-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SD0dC0Q5IaXXNXTltMHUo7kkIsDHCFPZQbiBC/t+5DCdFEAIn+gH8PR8ntX4kmxM Jt7BpJjcuyEZpOnecX4p4g== 0000950115-98-000126.txt : 19980130 0000950115-98-000126.hdr.sgml : 19980130 ACCESSION NUMBER: 0000950115-98-000126 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19971031 FILED AS OF DATE: 19980129 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NUMEREX CORP /PA/ CENTRAL INDEX KEY: 0000870753 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 112948749 STATE OF INCORPORATION: PA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-22920 FILM NUMBER: 98516947 BUSINESS ADDRESS: STREET 1: 100 FOUR FALLS CORPORATE CENTER STE 407 STREET 2: RTE 23 & WOODMONT RD CITY: WEST CONSHOHOKEN STATE: PA ZIP: 19428-2961 BUSINESS PHONE: 6108920316 MAIL ADDRESS: STREET 1: 1400 N PROVIDENCE ROAD STE 5500 CITY: MEDIA STATE: PA ZIP: 19063 10-K 1 ANNUAL REPORT 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 ------- NUMEREX CORP. ------------------------------------------------------ (Exact Name of Registrant as Specified in its Charter) Pennsylvania 11-2948749 - ------------------------------- --------------------------------- (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 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (610) 892-0316 --------------- Securities Registered Pursuant to Section 12(b) of the Act: None ---- Securities Registered Pursuant to Section 12(g) of the Act: Class A Common Stock, no par value 10,914,592 ---------------------------------- ----------------------------- (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) 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. - ----------------- (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. TABLE OF CONTENTS Page ---- 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, ------------------------------------ 1997 1996 1995 1994 ------ ------ ------ ------ 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) 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, 1 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. 2 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 3 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, 4 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 5 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 6 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 7 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 8 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 9 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. 10 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 11 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. 12 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 13 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 14 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. 15 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. 16 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. 17 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. 18 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 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 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 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 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 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 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 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 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 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 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 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 - ------------------ (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 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 INDEX TO FINANCIAL STATEMENTS
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
F-1 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
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 ----------- ------------- ------------- 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 ======= ============= =============
See notes to consolidated financial statements F-3
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 ----------- ------------- ------------- ------------- 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 ======= ============= ============= =============
See notes to consolidated financial statements. F-4
NUMEREX CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands) - ---------------------------------------------------------------------------------------------------------------------------------- Common Stock Accumulated -------------------- Treasury Translation Retained Shares Amount Stock Adjustment Earnings Total ------ ------------- ------------ ------------- ------------- ------------- 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 ====== ============= ============= =========== ============= =============
See notes to consolidated financial statements. F-5
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 ----------- ------------- ------------- ------------- 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
See notes to consolidated financial statements. F-6 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 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 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 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 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 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 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 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:
October 31, -------------------------------------------- 1997 1996 1995 ---------- ------------ ------------ (In Thousands) 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 ========== ========== ============
F-14 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 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 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 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:
1997 1996 1995 ----------------------- ---------------------- --------------------- Weighted Weighted Weighted Average Average Average Shares Ex. Price Shares Ex. Price Shares Ex. Price ------- --------- ------- --------- ------- --------- 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 ======= ===== ======= ====== ======= =====
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 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 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):
United States United Kingdom Eliminations Consolidated ------------- -------------- ------------ ------------ 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
F-20 EX-2.7 2 SHAREHOLDERS' AGREEMENT EXHIBIT 2.7 ================================================================================ BROADBAND NETWORKS, INC., SHAREHOLDERS' AGREEMENT among BROADBAND NETWORKS, INC., NUMEREX CORP. and THE SHAREHOLDERS LISTED ON EXHIBIT A February 28, 1997 ================================================================================ 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 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- 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". 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- 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- 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- 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 -5- 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. -6- 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 -7- 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 -8- 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. -9- 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 -10- 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 -11- 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. -12- 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 -13- (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. -14- 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- (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- 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- /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- /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- /s/ Carol Zollweg --------------------------------- Carol Zollweg WARRANT HOLDER: /s/ Robert J. Beaury --------------------------------- Robert J. Beaury -20- EX-2.8 3 STOCK PURCHASE AGREEMENT 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. 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 2 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 3 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 (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 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 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 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 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; 9 (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. 10 (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 11 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. 12 (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 13 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 14 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, 15 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 16 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 17 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 18 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. 19 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 20 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. 21 (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 22 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 23 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. 24 (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 25 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 26 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 27 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; 28 (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 29 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; 30 (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 31 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." 32 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. 33 (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. 34 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 35 (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. 36 (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. 37 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; 38 (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; 39 (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 40 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; 41 (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; 42 (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. 43 (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. 44 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 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 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. 47 "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, 48 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. 49 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 50 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 51 EX-2.9 4 STOCK PURCHASE AGREEMENT 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 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. "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 -2- 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. -3- "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. -4- "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. -5- "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. -6- (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. -7- (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: 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
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: -8- 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 -9- 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 -10- 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. -11- 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 -12- 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: -13- (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 -14- 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. -15- [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 -16- 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 -17- 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 -18- 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 -19- 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 -20- 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. -21- (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 -22- 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 -23- 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"). -24- (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. -25- 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 -26- 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. -27- 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: -28- (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. -29- 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. -30- 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. -31- 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") -32- (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 -33- 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 -34- 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. -35- 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. -36- (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- (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 -38- 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- 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. * * * -40- 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- 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- EX-2.10 5 SHAREHOLDERS' AGREEMENT EXHIBIT 2.10 ================================================================================ UPLINK SECURITY, INC. SHAREHOLDERS' AGREEMENT among UPLINK SECURITY, INC. NUMEREX CORP. and THE SHAREHOLDERS LISTED ON EXHIBIT A July 16, 1997 ================================================================================ TABLE OF CONTENTS
PAGE ---- 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
-i-
PAGE ---- 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
-ii- 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 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 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 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 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 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. 6 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 7 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. 8 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. 9 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 10 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. 11 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; 12 (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 13 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 14 (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. 15 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 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 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 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
EXHIBIT A MANAGEMENT SHAREHOLDERS Shareholder Shares of Common Stock Address - ----------- ---------------------- ------- 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
20 EX-2.11 6 LOAN AND SECURITY AGREEMENT EXHIBIT 2.11 LOAN AND SECURITY AGREEMENT Dated as of July 16, 1997 between NUMEREX CORP. and UPLINK SECURITY, INC. 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 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 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 (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 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 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 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 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 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 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 (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 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 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. 14 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 15 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, 16 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 17 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. 18 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. 19 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 20 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. 21 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 22 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. 23 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 24 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 25 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 26 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. 27 "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 28 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 29 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 30 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, 31 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. 32 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 33 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. 34 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 EX-10.20 7 INCENTIVE COMPENSATION PROGRAM FOR FY 98 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. EX-10.23 8 LOAN AGREEMENT 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 -1- 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. -2- 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 -3- 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. -4- 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 -5- 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). -6- 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 -7- 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- 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- 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- 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- 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- 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- 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: ---------------------------- ----------------------------- -14- [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 ----------------------------- -15- 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. -3- "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- 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: 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:____________
-5- 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 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 PNC BANK, NATIONAL ASSOCIATION BY: /S/ AUTHORIZED OFFICER --------------------------------- PRINT NAME: TITLE: FORM 17F - PA REV. 12/95 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 EX-10.24 9 TECHNOLOGY LICENSE 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 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:- "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; "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; "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 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. 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. 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. 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 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 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 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. 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. 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:- 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); 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 :- 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. 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. 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. 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 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:- 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. 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: EX-10.25 10 CONTRACT 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 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SCHEDULE 1 REQUIREMENTS CONTRACT NO: 652902 - -------------------------------------------------------------------------------- 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 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. 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. 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 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. 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: - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------- ITEM CODE DESCRIPTION TOTAL TOTAL CRD NED RELEASED RELEASED TO DATE - ------------ ----------------------------------- ---------------- ---------------- --------------- ---------------- - ------------ ----------------------------------- ---------------- ---------------- --------------- ---------------- - ------------ ----------------------------------- ---------------- ---------------- --------------- ---------------- - ------------ ----------------------------------- ---------------- ---------------- --------------- ---------------- - ------------ ----------------------------------- ---------------- ---------------- --------------- ---------------- - ------------ ----------------------------------- ---------------- ---------------- --------------- ---------------- - ------------ ----------------------------------- ---------------- ---------------- --------------- ---------------- - ------------ ----------------------------------- ---------------- ---------------- --------------- ---------------- - ------------ ----------------------------------- ---------------- ---------------- --------------- ---------------- - ------------ ----------------------------------- ---------------- ---------------- --------------- ---------------- - ------------ ----------------------------------- ---------------- ---------------- --------------- ---------------- - ------------ ----------------------------------- ---------------- ---------------- --------------- ---------------- - ------------ ----------------------------------- ---------------- ---------------- --------------- ----------------
SIGNED: ............................ 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: ............................ 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). 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. 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 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. 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. 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. SCHEDULE 1 to CONTRACT NO: 652902 PAGE 14 of 17 - --------------------------------------------------------------------------------
- ------------------------------------------- --------------------------------------------------------------------- Data Field Input Requirements - ------------------------------------------- --------------------------------------------------------------------- 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. - ------------------------------------------- ---------------------------------------------------------------------
SCHEDULE 1 to CONTRACT NO: 652902 PAGE 15 of 17 - -------------------------------------------------------------------------------- Form `a' LATE ORDERS REPORT
- ------------------------ ------------------------------------------------------------- --------------------------------------------- COMPANY: VERSUS TECHNOLOGY LIMITED CONTRACT NO: - ------------------------ ----------------- --------------------- --------------------- --------------------------------------------- PROPOSED REQ NO./ ITEM DUE DELIVERY REASON LATE/ CALL OFF REF CODE DATE DATE ACTION TAKEN - ------------------------ ----------------- --------------------- --------------------- --------------------------------------------- - ------------------------ ----------------- --------------------- --------------------- --------------------------------------------- - ------------------------ ----------------- --------------------- --------------------- --------------------------------------------- - ------------------------ ----------------- --------------------- --------------------- --------------------------------------------- - ------------------------ ----------------- --------------------- --------------------- --------------------------------------------- - ------------------------ ----------------- --------------------- --------------------- --------------------------------------------- - ------------------------ ----------------- --------------------- --------------------- --------------------------------------------- - ------------------------ ----------------- --------------------- --------------------- --------------------------------------------- - ------------------------ ----------------- --------------------- --------------------- --------------------------------------------- - ------------------------ ----------------- --------------------- --------------------- --------------------------------------------- - ------------------------ ----------------- --------------------- --------------------- --------------------------------------------- - ------------------------ ----------------- --------------------- --------------------- --------------------------------------------- - ------------------------ ----------------- --------------------- --------------------- --------------------------------------------- - ------------------------ ----------------- --------------------- --------------------- ---------------------------------------------
SCHEDULE 1 to CONTRACT NO: 652902 PAGE 16 of 17 - -------------------------------------------------------------------------------- Form `b' SUPPLIER DELIVERY PERFORMANCE SELF MONITORING FORM SUPPLIER: VERSUS TECHNOLOGY LIMITED
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) - ----------------------------- -------------- --------------- -------------- ----------------- ---------------- ------------- - ----------------------------- -------------- --------------- -------------- ----------------- ---------------- ------------- - ----------------------------- -------------- --------------- -------------- ----------------- ---------------- ------------- - ----------------------------- -------------- --------------- -------------- ----------------- ---------------- ------------- - ----------------------------- -------------- --------------- -------------- ----------------- ---------------- ------------- - ----------------------------- -------------- --------------- -------------- ----------------- ---------------- ------------- - ----------------------------- -------------- --------------- -------------- ----------------- ---------------- ------------- - ----------------------------- -------------- --------------- -------------- ----------------- ---------------- ------------- - ----------------------------- -------------- --------------- -------------- ----------------- ---------------- ------------- - ----------------------------- -------------- --------------- -------------- ----------------- ---------------- ------------- - ----------------------------- -------------- --------------- -------------- ----------------- ---------------- ------------- - ----------------------------- -------------- --------------- -------------- ----------------- ---------------- ------------- - ----------------------------- -------------- --------------- -------------- ----------------- ---------------- ------------- - ----------------------------- -------------- --------------- -------------- ----------------- ---------------- ------------- - ----------------------------- -------------- --------------- -------------- ----------------- ---------------- ------------- - ----------------------------- -------------- --------------- -------------- ----------------- ---------------- ------------- TOTAL - ----------------------------- -------------- --------------- -------------- ----------------- ---------------- ------------- - --------------------- --------------- ---------------- --------------- % DELIVERY LIQUIDATED CUMULATIVE QUANTITY OF PERFORMANCE DAMAGES LIQUIDATED FINISHED Quantity Delivered APPLICABLE DAMAGES STOCK HELD / (Quantity Order FOR MONTH + Arrears)*100 - --------------------- --------------- ---------------- --------------- - --------------------- --------------- ---------------- --------------- - --------------------- --------------- ---------------- --------------- - --------------------- --------------- ---------------- --------------- - --------------------- --------------- ---------------- --------------- - --------------------- --------------- ---------------- --------------- - --------------------- --------------- ---------------- --------------- - --------------------- --------------- ---------------- --------------- - --------------------- --------------- ---------------- --------------- - --------------------- --------------- ---------------- --------------- - --------------------- --------------- ---------------- --------------- - --------------------- --------------- ---------------- --------------- - --------------------- --------------- ---------------- --------------- - --------------------- --------------- ---------------- --------------- - --------------------- --------------- ---------------- --------------- - --------------------- --------------- ---------------- ---------------
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 SCHEDULE 1 to CONTRACT NO: 652902 PAGE 1 of 1 APPENDIX A - -------------------------------------------------------------------------------- FIXED PRICES FOR THE DURATION OF CONTRACT
- --------------------------------------------------------------------------------------------------------------------------------- ITEM DESCRIPTION ESTIMATED DELIVERY TO DEPOT OR ANYWHERE IN UK EX-WORKS ITEM CODE QUANTITY - ---- ------ --------------------------- --------------- ---------------------------------------- -------------------------------- 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 - ---- ------ --------------------------- --------------- ---------------------------------------- --------------------------------
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. ------------------------------------------------------------------------ SCHEDULE 2 CONDITIONS OF CONTRACT CONTRACT NO: 652902 ------------------------------------------------------------------------ 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 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 - ------------------------------- ---------------------------------------------- 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. SCHEDULE 2 to CONTRACT NO: 652902 PAGE 4 of 21 - -------------------------------------------------------------------------------- "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. SCHEDULE 2 to CONTRACT NO: 652902 PAGE 5 of 21 - -------------------------------------------------------------------------------- "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. SCHEDULE 2 to CONTRACT NO: 652902 PAGE 6 of 21 - -------------------------------------------------------------------------------- 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 SCHEDULE 2 to CONTRACT NO: 652902 PAGE 7 of 21 - -------------------------------------------------------------------------------- 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, SCHEDULE 2 to CONTRACT NO: 652902 PAGE 8 of 21 - -------------------------------------------------------------------------------- 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 SCHEDULE 2 to CONTRACT NO: 652902 PAGE 9 of 21 - -------------------------------------------------------------------------------- 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. SCHEDULE 2 to CONTRACT NO: 652902 PAGE 10 of 21 - -------------------------------------------------------------------------------- 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 SCHEDULE 2 to CONTRACT NO: 652902 PAGE 11 of 21 - -------------------------------------------------------------------------------- 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. SCHEDULE 2 to CONTRACT NO: 652902 PAGE 12 of 21 - -------------------------------------------------------------------------------- 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. SCHEDULE 2 to CONTRACT NO: 652902 PAGE 13 of 21 - -------------------------------------------------------------------------------- 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, SCHEDULE 2 to CONTRACT NO: 652902 PAGE 14 of 21 - -------------------------------------------------------------------------------- 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 SCHEDULE 2 to CONTRACT NO: 652902 PAGE 15 of 21 - -------------------------------------------------------------------------------- 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 SCHEDULE 2 to CONTRACT NO: 652902 PAGE 16 of 21 - -------------------------------------------------------------------------------- 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 SCHEDULE 2 to CONTRACT NO: 652902 PAGE 17 of 21 - -------------------------------------------------------------------------------- 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: SCHEDULE 2 to CONTRACT NO: 652902 PAGE 18 of 21 - -------------------------------------------------------------------------------- (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). SCHEDULE 2 to CONTRACT NO: 652902 PAGE 19 of 21 - -------------------------------------------------------------------------------- 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 SCHEDULE 2 to CONTRACT NO: 652902 PAGE 2 of 21 - -------------------------------------------------------------------------------- 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 SCHEDULE 2 to CONTRACT NO: 652902 PAGE 21 of 21 - -------------------------------------------------------------------------------- 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. 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 EX-10.26 11 CONFIDENTIAL TEAMING AGREEMENT 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. TEAMING AGREEMENT between DCX SYSTEMS LTD. and BELL CANADA Page 2 ================================================================================ 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. TEAMING AGREEMENT between DCX SYSTEMS LTD. and BELL CANADA Page 3 ================================================================================ 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"). TEAMING AGREEMENT between DCX SYSTEMS LTD. and BELL CANADA Page 4 ================================================================================ 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 TEAMING AGREEMENT between DCX SYSTEMS LTD. and BELL CANADA Page 5 ================================================================================ 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 TEAMING AGREEMENT between DCX SYSTEMS LTD. and BELL CANADA Page 6 ================================================================================ 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. TEAMING AGREEMENT between DCX SYSTEMS LTD. and BELL CANADA Page 7 ================================================================================ 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. TEAMING AGREEMENT between DCX SYSTEMS LTD. and BELL CANADA Page 8 ================================================================================ 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: TEAMING AGREEMENT between DCX SYSTEMS LTD. and BELL CANADA Page 9 ================================================================================ 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. TEAMING AGREEMENT between DCX SYSTEMS LTD. and BELL CANADA Page 10 ================================================================================ $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. TEAMING AGREEMENT between DCX SYSTEMS LTD. and BELL CANADA Page 11 ================================================================================ 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. TEAMING AGREEMENT between DCX SYSTEMS LTD. and BELL CANADA Page 12 ================================================================================ 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. TEAMING AGREEMENT between DCX SYSTEMS LTD. and BELL CANADA Page 13 ================================================================================ 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. TEAMING AGREEMENT between DCX SYSTEMS LTD. and BELL CANADA Page 14 ================================================================================ 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. TEAMING AGREEMENT between DCX SYSTEMS LTD. and BELL CANADA Page 15 ================================================================================ 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. TEAMING AGREEMENT between DCX SYSTEMS LTD. and BELL CANADA Page 16 ================================================================================ 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 TEAMING AGREEMENT between DCX SYSTEMS LTD. and BELL CANADA Page 17 ================================================================================ 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. TEAMING AGREEMENT between DCX SYSTEMS LTD. and BELL CANADA Page 18 ================================================================================ 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 TEAMING AGREEMENT between DCX SYSTEMS LTD. and BELL CANADA Page 19 ================================================================================ 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. TEAMING AGREEMENT between DCX SYSTEMS LTD. and BELL CANADA Page 20 ================================================================================ 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. TEAMING AGREEMENT between DCX SYSTEMS LTD. and BELL CANADA Page 21 ================================================================================ 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. TEAMING AGREEMENT between DCX SYSTEMS LTD. and BELL CANADA Page 22 ================================================================================ 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. TEAMING AGREEMENT between DCX SYSTEMS LTD. and BELL CANADA Page 23 ================================================================================ 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, TEAMING AGREEMENT between DCX SYSTEMS LTD. and BELL CANADA Page 24 ================================================================================ 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 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 EX-10.27 12 TEAMING AGREEMENT EXHIBIT 10.27 TEAMING AGREEMENT BETWEEN NUMEREX CORP. AND TELEMONITOREO S.A. 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"). 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- 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- 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- 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- 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- 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- 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- (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- 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- 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- EX-11 13 EARNINGS PER SHARE 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 ====== ====== (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.
1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- 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 ============ ============ ============ ============== ============
EX-13 14 SECTIONS OF 1997 ANNUAL REPORT INCORP. BY REF. 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. Selected Consolidated Financial Data
Year Ended October 31, -------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ (in thousands, except per share data) Statement of Income Data: Net Sales: 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
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. 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. 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. 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. 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. 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. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Selected Quarterly Financial Data (Unaudited)
Three Months Ended ----------------------------------------------------------- January 31, April 30, July 31, October 31, 1997 1997 1997 1997 ----------------------------------------------------------- (in thousands) Net sales: 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 Three Months Ended ----------------------------------------------------------- January 31, April 30, July 31, October 31, 1996 1996 1996(1) 1996(1) ----------------------------------------------------------- (in thousands) Net sales: 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)
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. 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. 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. EX-21 15 SUBSIDIARIES OF NUMEREX CORP.(1) 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%. EX-23 16 INDEPENDENT AUDITORS' CONSENT 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 EX-27 17 FDS
5 UK Pounds Sterling 12-mos Oct-31-1997 Oct-31-1997 1.6743 15,626 0 4,432 34 2,929 24,454 2,266 1,174 32,509 2,787 0 0 0 18,321 8,713 32,509 17,676 0 8,830 0 7,496 0 0 2,863 676 0 0 0 0 2,187 0 0
-----END PRIVACY-ENHANCED MESSAGE-----