i) Quebec Sales Tax (QST): 1002969366
ii) Goods and Services Tax (GST): 123614125
36 ESCROW AGREEMENT
36.1 The parties agree to diligently execute the Source Code Escrow
Agreement in the same form as the one attached hereto as
Appendix "E" and forming part hereof.
IN WITNESS WHEREOF the parties hereto have, through their duly authorized
representative, executed this Agreement on the 19th day of August, 1997.
DCX SYSTEMS LTD. BELL CANADA
- -------------------------------- ----------------------------------------
Per Charles L. McNew Per Michel Plouffe
Vice-President and Director - Product Line Manager
Chief Financial Officer
NUMEREX CORP.
- --------------------------------
Per John J. Reis
President
<PAGE>
APPENDIX B "EQUIPMENT"
================================================================================
Pairs of message switches hardware DEC Alpha from 32 to 160 port Message switch
software DEC Alpha from 32 ports to 160 ports Scanners, Rscanners and Nscanners
as specified by Bell VSIM's, ESIM's with In-band signalling and X-R modules
Possible pairs of PC's & appropriate software for future applications
EXHIBIT 10.27
TEAMING AGREEMENT
BETWEEN
NUMEREX CORP.
AND
TELEMONITOREO S.A.
<PAGE>
TEAMING AGREEMENT
THIS AGREEMENT made this 8th day of January, 1998
BETWEEN: Numerex Corp. (the "Company"), a Pennsylvania corporation, having its
principal place of business at 100 Four Falls Corporate Center, Suite
407, Route 23 and Woodmont Road, West Conshohocken, PA 19428-2961
AND: TELEMONITOREO S.A., an Argentine Company, having its principal place of
business at Sarmiento 385, Floor 5, Suite 80, Buenos Aires (1041),
Argentina.
WHEREAS the parties hereto have signed a letter of intent (the "Letter of
Intent") whereby the Company has agreed to sell and Telemonitoreo has agreed to
buy certain Derived Channel networking equipment (the "Equipment") for
deployment in Argentina.
WHEREAS in the Letter of Intent, the parties have agreed to move forward with
the preparation and execution of a definitive teaming agreement.
NOW THEREFORE, WITNESSETH that, in consideration of the premises and the terms,
conditions and mutual covenants and agreements contained herein, and for other
good and valuable consideration the receipt and adequacy of which is hereby
acknowledged, the parties hereto agree as follows:
1. DEFINITIONS
1.1 The following terms used in this Agreement shall have the definitions
assigned to them hereunder, unless the subject matter or context of this
Agreement otherwise requires.
1.1.1 "Agreement" shall mean this teaming agreement.
1.1.2 "Derived Channel Connection" shall mean each port used in the
scanner comprised in the Equipment provided by the Company and
used by a Derived Channel Service provider.
1.1.3 "Derived Channel Network" shall mean the message switches,
scanners and other related equipment including software, used to
provide alarm and other data over voice transport services,
exclusive of subscriber terminal units ("STUs").
<PAGE>
1.1.4 "Equipment" shall mean message switches, scanners and other
related equipment, used to provide alarm and other data over
voice services, exclusive of STUs, which form the Derived
Channel Network.
1.1.5 "Intellectual Property" the computer programs, documentation,
the object code and the source code for the computer programs,
the visual expressions, screen formats, report formats and other
design features of the computer programs, all ideas, methods,
algorithms, formulae and concepts used in developing and/or
incorporated into the computer programs or documentation and all
future modifications of the computer programs or documentation
made by the Company and provided to or used by or for
Telemonitoreo under this Agreement, and all copies of the
foregoing provided to or used by or for Telemonitoreo under this
Agreement.
1.1.6 "STU" shall mean subscriber terminal unit, to be supplied by the
Company or a licensed representative or an authorized dealer.
1.1.7 "Distribution Agreement" shall mean the Distribution Agreement
between The Company and Telemonitoreo S.A. dated March 11, 1997.
2. REPRESENTATIONS, WARRANTIES AND OBLIGATIONS OF THE COMPANY
2.1 The Company has full legal right and authority to enter into this
Agreement.
2.2 The Company hereby agrees to sell to Telemonitoreo the Equipment
listed in Appendix 2.1 hereto.
2.3 The Company hereby grants to Telemonitoreo an exclusive,
non-transferable, paid up license to use the programs and the software
(in object-code only) installed or comprised in the Equipment to be
deployed in Argentina, which such license shall terminate at such time
as the Company ceases to receive payments pursuant to Section 5
hereof, or upon termination of this Agreement pursuant to Section 12
hereof.
2.4 The Company agrees to provide advice on matters related to sales and
marketing activities.
2.5 The Company shall provide, with regard to the Equipment, the warranty
in the form set forth in the Distribution Agreement.
2.6 The Company warrants that it is the rightful owner of the Equipment
with the right to license the software and warrants that the Equipment
is free and clear from any liens and encumbrances.
-2-
<PAGE>
2.7 The Company agrees to provide software maintenance free of charge and
hardware maintenance at a rate equal to fifty (50%) percent of its
standard list pricing.
2.8 The Company agrees to sell to Telemonitoreo STUs pursuant to the terms
and conditions set forth in the Distribution Agreement.
3. REPRESENTATIONS, WARRANTIES AND OBLIGATIONS OF TELEMONITOREO
3.1 Telemonitoreo has the full legal right and authority to enter into
this Agreement
3.2 Telemonitoreo represents that it has the exclusive contractual right
to provide Derived Channel Network services in Argentina on behalf of
Telecom S.A. and Telefonica de Argentina S.A. and to directly receive
monthly payments from each Derived Channel Connection in an amount in
excess of US$ * per month.
3.3 Telemonitoreo will be solely responsible for the installation,
maintenance and customer service and support for the Derived Channel
Network.
3.4 It shall be the obligation of Telemonitoreo to provide sales and
marketing support in connection with the Derived Channel Network.
Telemonitoreo will be the primary supplier of support to TELECOM
and/or Telefonica, and DCX will be the second line of support to
TELECOM and/or Telefonica.
3.5 Telemonitoreo agrees that all STUs used in the Derived Channel Network
shall be purchased solely from the Company, its affiliates or
authorized distributors.
3.6 Telemonitoreo shall be responsible, at its cost and expense, for
complying with all applicable laws and regulations in connection with
the Agreement and the Derived Channel Network, including laws and
regulations pertaining to (a) exports or imports of software and
related property, (b) use or remote use of software and related
property, or (c) registration of this Agreement. Telemonitoreo will
defend, indemnify and hold harmless the Company (and its affiliates,
and the respective directors, officers, employees and agents of the
Company and its affiliates) from and against all actions, claims,
damages or liabilities arising directly out of any violation by
Telemonitoreo of any such laws or regulations. Telemonitoreo will have
the sole right to control the defense thereof, but the Company will
have the right to participate therein at its own cost and expense.
- ----------
* Confidential information which has been omitted pursuant to Rule 24b-2
under the Securities Exchange Act of 1934 and filed separately with the
SEC.
-3-
<PAGE>
3.7 The fees and other amounts payable by Telemonitoreo to the Company
under this Agreement do not include any duties, charges or taxes of
any jurisdiction that may be assessed or imposed including export and
import duties and sales, use, excise, value added and personal
property taxes, excluding only taxes based upon the Company's net
income. Telemonitoreo will be responsible for and directly pay any
such duties, charges and taxes (exclusive of those associated with
Section 5 hereof), and Telemonitoreo will promptly reimburse the
Company for any such taxes payable or collectable by the Company.
4. ORDER, SUPPLY, PAYMENT OF EQUIPMENT AND AUDIT
4.1 Telemonitoreo shall place an initial order (the "Initial Order") for
not less than $1 Million of Equipment, not later than October 17,
1997.
4.2 The Company agrees to ship Equipment in connection with the Initial
Order, on or before October 31, 1997.
4.3 Telemonitoreo agrees to pay for the Equipment shipped pursuant to the
Initial Order within 30 days of the earlier occurrence of the
attainment of 360 subscribers or April 30, 1998.
4.4 After receipt of payment in connection with the Initial Order the
Company shall provide $1 Million (or such higher amount equal to the
Initial Order) of additional Equipment, at no additional charge.
4.5 In connection with all subsequent orders (the "Subsequent Orders") of
Equipment, Telemonitoreo shall pay, within thirty (30) days of
receipt, 50% of the standard list price, which shall be deemed payment
in full for Equipment subject to the Subsequent Orders.
4.6 The Company may, at its cost and expense and by giving at least three
(3) business days' prior written notice to Telemonitoreo, enter
Telemonitoreo's locations during normal business hours and audit
Telemonitoreo's compliance with the provisions of this Agreement.
5. PAYMENT TO THE COMPANY
5.1 Telemonitoreo shall pay to the Company $ * per month, for each Derived
Channel Connection, until the earlier of five (5) years from the date
hereof, or the date upon which twenty thousand (20,000) Derived
Channel Connections have been achieved.
- ----------
* Confidential information which has been omitted pursuant to Rule 24b-2
under the Securities Exchange Act of 1934 and filed separately with the
SEC.
-4-
<PAGE>
5.2 Upon the earlier of five (5) years from the date hereof, or the date
upon which twenty thousand (20,000) Derived Channel Connections have
been achieved, Telemonitoreo shall pay to the Company $ * per month,
for each Derived Channel Connection.
5.3 An accounting of Derived Channel Connections will be made on a monthly
basis and Telemonitoreo shall pay to the Company all amounts due
within 30 days of the end of each month.
6. ASSIGNMENT
6.1 This Agreement may not be assigned by either party without the prior
written agreement of the other party.
7. TITLE AND RISKS
7.1 Title to the Equipment shall pass to Telemonitoreo upon delivery of
the Equipment for which payment has been received by the Company.
Telemonitoreo shall be deemed the owner of the remaining Equipment,
which had been contributed free of charge and delivered by the Company
once twenty thousand (20,000) Derived Channel Connections have been
achieved and the Company has received payments pursuant to Sections
5.1 and 5.2 hereof equal to the value of the Equipment contributed
free of charge.
7.2 Risk of loss or damage to the Equipment shall be assumed by
Telemonitoreo upon delivery.
8. RIGHT OF FIRST REFUSAL
8.1 Before accepting an offer by a third party to acquire a controlling
interest in the voting shares of Telemonitoreo or the assets of the
Telemonitoreo, Telemonitoreo shall first offer the Company the right
to acquire the portion of Telemonitoreo associated with providing
Derived Channel Network services and the related customer base at a
price (or other terms and conditions associated with the offer) equal
to the value of portion of the offer associated with the Derived
Channel Network services business, by sending a notice to that effect
to the Company. Failure by the Company to accept such offer within 30
days of the date of receipt of such notice shall constitute evidence
of its rejection of such right of first refusal. Should Telemonitoreo
sell the controlling interest during the life of this contract, the
terms of this contract shall remain in force.
- ----------
* Confidential information which has been omitted pursuant to Rule 24b-2
under the Securities Exchange Act of 1934 and filed separately with the
SEC.
-5-
<PAGE>
9. THE COMPANY'S INTELLECTUAL PROPRIETARY
9.1 Telemonitoreo acknowledges that the Intellectual Property which is not
now or hereinafter becomes in the public domain in the manner used by
or aggregated by the Company, are trade secrets and proprietary
property of the Company, having substantial commercial value to the
Company. Telemonitoreo acknowledges that the restrictions in this
Agreement are reasonable and necessary to protect the Company's
legitimate business interests. All of the Company's Intellectual
Proprietary in Telemonitoreo's possession will be held in strict
confidence by Telemonitoreo, and Telemonitoreo will take all steps
reasonably necessary to preserve the confidentiality thereof.
Telemonitoreo will not, directly or indirectly, communicate, publish,
display, loan, give or otherwise disclose any such Intellectual
Proprietary to any person, or permit any person to have access to or
possession of such Intellectual Property, except for the purposes
permitted under this Agreement.
9.2 Telemonitoreo acknowledges that any breach of any of the provisions of
this Section 9.1 will result in irreparable injury to the Company for
which money damages could not adequately compensate. If there is a
breach, the Company will be entitled, in addition to all other rights
and remedies which the Company may have at law and equity, to have a
decree of specific performance or an injunction issued requiring the
breach to be cured (if curable) or enjoining all persons involved from
continuing the breach. The existence of any claim or cause of action
which Telemonitoreo or any other person may have against the Company
will not constitute a defense or bar the enforcement of any of the
provisions of this Section 9. Telemonitoreo acknowledges that the
restrictions in this Agreement are reasonable and necessary to protect
legitimate business interests of the Company. The Company will be
liable for any breach of this Agreement by any of its employees or any
other person who obtains access to or possession of any Company
Proprietary Item.
10. INSURANCE
10.1 Telemonitoreo shall, at its sole cost and expense, procure, maintain
and pay for and keep in force adequate (as determined by mutual
agreement of Telemonitoreo and the Company) comprehensive general
liability coverage on an occurrence basis for bodily injury and
property damage. Such coverage shall include contractual, owners and
contractors protective, products/completed operations, occurrence
property damage, personal injury and contingent employer's liability
endorsements, a cross liability clause, name the Company as an
additional named insured and contain a severability of interests
clause.
-6-
<PAGE>
11. REGULATORY APPROVALS AND LICENSES
1. It shall be the obligation of Telemonitoreo to procure any and all
regulatory approvals and licenses necessary in connection with the
Equipment and the Derived Channel Network.
12. TERMINATION AND THE EFFECT OF TERMINATION
12.1 Telemonitoreo and the Company may terminate this Agreement by mutual
consent.
12.2 In the event Telemonitoreo becomes insolvent or bankrupt, the Company
shall be entitled to terminate this Agreement.
12.3 In the event that one of the parties to this Agreement is in material
breach thereof, and such breach is not adequately remedied within
thirty (30) days of receipt of written notice of the material breach,
the non-breaching party shall be entitled to terminate the Agreement.
12.4 The Company may terminate this Agreement should Telemonitoreo fail to
make any payments due pursuant to Sections 4 and 5 hereof within 30
days of their respective due date.
12.5 In the case of termination of this Agreement the provisions of
Sections 2.6, 3.2, 3.3, 3.4, 3.6, 3.7, 4.5, 4.6, 5, 6.1, 7, 9, 10, 11,
13, 17, 21 and 22 as well as any other provision applicable to the
implementation of such provisions shall survive termination of this
Agreement for any reason, until by their terms they are no longer
applicable.
12.6 In the event of termination of this Agreement as provided in Section
12.3, such termination shall be without prejudice to any rights that
the terminating party may have against the breaching party or parties
or any other person under the terms of this Agreement or otherwise.
13. WARRANTY AND INDEMNIFICATION
13.1 Neither party shall be liable to the other for any indirect,
incidental, special, consequential or special damages arising out of
or in connection with this Agreement even if notified of the
possibility of such damages.
13.2 Without prejudice to any other rights or remedies available to the
Company, Telemonitoreo shall indemnify the Company against:
(a) all loss of or damage to any property belonging to the Company,
to the extent arising as a result of any act or omission of
Telemonitoreo, its
-7-
<PAGE>
employees, agents, or subcontractors (or their employees or
agents) in relation to performance of this Agreement;
(b) All claims and proceedings, damages, costs and expenses arising
or incurred in respect of:
(i) Death or personal injury of any employee of Telemonitoreo or
any third party, its agents or subcontractors (or their
employees or agents) employed in or in connection with the
performance of this Agreement; or
(ii) Death or personal injury to any other person to the extent
arising as a result of the acts or omissions of
Telemonitoreo, its employees, agents or subcontractors (or
their employees or agents) in relation to the performance or
associated with this Agreement; or
(iii) Loss of or damage to any property to the extent arising as
a result of any act or omission of Telemonitoreo, its
employees, agents or subcontractors (or their employees or
agents) in relation to the performance, or associated with
this Agreement.
(iv) any breach, violation, or non-performance of any condition,
covenant, obligation, representation or warranty of
Telemonitoreo in relation to this Agreement.
13.3 Without prejudice to any other rights and remedies available to
Telemonitoreo, the Company shall indemnify Telemonitoreo against:
(a) all loss of or damage to any property belonging to Telemonitoreo,
to the extent arising as a result of any act or omission of the
Company, its employees, agents, or subcontractors (or their
employees or agents) in relation to performance of this
Agreement;
(b) All claims and proceedings, damages, costs and expenses arising
or incurred in respect of:
(i) Death or personal injury of any employee of Telemonitoreo or
any third party, its agents or subcontractors (or their
employees or agents) employed in or in connection with the
performance of this Agreement; or
(ii) Death or personal injury to any other person to the extent
arising as a result of the acts or omissions of
Telemonitoreo, its employees, agents or subcontractors (or
their employees or agents) in relation to the performance or
associated with this Agreement; or
-8-
<PAGE>
(iii) Loss of or damage to any property to the extent arising as
a result of any act or omission of Telemonitoreo, its
employees, agents or subcontractors (or their employees or
agents) in relation to the performance, or associated with
this Agreement.
(iv) any breach, violation, or non-performance of any condition,
covenant, obligation, representation or warranty of the
Company in relation to this Agreement.
13.4 EXCEPT AS EXPRESSLY STATED HEREIN, THE COMPANY MAKES NO
REPRESENTATIONS OR WARRANTIES, ORAL OR WRITTEN, EXPRESS OR IMPLIED,
INCLUDING IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE, TO TELEMONITOREO REGARDING THE EQUIPMENT, STUs AND
THE INTELLECTUAL PROPERTY, OR ANY OTHER MATTER PERTAINING TO THIS
AGREEMENT.
14. NOTICES
14.1 The parties hereby agree that any notice, request, demand, consent,
approval, correspondence or other communication required or permitted
to be given hereunder, shall be in writing and be sent registered
mail, telex, telegram, facsimile, or other agreeable electric means
addressed as follows:
NUMEREX CORP.: TELEMONITOREO S.A.
John J. Reis, President and Oscar M. Ghillione
Chief Executive Officer President
NUMEREX CORP. TELEMONITOREO, S.A.
100 Four Falls Corporate Center Sarmiento 385
Suite 407 Piso 5, Oficina 80
Route 23 and Woodmont Road Buenos Aires
West Conshohocken, PA 19428-2961 Argentina
copy to:
Barry H. Genkin, Esq.
BLANK ROME COMISKY
& MCCAULEY
One Logan Square, 9th Floor
Philadelphia, PA 19103
15. ENTIRE AGREEMENT
15.1 This Agreement and the Appendices thereto contain the entire agreement
between the parties hereto relating to the subject matter herein and
supersedes any prior
-9-
<PAGE>
agreements, obligations, statements, representations, understandings,
communications and negotiations between the parties, whether oral or
written, including the Letter of Intent. Except as otherwise provided
in this Agreement, this Agreement shall bind the parties and the
parties hereby agree that there are no terms and obligations,
covenants, representations, statements or conditions, oral or written,
other than those contained herein.
16. SEVERANCE
16.1 In the event any of the provisions of this Agreement are held to be
illegal, invalid or unenforceable, any such provision shall, to the
extent permitted by law, be severed and the remaining provisions of
the Agreement remain in full force and effect.
17. CONFIDENTIALITY
17.1 It is anticipated that with respect to any matter related to this
Agreement, it may be necessary for the parties to exchange
"Confidential Information." Confidential Information is information of
the parties or of their suppliers, whether written or in any other
tangible form, or oral including, but not limited to, plans, drawings
and information related to design, technical, performance, sales,
financial, personnel, contractual and marketing matters, including
contracts, ideas and concepts, as well as software, belonging to
either of the parties or to their suppliers and which is provided in
relation to this Agreement. Confidential Information shall remain the
property of the disclosing party or of its suppliers as the case may
be, and will be returned to the disclosing party upon written request
together with all copies that could have been made, unless otherwise
agreed upon in writing.
17.2 Confidential Information shall be protected by the receiving party
using the same degree of care as used to protect similar valuable
information used and reproduced by the receiving party solely for the
purposes of this Agreement and disclosed only to those persons having
a need to know, who shall be made aware of the obligations hereunder.
18. FORCE MAJEURE; EXCLUSION FOR UNAUTHORIZED ACTIONS
18.1 Neither party shall be liable for any delay or failure to perform its
obligations under this Agreement arising out of a cause beyond its
control or without its fault or negligence. Such causes may include,
but are not limited to, fires, floods, and natural disasters. This
clause does not apply to the acquisition of Commercial or Government
Licenses or Approvals.
-10-
<PAGE>
19. AMENDMENT
19.1 This Agreement shall not be modified, varied, amended, or supplemented
except in a writing executed by both parties.
20. TIME OF ESSENCE
20.1 Time is of the essence in any matter relating to the performance of
this Agreement.
21. LAW AND DOMICILE
21.1 This Agreement shall be governed by and construed in accordance with
the internal laws (without giving effect to the conflict of laws
principles thereto) of the Commonwealth of Pennsylvania.
22. JURISDICTION AND SERVICE OF PROCESS
22.1 Any action or proceedings seeking to enforce any term or provision of
this Agreement, or based on any right arising out of this Agreement,
may be instituted against a party only in the courts of the
Commonwealth of Pennsylvania, or, if it can acquire jurisdiction, in
the United States District Court for the Eastern District of
Pennsylvania, and the parties irrevocably consent and submit to the
exclusive jurisdiction of such courts (and of the appropriate
appellate courts) in any such action or proceeding and waive any
objection which they may now have or hereafter have to the laying of
the venue of any such action or proceedings in such courts. Service of
process, and any other notice of communication, in any such action or
proceedings shall be effective against or as to a party if given by
first class certified mail or registered mail, return receipt
requested, or by any other means of mail which requires a signed
receipt, postage prepaid, mailed to such party at the address to which
such party is to be sent notices in accordance with the notice
provisions of this Agreement, and the parties irrevocably consent to
such service of process, giving of notices and transmission of
communications. This section shall not diminish or otherwise affect
the right of a party to serve process in any other matter permitted
under applicable law.
IN WITNESS WHEREOF the parties hereto have, through their duly authorized
representative, executed this Agreement on this 8th day of January, 1998.
NUMEREX CORP. TELEMONITOREO S.A.
/s/ John J. Reis /s/ Oscar M. Ghillione
------------------------ -----------------------
John J. Reis, Oscar M. Ghillione,
President President
-11-
<PAGE>
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(A) Computation of the weighted average number of shares of common stock
outstanding for the fiscal years ended October 31, 1993, 1994, 1995, 1996
and 1997.
Shares of Weighted
Common Stock Shares Outstanding
------------ ------------------
1993
- ----
November 1, 1992 to October 31, 1993 6,400 6,400
Shares issued in connection with the
acquisition of DA Systems 1,625 423
Shares issued in connection with the
acquisition of Versus Technology UK 1,208 198
------ ------
Total 9,233 7,021
====== ======
1994
- ----
November 1, 1993 to October 31, 1994 9,233 9,233
Shares issued in connection with the
February 28, 1994 Stock Exchange 392 263
Shares purchased by a member of senior
management in connection with the
Digilog acquisition 10 3
------ ------
Total 9,635 9,499
====== ======
1995
- ----
November 1, 1994 to October 31, 1995 9,635 9,635
Shares issued in connection with
public offering 1,875 961
Shares issued in connection with
the underwriters exercise of an
overallotment option 88 37
------ ------
Total 11,598 10,633
====== ======
1996
- ----
November 1, 1995 to October 31, 1996 11,598 11,598
Shares acquired and held in treasury (310) (66)
------ ------
Total 11,288 11,532
====== ======
1997
- ----
November 11, 1996 to October 31, 1997 11,288 11,288
Shares acquired and held in treasury (375) (211)
------ ------
Total 10,913 11,077
====== ======
<PAGE>
(B) Computation of Earnings per Share:
Computation of earnings per share is net (loss) income divided by the
weighted average number of shares of common stock outstanding for the
fiscal years ended October 31, 1993, 1994, 1995, 1996 and 1997.
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net (loss) income (pound)2,464 (pound)5,885 (pound)5,140 (pound)(3,605) (pound)2,187
------------- ----------- ------------ -------------- ------------
Weighted average number of shares
of common stock outstanding 7,021 9,499 10,633 11,532 11,077
============ ============ ============ ============== ============
Earnings per share (pound) 0.35 (pound) 0.62 (pound) .48 (pound) (0.31) (pound) 0.20
============ ============ ============ ============== ============
</TABLE>
<PAGE>
EXHIBIT 13
Pursuant to Note 2 of Instruction G(2) to Form 10-K, in response to Item 6.
Selected Financial Data, "Selected Consolidated Financial Data" set forth on
page 10 of the Company's 1997 Annual Report to Shareholders, and in response to
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" set forth on pages 11-18 of the Company's 1997 Annual
Report to Shareholders are being filed in electronic format. No other sections
of the Company's 1997 Annual Report to Shareholders shall be deemed "filed" as
part of this filing.
<PAGE>
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
Year Ended October 31,
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(in thousands, except per share data)
Statement of Income Data:
Net Sales:
<S> <C> <C> <C> <C> <C>
Derived Channel Systems (Pound)10,594 (Pound)13,258 (Pound)14,879 (Pound)15,645 (Pound) 9,048
Intrusion alarm, broadband, and network
management products 7,082 4,934 6,166 5,592 1,247
------ ------ ------ ------ ------
Total net sales 17,676 18,192 21,045 21,237 10,295
Cost of sales (8,830) (9,961) (8,432) (8,405) (5,360)
Inventory obsolescence charge -- (1,473) -- -- --
------ ------ ------ ------ ------
Gross profit 8,846 6,758 12,613 12,832 4,935
Selling, general, administrative and other (7,496) (7,716) (5,715) (3,889) (1,265)
Special charges -- (2,721) -- -- --
------ ------ ------ ------ ------
Operating income (loss) 1,350 (3,679) 6,898 8,943 3,670
Net interest and other income (expense) 1,513 1,069 773 71 (78)
------ ------ ------ ------ ------
Income (loss) before income taxes 2,863 (2,610) 7,671 9,014 3,592
Income taxes (676) (995) (2,531) (3,129) (1,128)
------ ------ ------ ------ ------
Net income (loss) (Pound) 2,187 (Pound)(3,605) (Pound) 5,140 (Pound) 5,885 (Pound) 2,464
====== ====== ====== ====== ======
Earnings (loss) per share (Pound) 0.20 (Pound) (0.31) (Pound) 0.48 (Pound) 0.62 (Pound) 0.35
====== ====== ====== ====== ======
Weighted average shares outstanding 11,077 11,532 10,633 9,449 7,021
Working capital (Pound)21,667 (Pound)23,187 (Pound)28,252 (Pound) 7,741 (Pound) 2,642
Total assets (Pound)32,509 (Pound)29,982 (Pound)37,353 (Pound)17,115 (Pound) 8,576
Long-term debt, less current portion (Pound) 2,688 (Pound) -- (Pound) -- (Pound) 12 (Pound) 70
Shareholders' equity (Pound)27,034 (Pound)26,300 (Pound)32,076 (Pound)10,389 (Pound) 4,251
</TABLE>
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
The following is a discussion of the consolidated financial condition and
results of operations of the Company for the fiscal years ended October 31,
1997, 1996 and 1995. This discussion should be read in conjunction with the
Company's consolidated financial statements, the related notes thereto, and the
other financial information included elsewhere in this report.
Overview
The Company's history began on July 13, 1992 when Bronzebase acquired 90% of the
outstanding stock of Versus Technology UK and certain proprietary intellectual
property rights, including rights to Derived Channel technology and the rights
to market such technology in certain countries, including the United Kingdom.
Bronzebase acquired the remaining Versus Technology UK stock in September 1993.
In February 1994, as a result of a stock exchange, Bronzebase and its
subsidiary, Versus Technology UK, became subsidiaries of NumereX Corp. For
financial reporting purposes, the Company's results of operations prior to the
date of the Stock Exchange are those of Bronzebase and its predecessor, Versus
Technology UK.
In July 1994, the Company completed the stock for stock acquisition of DA
Systems. Because the shareholders of the Company and DA Systems were
substantially the same prior to the acquisition, the historical financial
statements for the Company have been restated to combine the Company with DA
Systems for all periods subsequent to July 28, 1993, the date on which common
control first existed. DA Systems was subsequently sold in May 1997. In July
1994 and November 1994, the Company acquired the assets comprising its Digilog
and DCX Systems subsidiaries, respectively. These acquisitions were cash
transactions and have been recorded under the purchase accounting method.
In February 1997, the Company acquired 100% of the outstanding common stock
of Broadband Networks, Inc. The acquisition was accounted for using the purchase
method of accounting. In July 1997, the Company acquired 19.5% of the common
stock of UPLINK Security, Inc. Due to the Company's inability to exert
significant influence over the operations of UPLINK, the Company accounted for
the investment in UPLINK using the cost method of accounting.
The Company generates substantially all of its net sales from the sale of
various equipment, systems and software products to its customers. Products are
typically shipped soon after order placement. Therefore, sales order backlog
historically has not been a meaningful indicator for the Company. The Company
presently generates a significant amount of its net sales from product sales to
an established customer base, principally British Telecom, the Company's largest
customer, and to an established network of alarm system distributors and
installers.
<PAGE>
The Company currently publishes its consolidated financial statements in
British pounds sterling, the functional currency of the country in which a
substantial majority of the Company's net sales are presently generated.
Results of Operations
The following table sets forth, for the periods indicated, the percentage of net
sales represented by selected items in the Company's Consolidated Statements of
Operations.
<PAGE>
Year Ended October 31,
----------------------------------------
1997 1996 1995
----- ----- -----
Net Sales:
Derived Channel Systems 59.9% 72.9% 70.7%
Intrusion alarm, broadband and
network management products (1) 40.1 27.1 29.3
----- ----- -----
Total net sales 100.0 100.0 100.0
Cost of sales 50.0 54.8 40.1
Inventory write-downs -- 8.1 --
----- ----- -----
Gross profit 50.0 37.1 59.9
Selling, general, administrative
and other 42.4 42.4 27.1
Special charges -- 14.9 --
===== ===== =====
Operating income (loss) 7.6 (20.2) 32.8
===== ===== =====
Net income (loss) 12.4% (19.8%) 24.4%
===== ===== =====
(1) The Company acquired BNI in February 1997 and sold DA in May 1997. The
above table includes sales of broadband products only for the year ended
October 31, 1997 and intrusion alarm products for all periods through April
30, 1997. Accordingly, future results of operations will include broadband
product sales, but will not include any intrusion alarm product sales.
Forward-Looking Statements
The information contained in this Annual Report to Shareholders contains
forward-looking statements (as such term is defined in the Securities Exchange
Act of 1934 and the regulations thereunder), including without limitation,
statements as to trends or management's beliefs, expectations or opinions, which
are based upon a number of assumptions concerning future conditions that
ultimately may prove to be inaccurate.
Such forward-looking statements are subject to risks and uncertainties and
may be affected by various factors which may cause actual results to differ
materially from those in the forward-looking statements. Certain of these risks,
uncertainties and other factors, are discussed in the Company's Annual Report on
Form 10-K for the year ended October 31, 1997.
<PAGE>
Net sales decreased 2.8% to (Pound)17.7 million for the fiscal year ended
October 31, 1997 as compared to (Pound)18.2 million in fiscal 1996. Derived
Channel product sales declined by (Pound)2.7 million in fiscal 1997 as compared
to fiscal 1996. The principal reason for the decline was a reduction in network
equipment sales in the United Kingdom and a decrease in sales of Subscriber
Terminal Units (STUs) as a result of the sale of DA, which was partially offset
by the inclusion of royalty revenue for the right to manufacture certain
intrusion alarm products through a license agreement with the acquirer of DA.
The Company believes that the network equipment coverage in the United Kingdom
(greater than 90%) may limit the potential for significant growth in the United
Kingdom for network equipment, although STU sales in the United Kingdom have
remained level throughout fiscal 1997 and 1996. Intrusion alarm, broadband and
network management product sales increased by (Pound)2.1 million in fiscal 1997
as compared to fiscal 1996. The principal reasons for the increase were the
inclusion of sales of broadband products and services (from BNI which was
acquired in February 1997) and a modest improvement in sales of network
management products. These increases in sales were partially offset by the
reduction in sales of intrusion alarm products due to the sale of DA, effective
May 1997.
Cost of sales decreased 22.8% to (Pound)8.8 million for fiscal year 1997 as
compared to (Pound)11.4 million for fiscal 1996. This primarily resulted from a
shift in sales mix to higher margin products principally due to the elimination
of DA Systems, Ltd. and its intrusion alarm product line and the inclusion of
broadband products and services. There were no inventory write-downs in fiscal
1997, whereas inventory write-downs of (Pound)1.5 million recorded in fiscal
1996 were the result of determining certain inventory items to be obsolete due
to market conditions. Gross profit, as a percentage of net sales, increased to
50.0% for fiscal 1997 as compared to 37.7% for fiscal 1996. The increase in
gross profit margin was primarily due to the absence of an inventory
obsolescence charge in fiscal 1997 as compared to fiscal 1996 and a shift in
sales mix to higher margin products.
Selling, general, administrative and other expenses decreased 2.9% to
(Pound)7.5 million for fiscal 1997 as compared to (Pound)7.7 million for fiscal
1996. The decrease was principally related to the elimination of underperforming
product lines and a decrease in legal and other expenses. In addition, one-time
special charges of (Pound)2.7 million were recorded in fiscal 1996. These
special charges related principally to fixed and intangible asset impairment
provisions for certain obsolete products and settlement of litigation. There
were no special charges in fiscal 1997.
Other income and expense increased 41.5% to (Pound)1.5 million for the
fiscal year ended October 31, 1997 as compared to (Pound)1.1 million in fiscal
1996. The increase was principally related to a credit on the sale of DA, which
was partially offset by a decrease in interest income generated by temporary
cash investments and the inclusion of interest expense on the Company's
revolving credit facility, which was used in conjunction with the BNI
acquisition.
The Company recorded a tax provision of (Pound)0.7 million for fiscal 1997.
The effective income tax rate for fiscal 1997 was 23.6%. The income taxes
recorded by the Company differ from the amounts computed by applying statutory
U.S. federal income tax rates principally due to the tax benefits resulting from
the distribution of U.K. earnings during fiscal 1997 which was partially offset
by unrecognized deferred tax benefits arising from certain U.S. losses.
The absence of inventory obsolescence and special charges, the increase in
gross profit margins, the increase in other income and expenses and a decrease
in the effective tax rate in fiscal 1997, resulted in a net income of (Pound)2.2
million as compared to a net loss of (Pound)3.6 million in fiscal 1996.
<PAGE>
As a result of the Company's stock buyback program, weighted average shares
outstanding declined to 11.1 million in fiscal 1997 as compared to 11.5 million
in fiscal 1996.
Fiscal Years Ended October 31,
1996 and 1995
Net sales decreased 13.6% to (Pound)18.2 million for the fiscal year ended
October 31, 1996 as compared to (Pound)21.0 million in fiscal 1995. Derived
Channel product sales declined by (Pound)1.6 million in fiscal 1996 as compared
to fiscal 1995. The principal reason for the decline was a reduction in network
equipment sales in the United Kingdom which was partially offset by increased
sales in the United States market. The Company believes that the network
equipment coverage in the United Kingdom (greater than 90%) will limit the
potential for significant growth in the United Kingdom for network equipment
sales, although Subscriber Terminal Unit (STU) sales in the United Kingdom have
remained strong throughout fiscal 1996. Intrusion alarm and network management
products declined by (Pound)1.2 million in fiscal 1996 as compared to fiscal
1995, principally due to the elimination of certain underperforming products
from the network management product line.
Cost of sales increased 35.5% to (Pound)11.4 million for fiscal year 1996
as compared to (Pound)8.4 million for fiscal 1995. The inventory write-downs of
(Pound)1.5 million represented a pre-tax charge recorded in the third and fourth
quarters of fiscal 1996 as a result of determining certain inventory items to be
obsolete due to market conditions related primarily to network management and
intrusion alarm products. Gross profit, as a percentage of net sales, decreased
to 37.1% for fiscal 1996 as compared to 59.9% for fiscal 1995. The decrease in
the gross profit margin was primarily due to a shift in sales mix to lower
margin products as network equipment (a higher margin product) sales to British
Telecom declined, inclusion of the inventory obsolescence charge, and, in
addition, certain fixed costs related to manufacturing, which did not decline in
conjunction with net sales, caused a further decrease in the gross profit
margin.
Selling, general, administrative and other expenses increased 35.1% to
(Pound)7.7 million for fiscal 1996 as compared to (Pound)5.7 million for fiscal
1995. The increase was principally related to a major expansion of the Company's
sales and marketing efforts, product development expenses and an increase in
legal and other expenses. In addition, special charges of (Pound)2.7 million
were recorded in the third and fourth quarters of fiscal 1996. These special
charges related principally to fixed and intangible asset impairment provisions
for certain obsolete products and settlement of litigation.
Other income and expenses increased 39.1% to (Pound)1.1 million for the
fiscal year ended October 31, 1996 as compared to (Pound)0.8 million in fiscal
1995. The increase was principally the result of interest income earned from
temporary investment of cash proceeds from a public offering. In fiscal 1996
these temporary investments earned income for a full twelve months versus fiscal
1995 (the year of the public offering), when the temporary investments earned
income for a partial year.
The Company recorded a tax provision of (Pound)1.0 million for fiscal 1996
despite the pre-tax loss. Certain losses arising from United States operations
were not deductible in fiscal 1996, while earnings from United Kingdom
operations were fully taxable. The Company expects to generate a tax benefit
from these losses in future periods. The effective income tax rate for fiscal
year 1995 was 33.0%.
The decrease in net sales, the inventory obsolescence charges and special
charges recorded in fiscal 1996 resulted in a net loss of (Pound)3.6 million as
compared to net income of (Pound)5.1 million in fiscal 1995.
<PAGE>
Weighted average shares increased to 11.5 million in fiscal 1996 as
compared to 10.6 million in fiscal 1995, principally due to the new shares
issued in conjunction with a mid-year 1995 public offering being outstanding for
a full year in fiscal 1996.
Selected quarterly Financial Data;
Seasonality
The following table (on page 16) shows certain unaudited financial data of the
Company for each quarter of the last two fiscal years. This information has been
prepared from the books and records of the Company in accordance with generally
accepted accounting principles for interim financial information. In the opinion
of management, all adjustments (including only normal, recurring adjustments)
considered necessary for a fair presentation have been included. Interim results
for any quarter are not necessarily indicative of the results that may be
expected for any future period.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------
January 31, April 30, July 31, October 31,
1997 1997 1997 1997
-----------------------------------------------------------
(in thousands)
Net sales:
<S> <C> <C> <C> <C>
Derived Channel Systems (Pound)2,656 (Pound)2,753 (Pound)2,494 (Pound)2,691
Intrusion alarm and network
management products 1,487 2,392 1,581 1,622
----- ----- ----- -----
Total net sales 4,143 5,145 4,075 4,313
Gross Profit 1,942 2,510 2,256 2,138
Operating income 142 530 610 68
Net income 241 455 857 634
<CAPTION>
Three Months Ended
-----------------------------------------------------------
January 31, April 30, July 31, October 31,
1996 1996 1996(1) 1996(1)
-----------------------------------------------------------
(in thousands)
Net sales:
<S> <C> <C> <C> <C>
Derived Channel Systems (Pound)2,872 (Pound)4,116 (Pound)3,397 (Pound)2,873
Intrusion alarm and network
management products 1,267 1,258 1,301 1,108
----- ----- ----- -----
Total net sales 4,139 5,374 4,698 3,981
Gross Profit 1,779 2,506 1,404 1,069
Operating income (loss) 16 544 (1,884) (2,346)
Net income (loss) 217 520 (1,653) (2,689)
</TABLE>
1 Net income for the third quarter includes pre-tax special charges of
(Pound)1,151,000, primarily related to intangible asset impairment
provisions for certain obsolete products and inventory write-downs of
(Pound)927,000.
2 Net income for the fourth quarter includes pre-tax special charges of
(Pound)473,000, primarily related to fixed asset impairment provision for
certain obsolete products, (Pound)1,097,000 relating to an accrual for
settlement of shareholder litigation and inventory write-downs of
(Pound)546,000.
<PAGE>
The Company's financial results may fluctuate from quarter to quarter as a
result of factors, including the timing of product shipments and new product
introductions as well as certain major network equipment software sales to
telephone companies that historically have been of a non-recurring nature.
Liquidity and Capital Resources
The Company is presently able to fund its operations and working capital
requirements from cash flow generated by operations, the proceeds from a public
offering completed in April 1995 and funds available under its revolving credit
facility. Net cash provided by operating activities increased to (Pound)0.3
million for the fiscal year ended October 31, 1997 as compared to (Pound)0.2
million in fiscal 1996. The increase from 1996 was primarily due to higher
earnings which was partially offset by cash payments for income taxes and a
settlement payment in conjunction with certain litigation.
Net cash used in investing activities increased to (Pound)4.0 million for
the fiscal year ended October 31, 1997 as compared to (Pound)1.6 million in
fiscal 1996. The increase was primarily due to the acquisition of Broadband
Networks, Inc., the investment in UPLINK and purchases of capitalized software,
which were partially offset by the cash proceeds received from the sale of DA.
Net cash provided by financing activities was (Pound)1.2 million for the
fiscal year ended October 31, 1997 as compared to net cash used in financing
activities of (Pound)2.0 million in fiscal 1996. Net cash provided during fiscal
1997 increased principally due to borrowings under the Company's revolving
credit facility which was somewhat offset by the purchase of treasury stock. The
principal reasons for fiscal 1996 usage was the payment of dividends and the
implementation of a stock buyback program.
The Company had working capital balances of (Pound)21.7 million and
(Pound)23.2 million as of October 31, 1997 and 1996, respectively.
The Company's business has not been capital intensive and, accordingly,
capital expenditures have not been material. To date, the Company has funded all
capital expenditures from cash provided by operating activities, the revolving
credit facility and the proceeds from a public offering completed in April 1995.
In order to fund an expansion of its Derived Channel System business (including
an effort to increase market penetration in North America, South America,
Western Europe and Australia and to acquire complementary businesses, products
or services), the Company may require significantly greater capital investments
than it has in the past.
The Company believes that its anticipated cash flow from operations,
together with its available cash, including the proceeds of its public offering
completed in April 1995, and funds available under its revolving credit
facility, will be sufficient to finance its operating and capital requirements
through the fiscal year ended October 31, 1997. Cash requirements for future
expansion of the Company's operations will be evaluated on an as-needed basis.
The Company does not expect that such expansion will have a materially negative
impact on the Company's ability to fund its existing operations.
Effect of Inflation
Inflation has not been a material factor affecting the Company's business. In
recent years, the cost of electronic components has remained relatively stable
due to competitive pressures within the industry, which has enabled the Company
to contain its production costs. The Company's general operating expenses, such
as salaries, employee benefits, and facilities costs, are subject to normal
inflationary pressures.
<PAGE>
Foreign Currency
Currently, the Company's functional and reporting currency is British pounds
sterling because a substantial majority of the Company's net sales are presently
generated in the United Kingdom. Although the Company does not have an ongoing
currency hedging program in place, it occasionally hedges its operations
selectively against fluctuations in foreign currency as needed. This occasional
hedging is done primarily because a portion of the Company's production costs
associated with its off-shore contract manufacturing are denominated in U.S.
dollars while the bulk of its net sales are in British pounds sterling. The
Company uses forward U.S. dollar contracts which have a maximum term of six
months and which are not material to the Company. The Company anticipates that
it may utilize additional foreign currency contracts as needed to hedge against
fluctuations in the exchange rate between the U.S. dollar and the British pound
sterling. Fluctuations in foreign currency exchange rates are not expected to
have a material impact on the Company's results of operations or liquidity.
EXHIBIT 21
SUBSIDIARIES OF NUMEREX CORP.(1)
Numerex Investment Corp. (Tier 1)
Bronzebase Limited (Tier 2)
Versus Technology Limited (Tier 3)
DCX Systems Company (Tier 2)
DCX Systems, Inc. (Tier 1)
Digilog Inc. (Tier 1)
Broadband Networks, Inc.(2) (Tier 1)
- --------
1 Does not include Uplink Security, Inc., in which Company owns a 19.5%
equity interest.
2 Company owns 100% of outstanding common stock, which upon the exercise of
employee stock options, could be reduced to 82%.
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
Numerex Corp.:
We consent to the incorporation by reference in Registration Statement No.
333-38667 of Numerex Corp. on Form S-8 of our report dated December 17, 1997
appearing in and incorporated by reference in this Annual Report on Form 10-K of
Numerex Corp. for the year ended October 31, 1997.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
January 28, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> UK Pounds Sterling
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Oct-31-1997
<PERIOD-END> Oct-31-1997
<EXCHANGE-RATE> 1.6743
<CASH> 15,626
<SECURITIES> 0
<RECEIVABLES> 4,432
<ALLOWANCES> 34
<INVENTORY> 2,929
<CURRENT-ASSETS> 24,454
<PP&E> 2,266
<DEPRECIATION> 1,174
<TOTAL-ASSETS> 32,509
<CURRENT-LIABILITIES> 2,787
<BONDS> 0
0
0
<COMMON> 18,321
<OTHER-SE> 8,713
<TOTAL-LIABILITY-AND-EQUITY> 32,509
<SALES> 17,676
<TOTAL-REVENUES> 0
<CGS> 8,830
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,496
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,863
<INCOME-TAX> 676
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,187
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
