Acquisition and Placing

RNS Number : 7490A

Corero PLC

07 February 2011

 



7 February 2011

CORERO PLC

Proposed Acquisition of Top Layer Networks, Inc. and Placing

Corero plc (AIM: CORO, "Corero" or the "Company"), has entered into a conditional agreement to acquire Top Layer Networks, Inc., a Massachusetts based developer of network security infrastructure solutions, by way of a merger for a maximum consideration of $15.3m to be satisfied by shares, loan notes and cash (the "Acquisition").  

In addition, the Company has conditionally raised up to £2.3 million (before expenses) by way of a placing (the "Placing") of up to 6,571,429 new ordinary shares in the capital of the Company ("Ordinary Shares") (the "Placing Shares") at a price of 35p per Placing Share (the "Placing Price").

On 4 February 2011, Jens Montanana, a non-executive director, was appointed non-executive Chairman following the resignation of Peter Waller as Chairman and a director of the Company.

Highlights

·      First step in strategy to build security systems business focused on the network security market  

·      Top Layer

−    Focuses on network security infrastructure software solutions - such as Intrusion Prevention Systems ("IPS") and Distributed Denial-of-   Service ("DDOS") protection solutions - to help commercial and government organisations protect critical on-line assets from cyber threats;

−    Brings strong proprietary technology offering and core platform with potential to deliver strong revenue growth through wider international sales focus;

−    13-year history in delivering high performance network security solutions, with over 1,000 corporate and government customers across numerous sectors with large multinational corporations and public sector customers including Air Liquide, Camelot UK Lotteries, Globix and University of Miami; and

−    Ranked by Gartner as a visionary in the IPS market in recent report.

·      Maximum consideration of $15.3m (approximately £9,495,752) to be satisfied in shares, loan notes and cash

−    Approximately $6.3m by the issue of 9,038,855 new Ordinary Shares (the "Completion Consideration Shares") (based on a share price of 45p and a US dollar-to-British pound sterling exchange rate of 1.55)

−    $5.0m in loan notes

−    $3.9m in cash

−    $123,558 in deferred consideration by the issue of 177,145 Ordinary Shares (the "Deferred Consideration Shares") payable within 30 days after the date that is 18 months after completion of the Acquisition subject to adjustment for set off against any warranty claims

Jens Montanana, non-executive Chairman, said:

"We are delighted that Top Layer will be our first acquisition and will provide us with the core technology for our move into network security systems - a market that offers significant growth potential. Top Layer is an established player at the mid to high end of the network security market and brings key proprietary intellectual property and a scalable software platform.

"Corero will now operate two distinct divisions: Top Layer, which will form the nucleus of our security ambitions, and Corero Business Systems, which serves the business and education sector in the UK.

"We see real opportunities to develop Top Layer's products and drive revenue growth; using its significant technology and know-how, Corero will create a much larger organisation. Our expertise will address the fast developing Next Generation Firewall market and complement Top Layer's existing business by growing international sales channels in order to become a key player in the network security market."

Peter Waller, outgoing chairman, said:

"As I stand down after five years as chairman, Corero has a recently strengthened executive team, an experienced board and a strong shareholder base. The company now has the financial capacity to invest further in the Corero Business Systems division whilst developing its business in the rapidly growing network security systems market."

Enquiries:

Corero plc
Jens Montanana, Non-executive Chairman Andrew Miller, Chief Operating Officer	01923 897 333
FinnCap
Sarah Wharry / Henrik Persson	020 7600 1658
College Hill
Kay Larsen / Rozi Morris	020 7457 2020

Further Information

Transaction Statistics

Number of Ordinary Shares in issue		31,963,434
Number of Completion Consideration Shares to be issued		9,038,855
Number of Placing Shares¹		6,571,429
Placing Price		35p
Estimated gross proceeds of the Placing¹		£2,300,000
Estimate net proceeds of the Placing receivable by the Company¹²		£1,790,000
Enlarged issued share capital of the Company immediately following Admission³		47,573,718
Maximum number of Deferred Consideration Shares to be issued		177,145
Percentage of Enlarged Issued Share Capital represented by the Completion Consideration Shares¹		19.0 per cent.
Percentage of Enlarged Issued Share Capital represented by the Placing Shares¹		13.8 per cent
Market Capitalisation of the Company immediately following Admission at the Placing Price¹		£16.65 million
ISIN	GB00B54X0432

Notes:

¹ Assuming the Placing is fully subscribed

²Net of estimated costs for the Placing and the Acquisition

³ Excludes any Deferred Consideration Shares

In view of the size of the Acquisition in relation to the Company, the Acquisition constitutes a reverse takeover under the AIM Rules for Companies. As such, the Acquisition is subject to the approval of the Company's shareholders which is being sought at a general meeting of the Company to be held at 11.00 a.m. on 1 March 2011 (the "General Meeting").

An admission document (the "Admission Document") setting out details of Top Layer, the Acquisition, the Placing and calling the General Meeting is being sent to the Company's shareholders today.

Definitions and Forward Looking Statements

All defined terms in this announcement shall, unless the context otherwise requires, have the same meaning as in the Admission Document. Copies of the Admission Document will be available to the public free of charge on the Company's website, www.corero.com.

finnCap Ltd, which is regulated in the United Kingdom by the FSA and which is a member of the London Stock Exchange, is acting as nominated adviser and broker for the Company and for no one else in connection with the matters described herein and will not be responsible to anyone other than the Company for providing the protections afforded to customers of finnCap, or for advising them on the contents of this announcement or any matter referred to herein. Its

responsibilities as the Company's nominated adviser under the AIM Rules are owed solely to the London Stock Exchange and are not owed to the Company or to any Director or to any other person in respect of his decision to acquire shares in the Company in reliance on any part of this document.

This announcement and the Admission Document contain forward‐looking statements which reflect the current view of the Company or, as appropriate, of the Directors with respect to financial performance, business strategy, plans and objectives of management for future operations (including development plans relating to the Enlarged Group's products and services). These forward‐looking statements relate to the Enlarged Group and the sectors and industries in which the Enlarged Group operates. Statements which include the words "expects", "intends", "plans", "believes", "projects", "anticipates", "will", "targets", "aims", "may", "would", "could", "continue", the negative of these words, or similar statements of a future or forward looking nature identify forward‐looking statements. All forward‐looking statements included in this announcement and the Admission Document address matters that involve known and unknown risks and uncertainties. Accordingly, there are or will be important factors that could cause the Enlarged Group's actual results of operations, performance, achievements or financial condition to differ materially from those indicated in these statements. These factors include but are not limited to those described in Part II of the Admission Document on Risk Factors, which should be read in conjunction with the other cautionary statements that are included in the Admission Document.

Although the Company and the Directors have attempted to identify all factors that may influence the accuracy of any forward‐looking statement there remain factors which are impossible to foresee and which may cause results or events to differ materially from those predicted. Any forward‐looking statements in this announcement and the admission document reflect the Company's and Directors' current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to the Enlarged Group's operations, results of operations, growth strategy and liquidity.

Any forward‐looking statements speak only as of the date of this announcement and the Admission Document. Subject to any obligations under the AIM Rules for Companies, the Company undertakes no obligation to update publicly or review any forward‐looking statement, whether as a result of new information, future developments or otherwise. All subsequent written or oral forward‐looking statements attributable to the Company, the Directors, or any member of the Enlarged Group or individuals acting on behalf of the Enlarged Group are expressly qualified in their entirety by this paragraph. Prospective investors should specifically consider the factors identified in this announcement and the Admission Document which could cause actual results to differ before making an investment.

Information on Top Layer

Top Layer is based in Hudson, Massachusetts, and focuses on developing and bringing to market network security infrastructure solutions such as Intrusion Prevention Systems ("IPS") that help commercial and government organisations protect their critical on-line assets from the losses and risks associated with cyber threats. Top Layer has over 1,000 corporate and government customers across the financial services, healthcare, retail and e-commerce, government, education, critical infrastructure, service provider and other markets.

Top Layer has a 13 year history in delivering high performance network security solutions that protect critical IT infrastructures of medium to large enterprises and service providers against the losses and risks associated with network-borne cyber threats. It has a recognised pedigree for dependable performance, reliability and quality for both hardware and software security systems.

In April 2010, Top Layer successfully completed a technology evolution from a product line based on custom ASIC hardware, to a proprietary software operating system that leverages recent advances in off-the-shelf, multi-core central processing unit ("CPU") technology. The release of these new 4th generation IPS appliances has boosted performance levels, significantly reduced manufacturing costs (by using industry standard hardware components), and has created a platform with the innate flexibility required to meet future market demands. In a recent report by Gartner, Top Layer is ranked as a "Visionary" in the IPS market.

Top Layer's scalable IPS platform includes solutions with network throughputs up to 20 Gigabits per second, and offers a highly competitive price performance ratio and a rich set of IPS features including DoS protection. The Top Layer operating system is capable of fully exploiting 64-core processors and beyond. It illustrates a clear path to the performance needs of the future, and creates a versatile platform for the delivery of a Next Generation Firewall product line and a suite of security gateways.

In addition to its flagship intrusion prevention products, Top Layer markets and sells its Intelligence Distribution System Balancer ("IDSB") family of products. The IDSB product is used by enterprises and government agencies to aggregate and distribute network traffic more efficiently to a variety of third-party network sensors like those used for Voice over Internet Protocol recording, data leakage protection and forensic analysis. In the year ended 31 December 2009, this business represented approximately 22 per cent. of Top Layer's revenue and in the six months ended 30 June 2010 approximately 30 per cent. of Top  Layer's revenue.

Summary Financial Information on Top Layer

	Year ended 31 December 2008 Audited ($'000)	Year ended 31 December 2009 Audited ($'000)	Six months ended 30 June 2010 Unaudited ($'000)
Revenue	11,779	11,693	5,269
Comprising of:
Products (hardware and software)	5,907	4,989	2,035
Services	5,872	6,583	3,015
Other	-	121	219
Gross Profit	8,697	6703	4,267
Loss before finance costs	(5,750)	(2,113)	(368)
Finance Costs (net of finance income)	(1,869)	(1,305)	(1,053)
Loss before taxation	(7,619)	(3,418)	(1,421)

The Business

Top Layer's IPS solution is built around a family of purpose-built appliances, using off the shelf silicon and hardware and Top Layer's proprietary software (licensed to customers on a non-exclusive basis until terminated by Top Layer), that are deployed at strategic points in customers' IT networks. The appliances inspect network traffic flows to identify and block malicious software ("malware") and other cyber attacks using multiple threat detection engines and an extensive database of rules and signatures developed by Top Layer. In addition to the IPS appliance, the Top Layer solution includes TopResponse™, an  automated threat update subscription service, IPS Controller, a centralised management software module and Network Security Analyzer, a security information and event management software module that provides real-time dashboard views and reporting capabilities. In addition, Top Layer offers customers professional services, comprising mainly IPS implementation and security optimisation services, training and maintained IPS security services.

Top Layer's product line uses an integrated firewall filtering and intrusion prevention-focused deep packet inspection to block undesired network access and malicious network content (including remote exploits of system vulnerabilities in computer operating systems and applications, viruses, worms, Trojans and spyware). The same product also mitigates rate-based attacks such as DoS and DDoS attacks and application-level flood attacks. Rate-based attacks are cyber attacks which intentionally overload computers or networks with traffic for the purpose of preventing legitimate traffic from reaching its destination, resulting in lost revenue and brand damage for the attacked enterprise or organisation.

Top Layer is headquartered in Hudson, Massachusetts, US and has 51 employees, of which 21 are involved in the sales and marketing function, 13 in development of Top Layer's technology and the balance in management, support, product management, finance and administration. The manufacturing and assembly of Top Layer's IPS hardware appliance is outsourced to a contract manufacturer in the US.

Top Layer's revenue model has several streams including hardware sales, software licensing, support and IPS update service fees, installation and maintenance services. A typical new customer sale will pay a set price for the hardware, software license, maintenance, technical support and IPS threat update services for a period ranging anywhere from one to three years in addition to implementation services. Approximately half of Top Layer's business is sold through channel partners including specialist IT distributors and integrators including Immix Technology, Inc., InfoPeople Security Solutions, Inc., FishNet Security Inc., Accuvant, Inc., and Blue Cube Security Limited. In the nine months ended 30 September 2010, over 65 per cent. of new business orders of Top Layer were generated from customers in the US. Top Layer's customers include large multinational corporations and public sector companies including Air Liquide SA, Globix Limited, University of Miami and Camelot UK Lotteries Limited.

Information on Corero

Corero's Business Systems division is a provider of management information software solutions to the Further Education, Academy, school and commercial markets. The Business Systems' software solutions include Resource Financials, a financial software solution and Resource Education Management System ("EMS"), a management information system aimed at the sixth form and further education college sector.

Resource Financials is a flexible financial management system with a suite of highly integrated modules including core accounting ledgers, order processing including e-procurement, project costing with timesheets and expenses, fixed asset accounting and tracking, and document scanning and management. Complementing these core modules are a range of web based applications covering reporting, requisitioning, timesheet and expense entry and approval. Resource Financials has approximately 330 customers (being those who pay for annual support), including approximately 110 Sixth Form and Further Education  College customers, approximately 150 Academies and Schools, and over 50 commercial customers including consulting engineers, market research and design companies.

Resource EMS manages the complete learner life-cycle, from initial enquiry through to completion within the further education market place in England. Combining both core and web portal technology, Resource EMS delivers key aspects of learner and employer administration including web and portal enrolments, applications and enquiries through to Individual Learner Plans, pastoral care and achievement. Resource EMS is a comprehensive solution with modules covering course provision, timetables, registers, work based learning and exams as well as satisfying the requirement for Department of Business, Innovation & Skills statutory returns. Resource EMS has approximately 40 Sixth Form and Further Education College Customers.

History of Corero

The Company was incorporated in November 1991 with the name Mondas plc and was admitted to trading on AIM on 9 October 2000. The Company changed its name to Corero plc on 27 February 2007. The Company's business, prior to the August 2010 Transaction comprised two divisions: Business Systems division and Financial Markets division. The Business Systems division was formed from two acquisitions: the acquisition of DSR Holdings Limited, a company whose principal activity was the design, manufacture and supply of accounting and management information software products mainly for small to medium sized enterprises, in October 2000 and the acquisition of Eclipse Learner Systems Limited, a provider of learner management administration software, in October 2005. The Financial Markets division was formed from the Company's legacy business, being the development and marketing of business process management and workflow software (branded as Radica) and the acquisition in January 2006 of Blue Curve Limited, a company whose principal activity was the development and marketing of software solutions used by financial institutions to improve a variety of financial information production and distribution processes. The Financial Markets division was disposed of on 6 August 2010 on the terms as detailed in the circular to Shareholders dated 14 July 2010 and comprised part of the August 2010 Transaction.

Strategy of the Enlarged Group

On completion of the Acquisition, the Enlarged Group will have businesses with a strong proposition in the international network security market and in the supply of software solutions to the UK education market.

The strategy for the Security Systems division will be to drive revenue growth through increased marketing and industry visibility of the division's approach and product capabilities and developing an international channel focused sales model which will enable the Enlarged Group to access new markets and customers. In terms of product development, the emphasis will be on leveraging Top Layer's IPS and DDoS protection product offerings and developing a broader network security portfolio, including a next generation firewall offering, both organically and through complementary acquisitions.

The strategy for the Business Systems division will be to continue to invest and grow the business focusing on the education sector where it has a strong market position, particularly in the Further Education College and Academy markets in England. Development will continue on Resource Financials and Resource EMS with additional modules to meet customer requirements. Resource Financials V7, the next generation financial software solution, is expected to be released in the first half of 2011.

Directorate change and information on Directors and Senior Management and Employees

With effect from 4 February 2011, Jens Montanana (formerly a non-executive Director) was appointed Chairman of the Company. On the same date, Peter Waller stood down as Chairman of the Company and resigned as a non-executive director of the Company. Mr. Waller has served as a director of the Company since 24 January 2006. The Board expresses its gratitude to Mr. Waller for his services to the Company.

Jens Peter Montanana (non-executive Chairman), aged 50, is the founder and CEO of Datatec Limited, established in 1986. Between 1989 and 1993 Mr. Montanana served as managing director and vice-president of US Robotics (UK) Limited, a wholly owned subsidiary of US Robotics Inc., which was acquired by 3Com. In 1993, he co-founded US start up Xedia Corporation in Boston, an early pioneer of network switching and one of the market leaders in IP bandwidth management, which was subsequently sold to Lucent Corporation in 1999 for $246 million. In 1994, Mr. Montanana became CEO of Datatec Limited. Datatec Limited listed on the Johannesburg Stock Exchange in 1994 and on AIM in 2006. Mr. Montanana has previously served on the boards and sub-committees of various public companies.

Andrew Douglas Miller (chief operating officer), aged 46, was with the Datatec Limited group in a number of roles between 2000 and 2009 including the Logicalis Group Limited ("Logicalis") Operations Director and Corporate Finance and Strategy Director. Mr. Miller led the Logicalis acquisition strategy, acquiring and integrating 12 companies in the US, UK, Europe and South America. Prior to this, Mr. Miller gained considerable corporate finance experience in London with Standard Bank, West Deutsche Landesbank and Coopers & Lybrand. Mr. Miller trained and qualified as a chartered accountant and has a bachelor's degree in commerce from the University of Natal, South Africa.

Bernard Patrick Snowe (executive director of Business Systems division), aged 52, as one of the founders of DSR UK Plc ("DSR"), was instrumental in helping to build the marketplace for Resource Financials and Resource EMS and was a key part of the management team retained following the acquisition of DSR by the Company in October 2000. Mr. Snowe has over twenty years experience in the Accounting and MIS marketplace, and is highly experienced within the education sector in the UK, establishing Resource as the market leading finance application to Colleges and Academies. Prior to DSR, Mr. Snowe was a consultant for the FPS Financial Services Group and Sales Manager for Hestair Dataline. He graduated in 1980 with BA (Hons) in Geography from Lancaster University.

Richard Last (non-executive director), aged 53, is a fellow of the institute of Chartered Accountants in England and Wales, has substantial experience in the IT software and services sectors and is chairman and non-executive director of The British Smaller Companies VCT 2 plc, which is listed on the main market of the London Stock Exchange, and Parseq plc, Patsystems plc and Arcontech Group PLC, all of which are AIM listed. He is also a non-executive director of AIM listed Lighthouse Group plc. In addition, Mr. Last is a director and shareholder of a number of private companies.

Following Admission, the Board intends to appoint an additional independent non-executive director.

Immediately following Completion, key senior employees of the Enlarged Group will include:

Peter Rendall - Top Layer Chief Executive Officer

Prior to joining Top Layer in 2003, Mr. Rendall served as the Chief Financial Officer of Elcom International, Inc., an international provider of technology solutions. Before that he was at Logica plc where he served as Vice President of Operations for its US telecommunications division. Mr. Rendall began his career with Price Waterhouse, where he spent nine years advising clients on transactions, including IPO's and corporate consolidations.

Paul Bogonis - Top Layer Chief Financial Officer

Prior to joining Top Layer in 2007, Mr. Bogonis served as Vice-President of Finance at Elcom International, Inc., and prior to that he was the Chief Financial Officer and Treasurer at Summit Design, Inc. where he also served as a member of the board of directors. Before that Mr. Bogonis held a number of finance positions at Viewlogic Systems, Inc., Netegrity, Inc., Progress Software Corporation, and Wang Laboratories, Inc. Mr. Bogonis has a BS in accounting from Northeastern University and an MS from Boston University.

Mike Cooper - Top Layer Vice President Engineering and Customer Services

Prior to joining Top Layer in 2004, Mr. Cooper co-founded New England Project Services, a project management consultancy. Previously he served as vice president of service delivery with Tanning Technology Corporation, an IT services company, and for several years prior to that was an independent consultant helping organisations improve their technology delivery practices. Mr. Cooper also served in a number of roles with Logica, Inc., including vice president of quality assurance and technology, Energy and Utilities Division; and vice president of engineering and quality assurance manager.

Mike Paquette - Top Layer Chief Strategy Officer

Prior to joining Top Layer in 1998, Mr. Paquette held the position of Senior Engineering Manager at Digital Equipment Corporation in the Network Product Group where he was responsible for Digital's multi-technology switch product development. He has more than 25 years of computer networking and security experience with an extensive background in the design and development of networking and security products. Mr. Paquette has a BSEE from Boston University.

Barry Spinney - Top Layer Chief Technology Officer

Mr. Spinney left FORE Systems, Inc. ("FORE") to found Top Layer in 1997. At FORE, he managed the engineering team responsible for the development of the ATM (Asynchronous Transfer Mode, a switching technique for telecommunication networks) card for the ES-3810 LAN switch. Prior to FORE, Mr. Spinney held engineering positions at Digital Equipment Corporation where he was the inventor, architect, and an engineering manager for the GIGAswitch product. He also developed and managed the FDDI (Fibre Distributed Data Interface, a technology used for LANs based on fibre optics) chipset and VNSwitch (a product that bridges (interconnected) LANs of different media (copper and fibre, and using different LAN protocols) into a contiguous LAN or LANs). Mr. Spinney has over 25 years of computer networking and security experience and has a Bachelor's degree in Mathematics and Computer Science from the University of Waterloo and a Masters degree in Computer Science from the University of Toronto.

James Williams - Top Layer Vice President Sales

Prior to joining Top Layer in 2008, Mr. Williams was Vice President and General Manager of North America Sales and Marketing for 3Com Corporation. Prior to that Mr. Williams held a number of senior sales positions including Senior Vice President of Sales for Nuvo Network Management, a division of Trilogy Enterprises, Inc., and President of Sales and Marketing for Vanguard Managed Solutions.

Background to and reasons for the Acquisition

In the context of the Corero Security Systems division, the Directors have examined a number of potential acquisition opportunities since the August 2010 Transaction. The Company's target acquisition profile is focused on technology-led companies with a software orientation in order to provide maximum flexibility for growth and development and the ability to exploit the latest advances in multi-core CPUs to deliver enhanced levels of security processing performance.

The Directors believe that Top Layer presents an exciting prospect for the Company as the first step in executing its acquisition strategy by providing a core platform on which to build a leading network security systems business. Top Layer has a strong proprietary technology offering with a multi-core processing platform to support high performance security applications and scalable architecture, which the Directors believe can be readily developed to add functionality with which to broaden its network security offering, and thereby the potential to deliver strong revenue growth.

The Acquisition will provide Top Layer with a higher profile and will give the Enlarged Group greater access to capital to facilitate increased organic and acquisitive growth.

The Directors believe that Top Layer can develop its business more rapidly by access to greater resources and the ability to finance suitable acquisitions through the issue of shares on a public market.

Principal terms of the Acquisition

The Company has conditionally agreed, pursuant to the terms of the Merger Agreement, to acquire the entire issued share capital of Top Layer and to satisfy the obligations of Top Layer to the Top Layer Management Team and employees arising from the Change of Control Agreements and Special Bonus Plan. The Acquisition is to be effected by way of a merger, under Delaware law, of Tomcat Sub with and into Top Layer. The Merger Agreement has been entered into between (1) the Company, (2) Tomcat Sub, (3) Top Layer, (4) CrossHill Debt II, L.P., (5)  CrossHill Georgetown Capital, L.P. and (6) Loudwater Trust Limited.

The aggregate consideration for the Acquisition is $15,288,160 (approximately £9,495,752), to be satisfied as to $6,304,602 by the issue, credited as fully paid, of the Completion Consideration Shares (such number of shares having been calculated using a share price of £0.45 and a US dollar-to-British pound sterling exchange rate of 1.55), $5,000,000 (approximately £310,559) by the issue of the Consideration Loan Notes and $3,860,000 (approximately £2,397,516) in cash (of which $500,000 (approximately £310,559) shall be paid into an escrow account comprising the Escrow Deposit). In addition, deferred consideration of $123,558 (approximately £76,744), to be satisfied by the issue of the Deferred Consideration Shares (such number of shares having been calculated using a share price of £0.45 and a US dollar-to-British pound sterling exchange rate of 1.55), shall be payable within 30 days after the date that is 18 months after Completion, subject to adjustment for set off against any warranty claims brought by the Company in accordance with the terms of the Merger Agreement. The majority of the consideration for the Acquisition will be received by the Principal Stockholders except for the following:

•      the amount of $1,364,198 (approximately £847,328) payable to the Top Layer Management Team in consideration for the cancellation of the outstanding Management Preferred Shares (to be issued by Top Layer immediately prior to Completion as payment in full for obligations arising from the Change of Control Agreements), to be satisfied as to $700,185 (approximately £434,898) by the issue of 1,003,850 Completion Consideration Shares (such number of shares having been calculated using a share price of £0.45 and a US dollar-to-British pound sterling exchange rate of 1.55), as to $123,558 (approximately £76,744) by the issue of the Deferred Consideration Shares, subject to adjustment for set off against any warranty claims under the terms of the Merger Agreement (such number of shares having been calculated using a share price of £0.45 and a US dollar-to-British pound sterling exchange rate of 1.55) and as to $448,049 (approximately £287,291) in cash (to fund the Top Layer Management Team's US income tax obligations which will arise from the issue of the shares); and

•      the amount of $279,000 (approximately £175,000) payable in cash to certain Top Layer employees under the terms of the Special Bonus Plan.

Relationship Agreement

The Principal Stockholders and the Company entered into the Relationship Agreement on 7 February 2011 to regulate certain aspects of the continuing relationship between them. For the purposes of this paragraph and the immediately following paragraph which summarises the provisions of the Relationship Agreement, "Shareholders" means Crosshill Debt II, L.P. and Crosshill Georgetown Capital, L.P. on the one hand (together being a "Shareholder") and Loudwater Trust Limited on the other hand. For so long as:

•      the Shareholders (or any of them) hold any of the Consideration Loan Notes or the Shareholders (or any of them) hold, in aggregate, more than 10 per cent. of the entire issued Ordinary Shares of the Company, the larger Shareholder shall be entitled to require the appointment of one director to the Board; and

•      the Shareholders (or any of them) hold, in aggregate, more than 10 per cent. of the entire issued Ordinary Shares of the Company or the Shareholders (or any of them) hold Consideration Loan Notes with an aggregate principal value of not less than $1 million, the smaller Shareholder shall have the right to appoint a representative as an observer to attend each and any meeting of the Board.

The agreement is conditional on the Acquisition becoming effective in accordance with the Merger Agreement and the Shareholders shall only be able to exercise their rights to appoint a director and/or observer after the expiry of three months following Admission.

Lock-Ins

Each of the Principal Stockholders has severally agreed pursuant to the terms of the Principal Stockholders Lock-In Deed that, for a period of 12 months from Admission, it will not dispose of any of the Completion Consideration Shares to which it is entitled pursuant to the Merger Agreement and, for a further 12 months, it will, at least two Business Days prior to a disposal of any such Completion Consideration Shares being made, notify finnCap in writing of the proposed disposal.

Each member of the Top Layer Management Team has severally agreed pursuant to the terms of the Management Lock-In Deed in respect of the Completion Consideration Shares to which he is entitled pursuant to the Merger Agreement, that he will not:

•      dispose of any Completion Consideration Shares during the period ending on the first anniversary of Admission;

•      dispose of more than 20 per cent. of Completion Consideration Shares during the period commencing on the date immediately following the expiry of the first anniversary of Admission and ending on the second anniversary thereafter; and

•      dispose of more than 50 per cent. of Completion Consideration Shares during the period commencing on the date immediately following the expiry of the second anniversary of Admission and ending on the third anniversary thereafter, and that he will, at least two Business Days prior to a disposal of Completion Consideration Shares (which are no longer the subject of a lock in) being made, notify finnCap in writing of the proposed disposal.

These restrictions will apply in respect of 9,038,855 Ordinary Shares representing 19.0 per cent. of the Enlarged Issued Share Capital. The Lock-In Deeds are conditional upon the Acquisition becoming effective in accordance with the Merger Agreement.

Share Options

The Company has an obligation under the Merger Agreement to issue 675,000 options over Ordinary Shares in the Company to the management and certain employees of Top Layer. These options will be granted as soon as possible following Completion of the Acquisition at the then prevailing share price of the Company. The options will vest as to one third on the first anniversary of the grant, one third on the second anniversary of the grant and one third on the third anniversary of the grant with a restriction that any Ordinary Shares acquired on the exercise of options may not be disposed of until after the second anniversary of the grant.

Details of the Placing and Use of Proceeds

Under the terms of the Placing Agreement, finnCap has conditionally placed, as placing agent to the Company, up to 6,571,429 Placing Shares at the Placing Price. The Placing Shares will (assuming that the Placing is fully subscribed) represent approximately 13.8 per cent. of the Enlarged Issued Share Capital. The Placing Shares have been conditionally placed with existing institutional shareholders and other new investors, including certain Directors. The Placing as a whole will, if approved, raise proceeds of up to £2.3 million, before expenses. The Placing Shares will be in registered form and capable of being held in certificated form or uncertificated form in CREST.

The Placing is conditional, inter alia, upon the passing of Resolutions numbered 1, 2 and 4, Completion of the Acquisition and Admission having occurred by no later than 2 March 2011 (or such time and date as finnCap may specify, being not later than 31 March 2011). The Placing Agreement contains provisions (including customary market related provisions) entitling finnCap to terminate the Placing Agreement at any time prior to Admission in certain circumstances. If this right is exercised, the Placing will lapse. The Placing is not being underwritten.

The Placing Price of 35p represents a discount of approximately 12.5 per cent. to the middle market price of an Ordinary Share at the close of business on 4 February 2011, being the latest practicable date prior to the date of this document.

The proceeds of the Placing will be used, inter alia, as working capital for the Enlarged Group and to provide the resources to allow the Enlarged Group to increase its market share in the network security and business systems markets through complementary acquisitions and organic growth.

Pursuant to the Placing Jens Montanana and Richard Last will be subscribing for 2,428,571 and 214,286 Ordinary Shares respectively. Their interests on Admission will be 26.97 per cent. and 0.47 per cent. respectively of the Enlarged Issued Ordinary Share Capital.

Recommendation

The Board considers that the terms of the proposed Acquisition and the Placing are in the best interests of the Company and its Shareholders as a whole and recommend that Shareholders vote in favour of the Resolutions to be proposed at the General Meeting.

General Meeting

The Directors have called the General Meeting to approve and grant the Directors a general authority to allot Ordinary Shares (including on a non pre-emptive basis) and authority to issue Ordinary Shares in connection with, inter alia, the Acquisition and the Placing. The General Meeting is to be held at the offices of finnCap, 60 New Broad Street, London, EC2M 1JJ at 11.00 a.m. on 1 March 2011.

Admission and Settlement

Application will be made to the London Stock Exchange for the Enlarged Issued Share Capital to be admitted to trading on AIM. Admission is expected to take place at 8.00 a.m. on 2 March 2011.

 

END

 

 

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