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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _____ to _____
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Commission File Number 1-14198
DIGITAL TRANSMISSION SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 58-2037949
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3000 NORTHWOODS PARKWAY, BUILDING 330, NORCROSS, GA 30071
(Address of principal executive office) (Zip Code)
(770) 798-1300
(Issuer's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ---------------------------------------
Common Stock Philadelphia and Boston Stock Exchanges
Warrants Philadelphia and Boston Stock Exchanges
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock and Warrants
(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
proceeding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Check if disclosure of delinquent filers in reponse to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
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Total revenues for the registrant for the fiscal year ended June 30, 1997 were:
$14,484,000.
At September 24, 1997, there were 4,132,180 shares of common stock
outstanding. The aggregate market value of the common stock held by
non-affiliates (based upon the closing price of common stock quoted on the
NASDAQ National Market System at September 24, 1997) was approximately
$21,465,594.
Transitional Small Business Disclosure Format (check one): Yes [ ] No[X]
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-KSB incorporates by reference
information (to the extent specific sections are referred to herein) from the
Company's Proxy Statement for its Annual Meeting of Shareholders to be held
October 30, 1997 (the "1997 Proxy Statement").
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PART I
ITEM 1. BUSINESS
GENERAL
Digital Transmission Systems, Inc., a Delaware corporation ("DTS" or the
"Company"), designs, manufactures, and markets a broad range of products for the
telecommunications industry. The Company's primary customers are domestic and
international long distance carriers and wireless service providers, including
those offering cellular telephone services and Personal Communications Services
("PCS"). Customers include Nextel, PrimeCo Personal Communications L.P.,
360(Degree) Communications, AirTouch, Sprint, MCI, Tele2000 in Peru and
TeleBahia in Brazil.
The Company's products, consisting of proprietary software and hardware
modules, facilitate the control, monitoring and efficient transmission of
high-speed digital information through public or private telecommunications
networks. The Company's network access products enable telecommunications
service providers to give their customers economical, high-quality access to
public and private networks and various telecommunications services. These
services include voice and high-speed data transmission, the Internet and video
and desktop conferencing. The Company's network control products enable service
providers to detect degradation on their networks so that appropriate action may
be taken in advance of service interruption. Important product requirements in
these market segments include high feature density, modularity, quality
performance and compactness. The Company's products meet these requirements and
are suitable for both wireline and wireless service environments.
DTS markets its products through a direct sales force and several reseller
channels. Domestically, inter-exchange carriers and wireless service providers,
including cellular, Specialized Mobile Radio ("SMR") and PCS service providers,
are serviced directly by the Company's sales force. DTS utilizes
telecommunications equipment resellers in the United States and Canada to sell
to private network customers. Within the last eighteen months, the Company has
signed thirty-four reseller agreements in Latin America, Asia Pacific, Europe
and the Middle East.
BACKGROUND
The telecommunications industry is undergoing rapid and fundamental changes.
Enhanced communication services such as those offering multimedia applications,
the Internet, video and desktop conferencing, facsimile transmission, compressed
voice communications and data communications between computers necessitate the
increased use of high-speed digital, rather than analog, transmissions. The
increased demand for digital transmission capacity has led to significant
network infrastructure growth and efforts to improve the efficiency of current
telecommunications systems. For all participants in the telecommunications
industry, including long distance carriers, telephone operating companies and
wireless service providers, the need for efficient transmission of high-speed
digitized signals, lower operating costs, seamless connectivity and the
assurance of quality service between networks is of vital importance. Continued
growth in traditional wireline and alternative services will increase the need
for products like those offered by the Company which are designed to address
these requirements. The Company believes the following trends are contributing
and will continue to contribute to the growth in demand for its products:
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Growth in Wireline Services. The Company believes the markets for traditional
wireline service will continue to grow and estimates that the market for
packet data services alone will exceed $2.1 billion by 1998. Internet access
is expanding and the Company believes the trend of increased telecommuting is
likely to continue, because of declining costs of telecommunications equipment
and services, employer cost-cutting and desires to improve employee
productivity, availability and convenience of improved technology and
environmental concerns. The increasing number of public telecommunications
services has created the need for high-speed connection devices which give
service providers the ability to economically expand their networks to provide
new service offerings without drastic changes in technology and the associated
infrastructure costs. The ability to quickly connect existing customers to
these new services without changing access technologies usually means lower
costs to end users and simplification of network construction for the service
provider.
Growth in Cellular Services. According to industry sources, the wireless
market is currently estimated to include over 52 million cellular customers in
the United States and is expected to grow to over 60 million customers by the
year 2001. Service revenues from the cellular industry for 1996 were $23.6
billion in the United States, and are expected to grow worldwide to $600
billion by 2010. The growth of the cellular industry, along with the
deployment of new wireless packet data offerings such as Cellular Digital
Packet Data ("CDPD"), has created the need for highly integrated,
multi-functional, high-speed network access products to speed deployment of
cellular services, ease the maintainability of networks, lower cell site costs
and simplify the day-to-day operation of the associated network.
Deployment of PCS. The Company believes that significant infrastructure
investments will be made over the next few years as PCS licensees build new
communications networks. In March 1996, over $8.2 billion was bid for the
licenses to provide broadband PCS service (similar to currently available
cellular service) in several consumer markets around the nation. Additional
PCS licenses are scheduled to be auctioned within the next year. The
establishment of a PCS network involves the construction of a significant
infrastructure which must be reliably connected to existing wireline and
cellular services. Each of these networks will require efficient equipment to
control and monitor the flow of digital information without significant
dependency on the local telephone company for links between cell sites or
major switching centers.
Proliferation of Competitive Access Providers. Deregulation of the
telecommunications industry has resulted in an increase in competitive
alternatives for local access to network services. These Competitive Access
Providers ("CAPs"), such as cable TV companies, utilities and long distance
telephone service providers, have targeted major metropolitan markets in the
United States to offer local telephone and network services and are courting
large corporate customers who have traditionally been serviced by the local
Regional Bell Operating Companies ("RBOCs"). These CAPs have unique connection
requirements for access to the public network which are creating opportunities
for wireless digital transport equipment providers. Bridging two buildings
separated by 100 yards or two locations 30 miles apart with wireless transport
equipment allows companies to avoid the expense of leased lines from the local
RBOC. The market for equipment which connects the various networks is one that
the Company believes will continue to grow through the late 1990s.
Growth of International Markets. Many countries throughout the world lag
behind the United States in telecommunications infrastructure development. As
customers in such countries begin to demand new or enhanced communications
services, service providers will seek the ability to upgrade telecommunication
networks quickly without sacrificing service quality. Service providers in
developing countries are faced with the need to promptly connect high-speed
digital lines to public networks, provide telecommunications to rural areas
and provide extensions for thin route cellular services. This creates an
opportunity for a wireless digital transport device with payload
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speeds of 64Kbps up to several megabits/second that can create an instant
digital connection without requiring the existence of a sophisticated
telecommunications infrastructure.
All of these trends have created and will continue to create the need for
cost-effective, quality high-speed network control and network access products,
such as those offered by the Company, that permit carriers to economically build
and operate networks to address the service requirements of their customers.
THE DTS SOLUTION
DTS has developed an integrated, systems-based, high-speed network control and
access solution for wireless and wireline networks that consists of the
software-based FlexSentry(TM) Network Management System (NMS) the FlexSentry
Network Control Unit and the family of access devices - FlexT1(C), FlexE1(TM),
FlexAir(TM) and SKYPLEX(TM). [The FlexSentry NMS was previously marketed as the
Communications Network Control System.] The Company believes that its products
can be combined to offer whole product solutions that provide significant
differentiation from competitive offerings in the marketplace with respect to
size, price, feature density and reliability.
The FlexSentry NMS is a software-based management system with graphical user
interface that, together with the Company's Network Control product, gives
telecommunications service providers tools to control, monitor, maintain and
rapidly deploy network services. These systems allow immediate activation of new
network sites, yielding associated subscriber revenues quickly. In addition, the
integrated systems solution provides proactive maintenance, assuring minimal
network downtime and lost revenue.
The FlexT1 and FlexEl network access products provide integrated access to
public network services for both domestic ("T1") and international ("El")
markets. The FlexT1 and FlexEl are provided in a compact physical package, are
expandable and allow an end user to access many of the business services
available from the public network. These products also enable the sharing of
telecommunication facilities among the different services, such as voice, video,
the Internet and facsimile, thus reducing the number of access lines the user
must lease and potentially reducing overall telecommunications expenses.
The Company's wireless network access products (FlexAir and SKYPLEX) eliminate
the dependency of wireless carriers and PCS providers upon Regional Bell
Operating Companies ("RBOCs") or Departments of Postal, Telegraph & Telephone
("PTTs") for leased access lines to connect their cell sites by providing a
wireless digital transport alternative using spread spectrum radio technology.
Additionally, in the United States and many developing countries, the FlexAir
and SKYPLEX systems allow for rapid service deployment since FCC or equivalent
agency license approval is not required for the use of spread spectrum
frequencies. FlexAir and SKYPLEX are delivered in compact packages which
optimize the use of limited space at telecommunications sites.
COMPANY STRATEGY
The Company's goal is to become a leading worldwide supplier of network
control systems and associated access products for both public and private
high-speed telecommunications networks. In order to realize these goals the
Company plans to:
Concentrate on the Domestic and International Expanding Cellular and PCS
Markets. The Company has recently increased the size of its sales force and
support staff to further penetrate the
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growing domestic and international Cellular and PCS markets. The Company's
network access products have numerous wireless applications, and together with
the proprietary FlexSentry NMS offer what the Company believes is a unique
integrated solution to the wireless carriers' need to monitor and control
transmission facilities to hundreds - or thousands - of remote cell sites.
Develop and Expand on Flexible and Modular Platforms. The Company continues to
expand upon its modular Flex line of network access products and plans to add
various modules for feature enhancements, facilitating continued utilization
of Flex products as new applications are developed.
Enhance the Company's International Presence. DTS has successfully employed
the following strategies to expand internationally: acquisitions,
distributorships, agents, export control and support:
- In December 1995, the Company acquired SKYPLEX, a product line with an
existing distribution network in Latin America through which the Flex line of
products can also be sold.
- DTS products are sold into more than 40 countries via a network of 60
resellers/dealers/distributors. In the past eighteen months the Company has
expanded its international sales channels by signing 34 sales agreements with
resellers in Latin America, Asia Pacific, Eastern Europe and the Middle East.
- Agents, or independent companies representing multiple, but non-competing
product lines were identified in four key regions. These agents were provided
with product training, technical support, collateral/marketing materials, and
products targeted at local market requirements.
- Multi-lingual sales administration and technical assistance comprise the
export control at the Norcross, Georgia facility. Any agent, reseller, dealer or
distributor can contact these personnel for support.
The Company was certified in December 1994 as an ISO 9001 supplier, thus
establishing its quality assurance credentials for the international arena.
PRODUCTS AND TECHNOLOGY
The Company's products facilitate network access, bandwidth management,
network control and delivery of high-speed digital telecommunications services.
The Company's products include T1 network control Units, the family of network
access products and the associated network management systems. Some of the
Company's T1-based products are designed to be controlled with FlexSentry, a
UNIX-based system capable of controlling and managing up to 3,000 T1 circuits.
DTS has been a major supplier for T1 network control systems to MCI and T1
network control systems to Sprint. These systems, which provide important
network functions such as performance monitoring, test access, timing insertion
and signaling, have been deployed to both customers.
As one of its first products, the Company pioneered the 2001 Data In Voice
("DIV") modem to transmit digitized information at T1 rates over an analog link.
This product uses Quadrature Amplitude Modulation ("QAM"), automatic
equalization and forward error correction algorithms to provide T1 transport
over analog microwave or cable facilities. The 2001 DIV modem is easy to install
and has shown a reliable record of performance in over 1,000 installations.
T1 Network Control Products
The 4010 and 4030 Network Control Units are T1-based products that provide
performance monitoring, frame format and line coding conversion and access to
Customer Premises Equipment ("CPE") like the FlexT1. These functions are
provided in a 12.5 inch chassis for 28 T1 circuits and
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and the unit is typically deployed at the service provider's central office.
The main difference between the two products is that the 4030 is designed to
operate with MCI's proprietary management systems while the 4010 is designed
to work with the Company's FlexSentry.
The 4010 and 4030 products are each comprised of three different modules:
- T1 Line Monitoring and Control Module - Provides conversion features,
performance monitoring and FDL access to CPE equipment. Each shelf can contain
28 of these modules.
- Shelf Control Unit - Provides the interface to the Communication Network
Control System. There is one control unit per shelf.
- Shelf Power Supply - Provides power to the shelf. There are two power
supplies per shelf, providing full redundant operation.
FlexSentry NMS
Global control of 4010 Network Control Units is provided by the FlexSentry, a
UNIX-based, graphically driven management system that can control up to 3,000 Tl
circuits per user system. FlexSentry NMS provides alarm information, archiving
of circuit history and provisioning of T1 equipment, including FlexT1 network
access devices. The system uses a Client-Server architecture in which servers,
running on a primary workstation provide basic functions such as alarm
collection and performance data gathering. Clients running on either the primary
or secondary workstations provide the operator interfaces.
The primary objective of this system is to detect and report network problems
in the most timely manner possible. The FlexSentry NMS will retrieve performance
and alarm information from the 4010 NCU as well as from the remote CPE, like the
FlexTl or other competitive network access equipment.
The FlexSentry is designed to aid the operator in determining the exact
location and nature of problems by providing the appropriate software "tools."
The system uses mouse-driven, graphics-based displays which are organized to
allow the operator to identify the source of circuit problems quickly. Displays
are projected on the operator's screen in "windows" and multiple windows can be
present on the screen at the same time. Finally, the system allows the operator
to log the performance of the circuits in the network automatically, thereby
providing the operators with a mechanism to implement a preventive maintenance
system.
The FlexSentry provides the following operations and features:
- - Automatic reporting and time stamping of alarm conditions
- - Operator alert upon alarm initiation
- - Graphics-oriented and text-oriented performance displays
- - Archiving of performance information
- - Circuit routing database
- - Schematic display of network elements and remote setup capability
- - Password-controlled operator access
- - Logging of operator- and network-initiated events.
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FlexT1 and FlexE1 Product Family
The FlexTl family of products, introduced in fiscal year 1995, provides
integrated access to public network telecommunications services. The FlexTl
consists of single and multi-slot enclosures that are customized with various
card sets to satisfy a wide range of network access applications. The FlexE1
provides much of the same functionality currently available in the FlexT1 for
countries using the E1 (international) standard. Customer equipment needs
include N x 56/64 Kbps and full T1 interfaces for data, voice and video
applications.
FLEXT1/E1 SYSTEM ARCHITECTURE
The FlexT1/E1 bandwidth management features are derived from an advanced
architecture with two independent Time Division Multiplexed ("TDM") busses
available to each card position within a FlexT1/E1 enclosure. This architecture
allows users to pay only for the functions and features needed for a particular
application. Bandwidth managers connect directly to the service provider's
network and user traffic is interfaced through card sets that connect directly
to voice, data and video terminals. All card sets within the product family can
be upgraded with software as new features become available.
The Company offers its complete set of products to wireless service providers
and long distance carriers through a direct sales force. Network access products
and the DIV modems are sold directly to utilities and railways. The family of
network access products is sold to corporate end users through a network of
domestic and international resellers. A secondary channel to telecommunications
service providers exists through selected OEM arrangements. The Company has had
long-standing supplier relationships with MCI and Sprint and has recently
expanded its list of customers to include three major wireless service providers
(PrimeCo Personal Communications, L.P., Nextel, and 360 degree Communications).
COMPETITION
The market for telecommunications products is highly competitive and subject
to rapid technological change, regulatory developments and emerging industry
standards. The Company believes that the principal competitive factors in its
markets are: support for multiple types of carrier services, conformance of
products to multiple public carrier standards, reliability and safety, the
development and rapid introduction of new product features, price, performance,
and quality of customer support.
The Company's principal competition to date has come from major
telecommunications equipment suppliers active in certain market segments. In the
network access market, competitors include but are not limited to Tautron (a
division of General Signal Corporation) and Hekemian (a division of Axel Johnson
Corporation). In the network control marketplace, Kentrox Industries (a
subsidiary of ADC Telecommunications Inc.), Premisys Corporation, Digital Link
Corporation, Adtran. Inc. and Newbridge Networks, Inc. are competitors. Western
Multiplex, P-COM, Inc., California Microwave Inc. and Cylink compete with DTS in
the wireless transport business.
The Company expects increased competition from existing competitors as they
develop products with functionality similar to that of the Company's products.
In addition, the Company expects to compete with other new entrants to the
telecommunications access equipment marketplace, including those targeting
bandwidth on demand services and broadband integrated access products. To the
extent that current or potential competitors can expand their current offerings
to include
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monitoring and maintaining network facilities in an integrated
product, the Company's business and operating results could be materially
adversely affected.
MANUFACTURING
DTS currently outsources subassembly kitting, board assembly and testing to
high quality suppliers which are ISO 9002 certified and were space program
suppliers to NASA and other United States governmental agencies.
Subassemblies and finished circuit boards are brought to DTS headquarters for
final assembly, system integration, testing and product burn-in. Defective
subassemblies are returned to the contract manufacturers for root cause analysis
and process problem resolution. System test development is jointly done by the
Company's engineering and quality assurance personnel. Most DTS product board
assemblies contain surface mount technology ("SMT") components so that only
minor touch-up is possible by DTS manufacturing personnel.
High quality is demanded by all DTS' customers. The Company believes that
quality in the design and the manufacturing of products is a competitive
advantage that it enjoys. The failure rate of network control products shipped
by the Company to three major customers and under warranty is below 1% in a base
of over 60,000 Units. This demonstrates the extent to which the quality control
department and associated manufacturing processes have succeeded in satisfying
stringent product quality requirements. All key procedures in the Company have
been documented and Company policy requires that employees follow these
procedures. It is the Company's belief that this policy promotes consistency in
the delivery of value to the customer. This effort led to ISO 9001 certification
for the Company in December, 1994 and six successful follow-up compliance
surveillance audits. The Company believes that ISO 9001 certification has become
important for international trade, since overseas customers can feel assured
that quality-based processes have been followed.
PRODUCT DEVELOPMENT
The market value of the Company's diversified network access and control systems
is based upon its core technologies in customer terminal interfaces for voice
and high-speed data applications, Tl networking and microwave radio
applications. Additionally, the Company has valuable experience in public,
private and cellular T1 networking standards and control systems. The Company's
product development efforts are currently concentrated in the Tl network access,
transport and control areas. In addition, core hardware and software
technologies have been developed by the Company's product development staff in
subTl areas such as high-speed (1.5 Mbps) digital modem technology. In order to
quickly implement the Company's network access product plans, the Company
intends to develop or acquire additional technologies in radio frequency
interfaces and E1 international access and transport.
The Company's resident core technologies resulting from the developments of the
Flex, SKYPLEX and FlexSentry products include:
- - T1 / E1 multiplexing of voice and high speed data signals
- - T1 / E1 alarm reporting and trunk conditioning
- - High-speed digital timing insertion
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- - Network performance monitoring and testing
- - Network management software with graphical user interfaces
- - TI ESF data link message transport
- - SNMP protocol processing
- - TCP/IP protocol message handling
- - 1OBase5 and 1OBaseT Ethernet Media Access Control
- - Microprocessor-based product design
- - Signal processing algorithms such as modulation, automatic equalization
and forward error correction
- - Real time processing of control and data signals
- - Spread spectrum signal design
- - Design of programmable logic device
- - Basic rate ISDN transport signal design and control
The Company's product development efforts have also resulted in the
development of a number of relevant technologies for products targeted toward
the wireless infrastructure and CAP market segments. These technologies include
hardware and software modules for high-speed digital modems, high data rate QAM
modulation algorithms, error correcting coding, automatic equalization methods
utilizing digital signal processing, VLSI devices, RF filtering for microwave
products, point-to-point and multipoint networking protocols, X.25 interfaces,
voice compression, voice telephony interfaces and T1 digital cross connects.
The technologies listed above are being used by the Company's product
development group to design wireless products and enhancements for the FlexT1/El
platform. Additional technologies will be developed or acquired for the
Company's wireless product lines. Local, domestic and international outsourced
design suppliers have been identified for assisting in the development of spread
spectrum, RF signal and antenna modules. The Company plans to incorporate access
technologies (e.g., multiplexing) as well as management (e.g., SNMP protocols)
into the FlexAir product line.
INTELLECTUAL PROPERTY
The Company's proprietary technology is protected by one patent granted and
two patents pending which relate to channel bank design and ISDN signal coding.
Core technologies described in the "Product Development" section are
incorporated in the Company's products through proprietary hardware and software
modules which embed original algorithmic and device circuitry. Although some of
these original designs are protected by the patents or patent applications
mentioned above, most of the designs are secured only by a claim of trade secret
rights. Two software modules used in several of the Company's products have been
licensed from outside suppliers. Although the loss of these licenses might
adversely affect the Company's performance if it were unable to license
replacement technology, the Company believes that such replacement technology is
readily available from other suppliers on favorable terms.
The patent positions of high technology firms, including those of the Company,
are uncertain and involve complex legal and factual questions for which
important legal principles are largely
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unresolved. In addition, the coverage claimed in a patent application can be
significantly reduced before a patent is issued. Consequently, even though
patent applications covering the technology used by the Company are being
prosecuted with the United States and certain foreign patent offices, there can
be no assurance that any of such patent applications will result in the issuance
of patents or, if any patents are issued, that they will provide significant
proprietary protection and will not be circumvented or invalidated. Since patent
applications in the United States are maintained in secrecy until patents issue
or foreign counterparts, if any, publish, and since publication of discoveries
in scientific or patent literature often lags behind actual discoveries, the
Company cannot be certain that it was the first creator of inventions covered by
pending patent applications or that it was the first to file patent applications
for such inventions. Moreover, the Company might have to participate in one or
more interference proceedings declared by the United States Patent and Trademark
Office to determine priority of invention, which could result in substantial
cost to the Company, whether or not the result of such proceedings was favorable
to the Company. There can be no assurance that any patents which may be issued
based upon the Company's patent application would be held valid and enforceable
by a court or that any given competitor's technology or product would be found
to infringe upon such patents. Litigation, which could result in substantial
cost to the Company, might be necessary to attempt to enforce the Company's
rights under the patents owned by the Company or to determine the scope and
validity of other parties' proprietary rights.
If the outcome of any such litigation were to be adverse, the Company's
business could be materially and adversely affected. The Company is unable to
predict how courts would resolve any future issues relating to the validity and
scope of the patents licensed by the Company, or any patents that may be issued
to the Company in the future.
A number of companies have developed technologies, filed patent applications
or received patents on various technologies that may be related to the Company's
technology. Many of these entities are larger and have significantly greater
resources than the Company. Some of the technologies, applications or patents of
these entities may conflict with the Company's technologies, patents or patent
applications. Such conflict could limit the scope of the patents that the
Company has or may be able to obtain or could result in denial of the Company's
patent applications. In addition, if patents that cover the technologies used by
the Company are issued to other companies, there can be no assurance that the
Company would be able to license these patents at a reasonable cost or be able
to develop or obtain alternative non-infringing technology.
The Company acquired the trademark of "SKYPLEX," and currently owns the
trademarks of "FlexT1," "FlexE1," and "FlexAir.' It has also filed federal
trademark applications for FlexSentry, FlexCell, FlexE1 and FlexAir
internationally, and these applications were published for opposition in the
Trademark Office after examination. The applications for FlexCell, FlexE1 and
FlexAir were formally opposed by Fujitsu Network Transmission Systems, Inc.
Fujitsu has alleged that the trademark registrations should be denied because of
their prior rights filed on a trademark application for FlexR, for certain
access controllers. The opposition proceeding is in an early stage, and the
Company intends to contest the allegations of the trademark opposition and to
assert the company's right to register the three trademarks in the federal
Patent and Trademark Office and internationally.
The Company also relies upon trade secret protection for its confidential and
proprietary information. There can be no assurance that competitors or potential
competitors of the Company will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets or disclose such technology, or that the Company can
meaningfully protect its trade secrets. Failure to obtain needed patents or
licenses or proprietary information held by others could have a material adverse
effect on the Company.
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RESEARCH AND DEVELOPMENT COSTS
During fiscal years 1997, 1996, and 1995, the Company's expenditures in
product development were $3.9 million, $2.7 million and $1.9 million,
respectively. The increase in spending from 1996 to 1997 is due to the continued
product development of the Company's Flex product line and the initial
development of the Company's SKYPLEX spread spectrum radio product. Total
research and development spending for fiscal 1997 includes $1.4 million of costs
that were capitalized relating to the development of the SKYPLEX radio. It was
determined that the future recoverability of the cost of certain features
developed for the radio was not assured and that the value of the asset was
impaired. As a result, $555,000 of the asset was written off during the year.
GOVERNMENT REGULATION
The FCC has regulated the design of telecommunications equipment for use in
the United States by restricting radio frequency signal emissions and by
licensing frequency usage. Compliance with electronic product safety regulations
is also required for every new product design. It is possible that a government
agency such as the FCC could issue regulations which would require the
modification of DTS equipment in order to comply with the new regulations. This
change in FCC rules may impact sales of DTS products should it occur.
International standards for electronic product design in the areas of safety and
signal emissions are different in many cases from those issued by United States
government agencies. Sales of telecommunications equipment in a foreign country
are often restricted by equipment design standards and regulations adopted by a
centralized governmental agency similar to the FCC. The Company has to date
experienced no material difficulties in complying with the various laws and
regulations affecting its business.
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EMPLOYEES
As of June 30, 1997, the Company had approximately 62 full-time employees, of
whom approximately 21 are technical personnel engaged in developing the
Company's products, approximately 20 are marketing and sales personnel,
approximately 13 are quality assurance, customer service and operations
personnel and approximately 8 are involved in administration and finance.
Substantially all of the Company's employees are full-time. The Company's
employees are not unionized and the Company believes that its employee relations
are good.
BACKGROUND OF THE COMPANY
A predecessor by merger to the Company was incorporated in Delaware in 1984.
The Company was originally incorporated in Delaware in 1992 as Netra Inc. and
changed its name to Digital Transmission Systems, Inc. in 1995 in conjunction
with the merger with its wholly-owned subsidiary Digital Transmission Systems,
Inc., a California corporation. On March 4, 1996, the Company completed the
Offering of 1,220,700 Units each consisting of one share of Common Stock and one
warrant to purchase one share of Common Stock at a price of 120% of the unit
offering price of $7.50. On February 18, 1997, trading of the Units was split
into separate trading of the underlying Common Stock and Warrants.
ITEM 2. PROPERTIES
The Company's operations are located in an approximately 20,000 square foot
facility in a technology park in Norcross (in the greater Atlanta, Georgia
area). In May of 1993, the Company entered into a six year lease for its current
facility. The base annual triple-net rate for this space is $7.02 per square
foot, including amortization of buildout costs of approximately $150,000, and
escalates by 4% per year. The Company believes its facilities are suitable and
adequate for its purposes.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings. From time to
time, the Company is involved in various routine legal proceedings incidental to
the conduct of its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Page 11
<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
On March 4, 1996, the Company completed a public offering of 1,220,700 Units
("Units"), each consisting of one share of Common Stock ("Common Stock") and one
Warrant ("Warrant") to purchase one share of Common Stock at an exercise price
per share equal to 120% of the initial public offering price of the Units. The
shares of Common Stock and Warrants were not detachable or separately
transferable, and could only have been traded as part of a Unit until February
18, 1997, when each Unit was separated into one share of Common Stock and one
Warrant (the "Separation Date"). The Common Stock and Warrants have been
approved for quotation on the NASDAQ SmallCap Market, the Company's principal
market, under the symbols DTSX and DTSXW, respectively, and have been approved
for listing on the Philadelphia Stock Exchange and the Boston Stock Exchange
under the symbols DTS and DTS.W, respectively. The Units previously traded on
the NASDAQ Market and the Philadelphia and Boston exchanges. The price per Unit
reflected in the table below represents the range of low and high closing sale
prices for the Company's Units as reported by the NASDAQ Stock Market for the
quarters indicated:
<TABLE>
<CAPTION>
Quarter Ended High Price Low Price
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Commencing March 4, 1996 and ending March 30 $ 9 3/8 $8
June 30, 1996 $14 3/4 $9
September 30, 1996 $15 1/2 $14
December 31, 1996 $16 1/4 $14 1/8
Commencing January 1, 1997 and ending February 14, 1997 $18 $13 7/8
</TABLE>
On February 18, 1997 the Common Stock and Warrants underlying the Units began
trading separately and the Units ceased to trade. Both the Common Stock and
Warrants currently trade on the NASDAQ Market and the Philadelphia and Boston
exchanges. The price per share of the Company's Common Stock in the table below
represents the range of low and high closing sale prices as reported by the
NASDAQ Stock Market for the quarters indicated:
<TABLE>
<CAPTION>
Quarter Ended High Price Low Price
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Commencing February 18, 1997 and ending March 31 $13 $10 3/4
June 30, 1997 $12 1/2 $10 1/4
</TABLE>
The price per share of the Company's Warrants in the table below
represents the range of low and high closing sale prices as reported by the
NASDAQ Stock Market for the quarters indicated:
<TABLE>
<CAPTION>
Quarter Ended High Price Low Price
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Commencing February 18, 1997 and ending March 31 $5 $2 7/8
June 30, 1997 $4 1/4 $2 3/8
</TABLE>
The closing sale price of the Company's Common Stock as reported by the NASDAQ
Stock Market on September 30, 1997 was $9. The closing sale price of the
Company's Warrants as reported by the NASDAQ Stock Market on September 30, 1997
was $2 3/8.
Page 12
<PAGE> 15
The Company has 2,700,000 shares of Common Stock which are outstanding but
were not registered as part of the Company's public offering. The Company has
approximately 42 shareholders of this Common Stock.
The total number of shareholders of record of the Company's common shares as
of September 30, 1997, was approximately 42. Because many shares are held by
brokers and other institutions on behalf of shareholders, the Company is unable
to estimate the total number of shareholders represented by these record
holders.
The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain any earnings for use in the business and does not
anticipate paying any cash dividends in the foreseeable future.
Page 13
<PAGE> 16
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion of the results of operations and financial
condition should be read in conjunction
with the Company's audited financial statements and notes thereto.
OVERVIEW
During the fiscal year ended June 30, 1997, sales to MCI accounted for 30% of
total revenue, as compared to 63% in fiscal year 1996 and 84% in fiscal year
1995. These sales have consisted primarily of the version of the Company's
network control products that was developed specifically for MCI. The Company
expects that future sales of this MCI proprietary product will be minimal and
that the growth will continue for its FlexT1, FlexEl, FlexAir and SKYPLEX
product lines. The Company's strategy is to leverage its technology to develop
these newer products and to continue its customer diversification to enable it
to achieve higher sales and net income over time. However, this shift in
products and customers has and may be expected to continue to negatively impact
the gross profit margin of the Company. The Company is currently experiencing
high initial costs of production on initial, lower volume production runs of its
new products. As the Company builds volume in these products, it is expected
that the gross profit margins will increase.
Industry trends which may also affect the Company's operating results include
the rate of demand for cellular and PCS services, the market acceptance of high
speed wireline service from telecommunications service providers, and the level
of investment in telecommunications infrastructure by developing countries over
the next few years.
COMPARISON OF YEARS ENDED JUNE 30, 1997 AND JUNE 30, 1996
The following table sets forth certain financial data derived from the Company's
Statements of Operations (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996
-------------------- --------------------
% OF % OF
$ SALES $ SALES
------- ----- ------- -----
<S> <C> <C> <C> <C>
Net Sales $14,484 100 $11,228 100
Gross Profit 4,639 32 4,272 38
Product development 2,458 17 2,495 22
Selling, general and administrative 6,331 44 4,206 37
Net income (loss) (4,190) (29) (2,383) (21)
</TABLE>
Page 14
<PAGE> 17
NET SALES. Net sales increased by 29%, to $14,484,000 for the year ended June
30, 1997, from $11,228,000 for the year ended June 30, 1996. The sales mix, and
the resulting percentage of total sales, is shown in the table below (dollars in
thousands):
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL
FISCAL YEAR FISCAL YEAR
ENDED JUNE 30, ENDED JUNE 30,
----------------------- -----------------------
1997 1996 1997 1996
------- -------- -------- --------
<S> <C> <C> <C> <C>
MCI network control $ 4,394 $ 7,113 30 63
Other network control 940 592 6 5
Flex T1/E1 4,861 1,905 34 17
SKYPLEX 3,342 1,111 23 10
DIV modem 556 381 4 4
Other products 391 126 3 1
------- -------- -------- --------
Totals $14,484 $11,228 100 100
======= ======== ======== ========
</TABLE>
During the year ended June 30, 1997, two customers accounted for greater than
10% each of the Company's sales. MCI represented 30% of total sales and Walker
(a reseller/integrator of telecommunications products) accounted for
approximately 15% of the Company's sales. Revenues from the Company's FlexT1/E1
product line increased over 155% from $1,905,000 in the year ended June 30, 1996
to $4,861,000 in the year ended June 30, 1997 and revenues from SKYPLEX grew by
201% from $1,111,000 in the year ended June 30, 1996 to $3,342,000 in the year
ended June 30, 1997. Total international sales increased by approximately 214%
from $1,200,000 in the year ended June 30, 1996 to $3,766,000 in the year ended
June 30, 1997.
GROSS PROFIT. Gross profit increased by 9%, to $4,639,000 for the year ended
June 30, 1997 from $4,272,000 for the year ended June 30, 1996. This increase is
due to the increase in total revenue of $3,256,000 for the year ended June 30,
1997 over the year ended June 30, 1996. As a percentage of sales, gross profit
decreased from 38% in the year ended June 30, 1996 to 32% in the year ended June
30, 1997. Cost of goods sold for the year ended June 30, 1997 includes a charge
to write off certain capitalized product development for products that will not
be realized in future years. The amount of capitalized product development costs
written off during the year ended June 30, 1997 was $555,000. In addition, the
decrease in margins also reflects a shift in product mix from higher margin
network control products to the newer products in the Flex and SKYPLEX product
lines. The Company is currently experiencing high initial costs of production on
initial, lower volume production runs of its new products. As the Company builds
volume in these products, it is expected that the gross profit margins will
increase.
PRODUCT DEVELOPMENT. Product development expenses decreased slightly from
$2,495,000 for the year ended June 30, 1996 to $2,458,000 for the year ended
June 30, 1997. Beginning at the end of the fiscal year ended June 30, 1996 and
continuing through most of the year ended June 30, 1997, the Company was
involved in initial development of a new product line, the SKYPLEX spread
spectrum radio product. Certain development costs related to the SKYPLEX product
were capitalized. During the year ended June 30, 1997, the Company capitalized
$1,432,000 of these
Page 15
<PAGE> 18
costs as compared to $207,000 during the year ended June 30, 1996. During the
fourth quarter of the year ended June 30, 1997, management determined that,
given the anticipated direction of the Company's product line, certain product
features that had been developed for SKYPLEX would not be implemented for some
time. Consequently, it was determined that the future recoverability of the cost
of those features was not assured and that the value of the asset was impaired.
As a result, the Company has written off $555,000 of costs that had been
capitalized during the year. As a percentage of sales, total product development
costs decreased from 22% in the year ended June 30, 1996 to 17% in the year
ended June 30, 1997.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by 51% from $4,206,000 for the year ended June 30, 1996 to
$6,331,000 for the year ended June 30, 1997. Selling expenses increased by 50%
from $3,213,000 in the year ended June 30, 1996 to $4,820,000 in the year ended
June 30, 1997. The increase resulted from expanded sales activity in the U.S. as
well as from expansion of sales activity outside the U.S. Selling expenses as a
percentage of net sales increased from 29% for the year ended June 30, 1996 to
33% for the year ended June 30, 1997 primarily due to the higher average
commission rates paid for new product lines compared to the rates paid on MCI
revenue. General and administrative expenses increased from $993,000 in the year
ended June 30, 1996 to $1,511,000 in the year ended June 30, 1997 due primarily
to increases in administrative and infrastructure costs needed to support the
operations of the business with expanded product lines and distribution
channels. As a percentage of net sales, general and administrative expenses
increased from 9% in the year ended June 30, 1996 to 10% in the year ended June
30, 1997.
NET INCOME / (LOSS). The net loss increased from $2,383,000 for the year ended
June 30, 1996 to a loss of $4,190,000 for the year ended June 30, 1997. This
increase resulted primarily from the shift in product mix to lower margin
products, as well as increased spending in sales and marketing and general and
administrative expenses.
COMPARISON OF YEARS ENDED JUNE 30, 1996 AND JUNE 30, 1995
The following table sets forth certain financial data derived from the Company's
Statements of Operations (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1995
------------------ -----------------
1996 1995 1996 1995
------------------ -----------------
% OF % OF
$ SALES $ SALES
------- --------- -------- -------
<S> <C> <C> <C> <C>
Net sales $11,228 100 $10,228 100
Gross profit 4,272 38 5,410 53
Product development 2,495 22 1,926 19
Selling, general and administrative 4,206 37 3,082 30
Net income (loss) (2,383) (21) 407 4
</TABLE>
Page 16
<PAGE> 19
NET SALES. Net sales increased by 10%, to $11,228,000 for the year ended June
30, 1996, from $10,228,000 for the year ended June 30, 1995. The sales mix, and
the resulting percentage of total sales, is shown in the table below (dollars in
thousands):
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL
FISCAL YEAR FISCAL YEAR
ENDED JUNE 30, ENDED JUNE 30,
------------------ ------------------
1996 1995 1996 1995
------- ------- ------ -------
<S> <C> <C> <C> <C>
MCI network control $ 7,113 $ 8,620 63 84
Other network control 592 281 5 3
Flex T1/E1 1,905 456 17 4
SKYPLEX 1,111 0 10 0
DIV modem 381 694 4 7
Other products 126 177 1 2
------- ------- ------ ------
Totals $11,228 $10,228 100 100
======= ======= ====== ======
</TABLE>
No customer, other than MCI, accounted for more than 10% of sales during
either of these fiscal years. Revenues from the Company's FlexT1/E1 product line
increased over 300% from $456,000 to $1,905,000 and revenues from SKYPLEX, in
it's first year of sales, were $1,110,000. Total international sales increased
by approximately 150% from $483,000 in the year ended June 30, 1995 to
$1,200,000 in the year ended June 30, 1996.
GROSS PROFIT. Gross profit decreased by 21%, to $4,272,000 for the year ended
June 30, 1996 from $5,410,000 for the year ended June 30, 1995. This decrease is
primarily due to the shift in product mix from higher margin network control
products to the newer products in the Flex product line which currently have
lower margins due to smaller production runs resulting in higher materials costs
which are typically related to products in early stages of production. As a
percentage of sales, gross profit decreased from 53% in the year ended June 30,
1995 to 38% in the year ended June 30, 1996.
PRODUCT DEVELOPMENT. Product development expenses increased from $1,926,000
for the year ended June 30, 1995 to $2,495,000 for the year ended June 30, 1996.
This increase represents increased spending on engineering for new products
which was funded, in part, by the proceeds of a public stock offering in March,
1996. As a percentage of sales, total product development costs increased from
19% in the year ended June 30, 1995 to 22% in the year ended June 30, 1996.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by 36% from $3,082,000 for the year ended June 30, 1995 to
$4,206,000 for the year ended June 30, 1996. Selling expenses increased by 39%
from $2,317,000 in the year ended June 30, 1995 to $3,213,000 in the year ended
June 30, 1996. The increase resulted from expanded sales activity in the U.S. as
well as from expansion of sales activity outside the U.S. Selling expenses as a
percentage of net sales increased from 23% for the year ended June 30, 1995 to
29% for the year ended June 30, 1996. General and administrative expenses
increased from $765,000 in the year ended June 30, 1995 to $993,000 in the year
ended June 30, 1996 due primarily to increases in legal and accounting costs to
support business growth and the Company's position as a publicly traded entity.
As a percentage of net sales, general and administrative expenses increased from
7% in the year ended June 30, 1995 to 9% in the year ended June 30, 1996.
Page 17
<PAGE> 20
NET INCOME / (LOSS). Net income decreased from $407,000 for the year ended June
30, 1995 to a loss of $2,383,000 for the year ended June 30, 1996. This decrease
resulted primarily from the shift in product mix to lower margin products, as
well as increased spending in product development and sales and marketing.
LIQUIDITY AND CAPITAL RESOURCES
On March 4, 1996 the Company completed an initial public offering (the
"Offering") of Units consisting of one share of the Company's Common Stock and
one Warrant to purchase one share of Common Stock at a price of 120% of the
initial unit offering price. Through this Offering, the Company raised
approximately $6,931,000 net of expenses. Of the net proceeds, $200,000 was used
to pay accrued dividends on the Series C Preferred Stock. On February 18, 1997
the Common Stock and Warrants underlying the Units began trading separately and
the Units ceased to trade.
On April 10, 1997, the Company established a bank line of credit agreement with
Silicon Valley Bank which makes available $2,500,000 in borrowings with
availability based on the Company's accounts receivable. The loan is secured by
the Company's assets and bears interest at the rate of prime plus 2.25% (10.75%
at June 30, 1997). The weighted average interest rate for the year ended June
30, 1997 was 9.45% compared to the weighted average interest rate of 9.25% on
the Company's borrowing facility for the year ended June 30, 1996. The loan
requires a monthly monitoring fee of $1,000 and a commitment fee of 0.125% due
monthly on the unused portion of the facility. The line of credit agreement term
is one year with an automatic renewal each year unless written notice of
termination is given by one of the parties. As of June 30, 1997, the Company was
in violation of certain covenants established by this credit facility regarding
the Company's tangible net worth. With the investment from Tandem Capital on
September 25, 1997, the Company was within the terms of this covenant.
At June 30, 1997, the Company had approximately $712,000 in cash and cash
equivalents. For the year ended June 30, 1997, the Company used $2,019,000 of
cash in operating activities, reflecting a net loss of $4,190,000, an increase
in accounts receivable of $567,000 and an increase in inventory of $99,000. Cash
was provided for operations through an increase in accounts payable and accrued
liabilities of $1,330,000. Working capital balances continue to grow as the
Company expands its product line and adds new customers both domestically and
internationally. Due to the shift in the Company's revenues from MCI to
resellers and certain international customers, it is anticipated that the days
sales outstanding will increase based on the terms of condition of certain of
these sales.
The Company purchased $1,446,000 of property and equipment during the year ended
June 30, 1997. Purchases were made primarily for equipment used to design and
test the Company's new SKYPLEX product line.
During 1997, the Company capitalized $1,432,000 of product development
expenditures relating to products expected to be made commercially available
before June 30, 1998. These amounts were primarily for development of the
Company's SKYPLEX spread spectrum radio product.
During the year ended June 30, 1997, the Company increased its borrowings and
sold investment securities to cover approximately $4,897,000 of cash used in
operating and investing activities. Borrowings under the Company's working
capital line of credit increased by $1,958,000 during the year ended June 30,
1997. In addition, the Company sold $3,001,000 of investment securities during
the year ended June 30, 1997.
Page 18
<PAGE> 21
At June 30, 1997, the Company's net current assets position was approximately
$1,916,000. The Company has no significant purchase commitments other than those
incurred in the normal course of business and commitments under facilities and
operating leases.
On September 25, 1997, the Company issued $4 million of 11.5% subordinated
debentures due September 25, 2002. The Debenture Purchase Agreement contains
numerous rights, privileges, conditions, etc., in favor of the lender, only
certain of which have been included herein. Accordingly, the Debenture Purchase
Agreement should be read in conjunction with this summary note. The debentures
are convertible at any time by the lender into common stock of the Company at a
conversion price of $10.25 per share, subject to adjustment in certain events.
The debentures are redeemable by the Company after September 1999 provided that
(a) the Company pays the lender additional interest such that the lender would
receive an effective compounded 20% interest rate from inception of the loan or
(b) the 20-day average bid price for the Company's stock exceeds $15.00 per
share.
The debentures may be required to be redeemed by the Company at the option of
the lender at any time prior to maturity if there is a change in control, as
defined in the debenture agreement, at the repayment prices set forth in the
debenture agreement, subject to adjustment, together with accrued interest. The
debenture agreement specifies certain covenants with which the Company must
comply.
The Company believes its available funds and its line of credit will satisfy the
Company's projected working capital requirements over the next 12 months.
SEASONALITY
The Company's sales have been subject to quarterly fluctuations mainly due to
the purchasing cycle of the Company's large customer, MCI. Other fluctuations
occur due to increased buildout of the telecommunications infrastructure during
the summer months. The Company's business plan is to continue the
diversification of its product offerings, further develop its distribution
channels and further expand its customer base. The Company believes that the
implementation of this plan and the expected decrease of sales to MCI will
decrease the seasonality of its sales. The Company operates with a moderate
level of backlog for each product line due to advance purchase commitments and
production lead times.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued SFAS 128,
Earnings per Share. SFAS 128 specifies modifications to the calculation of
earnings per share from those currently utilized by the Company. Under SFAS 128,
"basic" earnings per share will be calculated based upon the weighted average
number of common shares actually outstanding, and "diluted" earnings per share
will be calculated based upon the weighted average number of common shares and
dilutive potential common shares. The Company intends that it will be adopted
when required. The Company believes that the adoption of SFAS 128 will have no
effect on the Company's financial position or cash flows.
In February 1997, the Financial Accounting Standards Board issued SFAS 129,
Disclosure of Information about Capital Structure. SFAS 129 requires companies
to disclose descriptive information about securities that is not necessarily
related to the computation of earnings per share.
Page 19
<PAGE> 22
It also requires disclosure of information about the liquidation preference of
preferred stock and redeemable stock. SFAS 129 is effective for financial
statements for periods ending after December 15, 1997. The Company does not
expect that SFAS 129 will require significant revision of prior disclosures.
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
Reporting Comprehensive Income. SFAS requires companies to display, with the
same prominence as other financial statements, the components of other
comprehensive income. SFAS 130 requires that an enterprise classify items of
other comprehensive income by their nature in a financial statement and display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the balance
sheet. SFAS 130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company's financial statements will
include the disclosure of other comprehensive income in accordance with the
provisions of SFAS 130 beginning in the first quarter of fiscal year ending June
30, 1999.
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
Disclosures about Segments of an Enterprise and Related Information. SFAS 131
requires that an enterprise disclose certain information about operating
segments. SFAS 131 is effective for financial statements for periods beginning
after December 15, 1997. The Company will evaluate the need for such disclosures
at that time.
IMPORTANT CONSIDERATIONS RELATED TO FORWARD-LOOKING STATEMENTS
It should be noted that this discussion contains forward-looking statements
which are subject to substantial known and unknown risks and uncertainties.
There are a number of factors which could cause actual results to differ
materially from those anticipated in statements made herein. Such factors
include, but are not limited to, changes in general economic conditions, the
growth rate of the market for the Company's products and services, the effect of
competitive products and pricing, and the irregular pattern of revenues, as well
as a number of other risk factors which could affect the future performance of
the Company.
Page 20
<PAGE> 23
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Please see pages F-1 through F-21.
Page 21
<PAGE> 24
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On July 11, 1996, the Company dismissed its independent public accountants,
Price Waterhouse LLP. Prior to July 11, 1996, Price Waterhouse LLP was engaged
as the principal accountant to audit the Company's financial statements. The
reports by Price Waterhouse LLP on the Company's financial statements for the
fiscal years ended June 30, 1995, June 30, 1994, and subsequent interim periods
did not contain any adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope or accounting principles.
The dismissal of the former accountants was recommended by the Company's Audit
Committee and approved by the Company's Board of Directors.
During the Company's fiscal years ended June 30, 1995 and June 30, 1994, and
during the subsequent interim fiscal periods through the date of dismissal,
there were no disagreements with Price Waterhouse LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Price Waterhouse LLP, would have caused it to make reference to the subject
matter of the disagreement in their reports. Also, there were no reportable
events of the nature described in Rule 304(a)(1)(v) during the Company's fiscal
years ended June 30, 1995 and June 30, 1994, or during the subsequent interim
fiscal periods following the Company's fiscal year ended June 30, 1995 through
the date of dismissal.
On July 11, 1996, the Company announced the appointment of KPMG Peat Marwick
LLP as independent public accountants to audit the Company's financial
statements as of and for the year ended June 30, 1996.
Page 22
<PAGE> 25
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this will be included in the Company's Proxy
Statement for the Annual Meeting of Shareholders expected to be filed with the
Commission on October 10, 1997 under the captions "Election of Directors" and
"Executive Officers" and is incorporated by reference herein.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this item will be included in the Company's Proxy
Statement for the Annual Meeting of Shareholders expected to be filed with the
Commission on October 10, 1997 under the caption "Executive Compensation" and is
incorporated by reference herein.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item will be included in the Company's Proxy
Statement for the Annual Meeting of Shareholders expected to be filed with the
Commission on October 10, 1997 under the caption "Security Ownership of Certain
Beneficial Owners and Management" and is incorporated by reference herein.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item will be included in the Company's Proxy
Statement for the Annual Meeting of Shareholders expected to be filed with the
Commission on October 10, 1997 under the caption "Related Transactions" and is
incorporated by reference herein.
Page 23
<PAGE> 26
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Exhibits:
The Exhibits are listed in the Index to Exhibits on page E - 1.
(b) Reports on Form 8-K. The Company filed no reports on Form 8-K during the
quarter ended June 30, 1997.
Page 24
<PAGE> 27
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 to be signed on its
behalf by the undersigned, thereunto duly authorized.
DIGITAL TRANSMISSION SYSTEMS, INC.
/s/ Andres C Salazar
-------------------------------------
Date: October 8, 1997 By: Andres C. Salazar,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/Andres C. Salazar Chief Executive Officer, October 8, 1997
- ----------------------------. Director (Principal Executive Officer)
Andres C. Salazar
/s/Roger Maloch. Vice-President-Finance and Secretary October 8, 1997
- ----------------------------. (Principal Financial and Accounting Officer)
Roger Maloch
/s/Frank LaHaye Director October 8, 1997
- ----------------------------.
Frank LaHaye
/s/Gene Miller Director October 8, 1997
- ----------------------------.
Gene Miller
/s/Robert D. Francis Director October 8, 1997
- ----------------------------.
Robert D. Francis
/s/Edwin Kantor Director October 8, 1997
- ----------------------------.
Edwin Kantor
</TABLE>
Page 25
<PAGE> 28
Index to Financial Statements
Balance Sheets as of June 30, 1997 and 1996
Statements of Operations for the years ended June 30, 1997 and 1996
Statements of Cash Flows for the years ended June 30, 1997 and 1996
Statements of Shareholders' Equity for the years ended June 30, 1997 and 1996
Notes to Financial Statements
Independent Auditors' Report - KPMG Peat Marwick LLP
F-1
<PAGE> 29
DIGITAL TRANSMISSION SYSTEMS, INC.
Balance Sheets
June 30, 1997 and 1996
(in thousands, except share data)
<TABLE>
<CAPTION>
Assets (note 6) 1997 1996
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 712 586
Investment securities - 3,001
Trade accounts receivable, net of allowances for
returns and doubtful accounts of $226 and
$50 in 1997 and 1996, respectively 4,223 3,595
Other receivables 14 75
Inventories (note 4) 2,440 2,341
Prepaid expenses 295 262
Deferred tax benefit (note 7) - 250
-------- --------
Total current assets 7,684 10,110
Property and equipment, net of accumulated depreciation
and amortization (note 5) 1,186 445
Deferred tax benefit (note 7) 285 35
Intangible assets (note 3) 1,137 368
Other assets 19 26
-------- --------
Total assets $ 10,311 10,984
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Line of credit (note 6) $ 1,958 -
Accounts payable and accrued liabilities 3,016 1,961
Accrued payroll and benefits 591 316
Warranty accrual 203 102
-------- --------
Total liabilities 5,768 2,379
-------- --------
Shareholders' equity (note 8):
Preferred stock - 3,000,000 shares authorized; -0- shares
issued and outstanding - -
Common stock - $.01 par value; 15,000,000 shares
authorized; 4,121,143 and 3,920,700 shares issued
and outstanding at June 30, 1997 and 1996, respectively 41 39
Additional paid-in capital 11,232 11,137
Deferred compensation (124) (188)
Notes receivable from stock sales (33) -
Accumulated deficit (6,573) (2,383)
-------- --------
Total shareholders' equity 4,543 8,605
Commitments and contingencies (notes 8, 9, 10, and 11)
Total liabilities and shareholders' equity $ 10,311 10,984
======== ========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE> 30
DIGITAL TRANSMISSION SYSTEMS, INC.
Statements of Operations
Years ended June 30, 1997 and 1996
(in thousands, except share data)
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Net sales (note 9) $ 14,484 11,228
Cost of sales, including $555 in write-offs of capitalized
product development costs 9,845 6,956
----------- --------
Gross profit 4,639 4,272
----------- --------
Selling, general, and administrative 6,331 4,206
Product development (note 10(c)) 2,458 2,495
----------- --------
Total operating expenses 8,789 6,701
----------- --------
Operating loss (4,150) (2,429)
Other (expense) income (40) 46
----------- --------
Loss before income tax expense (4,190) (2,383)
Income tax benefit (expense) - -
----------- --------
Net loss (4,190) (2,383)
Accretion of redemption value and dividends accrued
on redeemable preferred stock - 225
----------- --------
Net loss attributable to common shareholders $ (4,190) (2,608)
=========== ========
Net loss per common share and common share equivalent $ (1.05) (.81)
=========== ========
Weighted average common and equivalent shares outstanding 3,999 3,228
=========== ========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 31
DIGITAL TRANSMISSION SYSTEMS, INC.
Statements of Cash Flows
Years ended June 30, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(4,190) (2,383)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 814 532
Write-off of capitalized product development costs 554 -
Amortization of deferred compensation expense 64 81
Change in assets and liabilities:
Trade accounts receivable (567) (1,647)
Inventories (99) (948)
Prepaid expenses (33) (94)
Accounts payable and accrued liabilities 1,055 1,210
Accrued payroll and benefits 275 153
Warranty reserve 101 27
Other 7 (8)
------- -------
Net cash used in operating activities (2,019) (3,077)
------- -------
Cash flows from investing activities:
Purchases of property and equipment (1,446) (585)
Additions to capitalized product development costs (1,432) (207)
Purchase of business - (200)
Purchases of held-to-maturity investment securities - (3,001)
------- -------
Net cash used in investing activities (2,878) (3,993)
------- -------
Cash flows from financing activities:
Net borrowings (payments) under line of
credit agreements 1,958 (450)
Proceeds from maturities of held-to-maturity
investment securities 3,001 -
Preferred dividends paid - (200)
Proceeds from exercise of stock options 57 18
Proceeds from issuances of common stock, net of
$2,155,000 in offering costs in 1996 7 6,931
------- -------
Net cash provided by financing activities $ 5,023 6,299
------- -------
Net increase (decrease) in cash and cash equivalents 126 (771)
Cash and cash equivalents at beginning of year 586 1,357
------- -------
Cash and cash equivalents at end of year $ 712 586
======= =======
</TABLE>
(Continued)
F-4
<PAGE> 32
DIGITAL TRANSMISSION SYSTEMS, INC.
Statements of Cash Flows
(in thousands)
<TABLE>
<S> <C> <C>
Supplemental disclosure of cash paid for income taxes and interest:
Cash paid for income taxes $ -- 3
====== =======
Cash paid for interest $ 56 59
====== =======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 33
DIGITAL TRANSMISSION SYSTEMS, INC.
Statements of Shareholders' Equity
Years ended June 30, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
Common stock
------------------------ Notes
Number Additional receivable
of shares paid-in Deferred from stock
issued Amount capital compensation sales
------ ------ ------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1995 772 $ 8 299 - -
Exercise of stock options 46 - 18 - -
Shares granted under stock incentive plan - - 269 (269) -
Compensation expense - - - 81 -
Dividends accrued on Series C preferred stock - - (58) - -
Accretion of redemption value of Series A
and Series B preferred stock - - (167) - -
Conversion of Series A, Series B, and Series C
preferred stock to common stock 1,813 18 3,534 - -
Units issued in public offering, net of
$2,155,000 of expenses 1,221 12 6,919 - -
Payment of accrued dividends on Series C
preferred stock 69 1 323 - -
Net loss - - - - -
------- ------ ------- ----- ----
Balance at June 30, 1996 3,921 39 11,137 (188) -
Exercise of stock options 200 2 88 - (33)
Compensation expense - - - 64 -
Shares issued under purchase plans - - 7 - -
Net loss - - - - -
------- ------ ------- ----- ----
Balance at June 30, 1997 4,121 $ 41 11,232 (124) (33)
======= ====== ======= ===== ====
</TABLE>
<TABLE>
<CAPTION>
Retained
earnings Total
(accumulated) shareholders'
deficit) equity
------------ -------------
<S> <C> <C>
Balance at June 30, 1995 - 307
Exercise of stock options - 18
Shares granted under stock incentive plan - -
Compensation expense - 81
Dividends accrued on Series C preferred stock - (58)
Accretion of redemption value of Series A
and Series B preferred stock - (167)
Conversion of Series A, Series B, and Series C
preferred stock to common stock - 3,552
Units issued in public offering, net of
$2,155,000 of expenses - 6,931
Payment of accrued dividends on Series C
preferred stock - 324
Net loss (2,383) (2,383)
------ ------
Balance at June 30, 1996 (2,383) 8,605
Exercise of stock options - 57
Compensation expense - 64
Shares issued under purchase plans - 7
Net loss (4,190) (4,190)
------ ------
Balance at June 30, 1997 (6,573) 4,543
====== ======
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 34
DIGITAL TRANSMISSION SYSTEMS, INC.
Notes to Financial Statements
June 30, 1996 and 1995
(1) Summary of Significant Accounting Policies
(a) Description of Business
Digital Transmission Systems, Inc. (the "Company"), formerly NETRA
Inc. (see note 2), designs, manufactures, markets, and services a
broad range of products for the telecommunications industry. The
Company's primary customers are long distance carriers and wireless
service providers. The Company sells its products both in the U.S.,
as well as key international markets, including Latin America, the
Asia/Pacific region and Eastern Europe. The Company's products,
consisting of proprietary software and hardware modules, facilitate
the control, monitoring, and efficient transmission of high-speed
digital information in telecommunications networks. The Company
subcontracts the kitting and assembly of its products to various
manufacturers.
(b) Cash and Cash Equivalents
Cash and cash equivalents include cash on deposit in banks, money
market accounts, and commercial paper instruments. All cash and cash
equivalents are carried at cost which approximates market. For
purposes of the statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months
or less to be cash equivalents.
(c) Investment Securities
The Company classifies its debt and equity securities in one of
three categories: trading, available-for-sale, or held-to-maturity.
Trading securities are bought and held principally for the purpose
of selling them in the near term. Held-to-maturity securities are
those securities in which the Company has the ability and intent to
hold the security until maturity. All other securities not included
in trading or held-to-maturity are classified as available-for-sale.
Investments at June 30, 1996 consist of U.S. Government agency
mortgage-backed debt securities, which were classified as
held-to-maturity securities and recorded at amortized cost.
Accordingly, temporary unrealized gains and losses on
held-to-maturity securities were not recognized.
(d) Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using average cost which approximates the first-in, first-
out (FIFO) method.
(e) Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is calculated on the
straight-line method over the estimated useful lives of the assets as
follows:
Computer and Test Equipment 3 years
Software 1 years
Furniture and Fixtures 3 years
Leasehold Improvements 3 years
F-7
<PAGE> 35
DIGITAL TRANSMISSION SYSTEMS, INC.
Notes to Financial Statements
(f) Intangible Assets and Research and Development Expenditures
Capitalized product development costs, goodwill, and other intangible
assets are being amortized on a straight-line basis over a three-year
period. The Company evaluates the recoverability of these intangible
assets at each period end using the undiscounted estimated future
cash flows expected to be derived from such assets. If such
evaluation indicates a potential impairment, the Company measures it
based on projected discounted future operating cash flows using a
discount rate reflecting the Company's average cost of funds. The
assessment of the recoverability of these intangible assets will be
impacted if estimated future operating cash flows are not achieved.
During the years ended June 30, 1997 and 1996, $555,000 and $-0-,
respectively, in write-offs were recognized due to impairment of net
realizable value.
Research and development costs related to new product development
that has not reached product design phase are expensed as incurred.
The Company capitalizes product development costs for outside
contractors from the time that product design has been completed for
the product to the time that the product is ready for production. The
determination of completion of the product design phase and the
ongoing assessment of recoverability of capitalized product
development costs require considerable judgment by management with
respect to certain external factors, including, but not limited to,
anticipated future revenues, estimated economic life, and changes in
technologies.
(g) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
Of
The Company adopted the provisions of SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of ("SFAS 121"), on July 1, 1996. SFAS 121 requires that
long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs
to sell. Adoption of SFAS 121 did not have a material impact on the
Company's financial position or results of operations.
(h) Financial Instruments
The Company's financial instruments consisted of cash and cash
equivalents; investments; accounts receivable; line of credit;
accounts payable and accrued expenses; and accrued payroll and
benefits. The carrying values of these financial instruments,
excluding investments and line of credit, approximate fair value
because of the short maturity of those instruments. The carrying
value of the Company's investments at June 30, 1996 was $3,000,910,
as compared to the fair value of $3,055,000. The carrying value of
the Company's line of credit approximates fair value based on the
variable rate nature of the instrument.
F-8
<PAGE> 36
DIGITAL TRANSMISSION SYSTEMS, INC.
Notes to Financial Statements
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash and equivalents,
investments, and accounts receivable. The Company's cash equivalents
are in money market accounts, and the Company's investments are in
U.S. Government agency mortgage-backed debt securities. The Company
believes no significant concentration of credit risk exists with
respect to these financial instruments.
The Company sells its products primarily to long-distance carriers,
wireless service providers, and resellers/integrators in the
telecommunications industry. Generally, the Company requires no
collateral on trade receivables, but believes that any credit risks
are substantially mitigated by its credit evaluation process, as well
as letters of credit and credit insurance procured for certain
international sales. The Company maintains allowances for potential
credit losses, but historically has not experienced significant
losses related to groups of customers in any particular geographic
area.
(i) Revenue Recognition
Revenue from the sale of equipment is recognized at the time of
shipment. The Company estimates and records provisions for sales
returns, discounts, and allowances in the period the sale is
reported, based on its experience and other relevant factors.
Certain of the Company's contractual arrangements allow for limited
right of return. Management of the Company has provided an allowance
for expected sales returns, discounts, and allowances related to
these customers based on the historical return rates and expected
future returns of sales to these customers. The amounts of sales
discounts, returns, and allowances ultimately incurred could differ
materially in the near term from the allowances recorded in these
financial statements.
(j) Warranty Accrual
The Company warrants its products against defects in design,
materials, and workmanship for periods ranging from one to five
years. A provision for estimated future costs relating to warranty
expense is recorded when the products are shipped based on historical
claims and projected future experience.
Certain of the Company's product lines have been recently introduced
to market and therefore limited historical data has been available on
which to base estimates of future returns for warranty repairs.
Management of the Company has provided for warranty expense related
to these new products based on the historical return rates and repair
costs of established products lines, as well as recent and expected
return rates and repair costs of these new products. The amount of
warranty expense ultimately incurred could differ materially in the
near term from the accrual recorded in these financial statements.
F-9
<PAGE> 37
DIGITAL TRANSMISSION SYSTEMS, INC.
Notes to Financial Statements
(k) Income Taxes
Income taxes are accounted for under the assets and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date.
(l) Stock Option Plan
Prior to July 1, 1996, the Company accounted for its stock option
plan in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. Only July 1, 1996, the
Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date
of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net income and pro forma earnings per share disclosures for
employee stock option grants made in fiscal 1996 and future years as
if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions
of APB Opinion No. 25 and provide the pro forma disclosure provisions
of SFAS No. 123.
(m) Loss Per Share
Net loss per common share has been computed using the
weighted-average number of outstanding shares of common stock and
common stock equivalents (when dilutive) during 1997 and 1996. The
weighted-average number of shares for 1996 includes common stock and
common stock equivalents issued within one year prior to the filing
of the initial public offering for all periods presented without
regard to whether the inclusion of the securities was dilutive. Net
loss per share computed on a fully diluted basis is not significantly
different than the weighted-average number of shares computed using
the primary method described above.
The pro forma loss per share for 1996 gives effect to the conversion
of 1,813,289 shares of redeemable convertible preferred stock into an
equal number of shares of common stock in conjunction with the
Company's public stock offering as if such conversion had occurred at
the beginning of 1996. Additionally, the pro forma earnings per share
gives effect to the approximately 69,383 shares of common stock which
were exchanged in partial consideration of accrued dividends (see
note 8).
F-10
<PAGE> 38
DIGITAL TRANSMISSION SYSTEMS, INC.
Notes to Financial Statements
(n) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
(o) Reclassifications
Certain amounts in the 1996 financial statements have been
reclassified to conform to classifications adopted in 1997.
(2) Changes in Corporate Structure
DTS Acquisition Corporation (DTS AC) was incorporated on August 14, 1990
for the purpose of acquiring all stock of DTS, Inc. The acquisition was
consummated on August 20, 1990 and DTS AC commenced operations on that
date.
NETRA Inc. ("NETRA"), a Delaware corporation, was formed on October 28,
1992 to effect the purchase of Able Telecommunications, Inc. ("Able"). On
February 5, 1993, Able stockholders contributed all outstanding shares of
Able to NETRA in a tax-free reorganization pursuant to Section 351 of the
Internal Revenue Code of 1986. Able Series A Preferred, Series B
Preferred, and common stockholders received one share of the respective
NETRA shares for each share of Able.
Simultaneously with the NETRA/Able merger described above, DTS AC merged
with and into NETRA, leaving NETRA as the surviving entity, in a tax-free
reorganization. Following the merger of DTS AC into NETRA, DTS AC's
wholly owned subsidiary, DTS, Inc., was merged with and into Able leaving
Able as the surviving entity. Able subsequently changed its name to DTS,
Inc. At the consummation of the transaction, NETRA was the parent company
with one wholly owned subsidiary, DTS, Inc. DTS, Inc.'s operations
include those of the former DTS, Inc. and Able Telecommunications, Inc.
During fiscal year 1994, the Company consolidated the operations of Able
from its California location to its Georgia facility. On November 11,
1995, the Board of Directors of NETRA and DTS, Inc. voted to formally
merge Digital Transmission Systems, Inc. into NETRA; on December 13,
1995, the name of NETRA was changed to Digital Transmission Systems, Inc.
As the NETRA consolidated financial statements prior to and for the year
ended June 30, 1995 included DTS, Inc. as a wholly-owned subsidiary, this
merger will have no effect on the financial statements included herein.
The DTS, Inc./Able combination described above was accounted for using
the purchase method of accounting for financial reporting purposes, with
Able deemed to be the purchased entity. In accordance with the purchase
method of accounting, the excess of the purchase price over specifically
identifiable tangible and intangible net assets of Able was recorded as
goodwill. The results of operations of DTS, Inc. and Able have been
included in the Company's financial statements from the dates of their
respective acquisitions.
F-11
<PAGE> 39
DIGITAL TRANSMISSION SYSTEMS, INC.
Notes to Financial Statements
(3) Intangible Assets
Intangible assets consist of the following as of June 30, 1997 and 1996
(in thousands):
<TABLE>
<CAPTION>
1997 1996
---- -----
<S> <C> <C>
Capitalized product development costs $ 1,085 207
Intangible asset related to the acquisition
of SKYPLEX rights 200 200
---------- -----
1,285 407
Less accumulated amortization 148 39
---------- -----
$ 1,137 368
========== =====
</TABLE>
Amortization expense recorded for the years ended June 30, 1997 and 1996
was approximately $109,000 and $57,000, respectively.
(4) Inventories
Inventories consist of the following at June 30, 1997 and 1996 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Raw materials $ 1,853 2,119
Work in process - 204
Finished goods 953 376
Inventory reserve (366) (358)
---------- -------
$ 2,440 2,341
========== =======
</TABLE>
(5) Property and Equipment
Property and equipment consist of the following at June 30, 1997 and 1996
(in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Computer and test equipment $ 2,324 1,099
Software 286 230
Furniture and fixtures 159 82
Leasehold improvements 205 117
---------- -------
2,974 1,528
Less accumulated depreciation and amortization 1,788 1,083
---------- -------
$ 1,186 445
========== =======
</TABLE>
F-12
<PAGE> 40
DIGITAL TRANSMISSION SYSTEMS, INC.
Notes to Financial Statements
(6) Lines of Credit
In April 1997, the Company executed a line of credit agreement with a
financial institution whereby it may borrow the lesser of $2,500,000 or
80% of eligible receivables, as defined in the Loan and Security
Agreement (the "Agreement"), through the maturity date of April 10, 1998.
Amounts outstanding under the Agreement were $1,958,172 at June 30, 1997.
Borrowings accrue interest at the prime rate plus 2.25% (10.75% at June
30, 1997) and are secured by accounts receivable, inventory, and certain
other assets as defined in the Agreement. A commitment fee of .125% of
the unused portion of the line of credit and a $1,000 collateral fee are
payable monthly under the terms of the Agreement.
The Agreement imposes certain covenants as defined in the Agreement with
which the Company was not in compliance as of June 30, 1997.
DTS, Inc. had a line of credit agreement with a financial institution
whereby it could borrow up to $1,200,000. Amounts outstanding under this
agreement were $-0- at June 30, 1996, and the agreement was not renewed
on its maturity date of October 31, 1996. Borrowings accrued interest at
the prime rate plus 1% (9.25% at June 30, 1996) and were secured by
accounts receivable and inventories. The line was additionally secured by
an assignment of $600,000 of the company's investment securities. A
commitment fee of .25% was charged on the unused portion of the line of
credit.
(7) Income Taxes
Because of operating losses, the Company has not provided any income tax
expense for the years ended June 30, 1997 and 1996. A reconciliation of
the expected income tax benefit (at the statutory federal income tax rate
of 34%) to the actual income taxes reported in the statement of
operations is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Computed "expected" income tax benefit
at Federal statutory rate of 34% $ (1,425) (810)
State income taxes, net of Federal benefit (165) (94)
Increase in valuation allowance 1,638 782
Other, net (48) 122
------- ------
$ - -
======= ======
</TABLE>
F-13
<PAGE> 41
DIGITAL TRANSMISSION SYSTEMS, INC.
Notes to Financial Statements
The income tax effects of the temporary differences that give rise to
significant portions of the Company's deferred tax assets at June 30,
1997 and 1996 are presented below (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 86 19
Inventory valuation allowance 139 136
Accrued expenses not reduced for tax purposes 99 39
Property and equipment depreciation 47 35
Net operating loss carryforwards 2,982 1,486
Product and development tax credit
carryforwards 441 441
---------- -------
Gross deferred tax asset 3,794 2,156
Less valuation allowance 3,509 1,871
---------- -------
Net deferred tax assets $ 285 285
========== =======
</TABLE>
The valuation allowance for deferred tax assets as of June 30, 1997 and
1996 was $3,509,000 and $1,871,000, respectively. The net change in the
total valuation allowance for the years ended June 30, 1997 and 1996 was
an increase of approximately $1,638,000 and $782,000, respectively. In
assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies
in making this assessment. In order to fully realize the deferred tax
asset, the Company will need to generate future taxable income of
approximately $8,000,000 prior to the expiration of the net operating
loss carryforwards beginning in 2005. Taxable loss for the years ended
June 30, 1997 and 1996 was approximately ($3,680,000) and ($2,200,000),
respectively. Based upon the level of historical taxable income and
projections for future taxable income over the periods in which the
deferred tax assets are deductible, management believes it is more likely
than not the Company will realize the benefits of these deductible
differences, net of the existing valuation allowances at June 30, 1997.
The amount of the deferred tax asset considered realizable, however,
could be reduced in the near term if estimates of future taxable income
during the carryforward period are reduced.
At June 30, 1997, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $8,000,000 which are
available to offset future federal taxable income, if any, through 2005.
In addition, the Company has product development tax credit carryforwards
of approximately $441,000 which are available to reduce future federal
regular income taxes, if any, and have expiration dates beginning in
2005.
F-14
<PAGE> 42
DIGITAL TRANSMISSION SYSTEMS, INC.
Notes to Financial Statements
The amount of net operating loss and research and experimentation credit
carryforwards may be limited due to an ownership change, as defined in
the Internal Revenue Service regulations. In the event of an ownership
change, the amount of taxable income of a loss corporation for any
postchange year which may be offset by prechange losses shall not exceed
the Internal Revenue Code Section 382 limitation for such year.
Generally, an ownership change occurs if a 5% stockholder or any equity
structure shift increases the percentage of the stock of the loss
corporation owned by more than 50 percentage points over the lowest
percentage of stock of the loss corporation owned by such stockholders at
any time during a three-year look-back testing period. The annual Section
382 limitation is equal to the value of the old loss corporation (before
the ownership change) multiplied by the Federal long-term, tax-exempt
rate.
(8) Shareholders' Equity
Amendment to the Certificate of Incorporation
Effective March 4, 1996, the date of the Company's public stock offering
(the "Offering"), the Company's Board of Directors amended the
certificate of incorporation of Digital Transmission Systems, Inc. to
declare a 3.35-to-1 reverse stock split on all common and redeemable
convertible preferred shares authorized; change the par value on both the
common stock and the redeemable convertible preferred stock from their
original par value of $.00001 and $.0001, respectively, to $.0l; and
reduce the number of authorized shares of common stock from 20,000,000 to
15,000,000. The amendment also authorized 3,000,000 shares of $.01 par
preferred stock. All shares and per share amounts have been retroactively
restated to reflect the reverse stock split and the change in par value
and authorized number of shares of common stock.
Conversion of Series A, Series B, and
Series C Redeemable Convertible Preferred Stock
Concurrent with the Offering, the Company converted the 358,563, 90,850,
and 1,363,876 outstanding shares of Series A, Series B, and Series C
Redeemable Convertible Preferred Stock, respectively, to shares of $.01
par value Common Stock on a 1:1 basis. At the time of the conversion,
$523,400 was accrued in dividends on the redeemable convertible preferred
stock. The Company paid $200,000 in cash and issued 69,383 shares of
common stock as payment for the remainder. The owners of this common
stock have retained certain demand registration rights. As of June 30,
1997 and 1996, the Company has no redeemable convertible preferred stock
authorized, issued, or outstanding.
Shareholder Lock-Up Agreements
Certain holders of the 2,700,000 shares of common stock outstanding prior
to the Offering entered into agreements that they would not sell any
common stock owned by them without the prior written consent of the
underwriter for a period of one year from the date of the Offering. Some
of these agreements have been extended beyond June 30, 1997.
F-15
<PAGE> 43
DIGITAL TRANSMISSION SYSTEMS, INC.
Notes to Financial Statements
Initial Public Offering
On March 4, 1996, the Company completed the Offering of 1,220,700 units
each consisting of one share of common stock and one warrant to purchase
one share of common stock at an exercise price per share of $9. Through
this Offering, the Company raised approximately $6,931,000 net of
expenses.
The 1,220,700 shares of common stock included in the units were shown as
outstanding shares for the purposes of the balance sheet and statement of
stockholders' equity as of and for the year ended June 30, 1996.
Separation of Units
The shares of common stock and warrants included in the 1,220,700 units
sold in the Offering were not separately detachable or separately
transferable, and could only be traded as units, until 365 days from the
date of the Offering or such earlier date as the underwriter could
determine (the "Separation Date"). On February 18, 1997, the units
separated so that the common stock and warrants underlying the units
began trading separately and the units ceased to trade.
Warrants
As of June 30, 1997, 1,220,700 warrants were issued and outstanding which
entitle the holder to purchase one share of common stock at an exercise
price of $9, and expire March 4, 2001. The Company has issued no warrants
other than these, which were included in the units sold in the Offering.
Stock Options
Effective October 1992, the Board of Directors adopted the 1992 Stock
Incentive Plan (the "1992 Plan") which provides for the grant of stock
options for up to 840,946 shares of common stock. The 1992 Plan also
permits the Board of Directors to grant stock appreciation rights, stock
bonuses, and restricted stock awards in accordance with the provisions of
the Plan. The Plan remains in effect until October 2002 unless sooner
terminated by the Board of Directors.
Effective January 1996, the Board of Directors adopted the 1996 Stock
Incentive Plan (the "1996 Plan") which provides for the grant of stock
options for up to 200,000 shares of common stock. In October 1996, the
Board of Directors voted to increase the number of shares of common stock
authorized under the 1996 Plan from 200,000 shares to 440,000 shares. The
1996 Plan also permits the Board of Directors to grant stock appreciation
rights, stock bonuses, and restricted stock awards in accordance with the
provisions of the Plan. The Plan remains in effect until January 2006
unless sooner terminated by the Board of Directors.
F-16
<PAGE> 44
DIGITAL TRANSMISSION SYSTEMS, INC.
Notes to Financial Statements
Options granted under the 1992 and 1996 Plans may be incentive stock
options or nonqualified stock options, as determined by the Board of
Directors at the time of grant. Incentive stock options are granted at a
price not less than the fair market value of the stock on the grant date,
and nonqualified options are granted at a price to be determined by the
Board of Directors provided that such exercise price is not less than 85%
of the fair market value of the stock on the grant date. Option vesting
terms are established by the Board of Directors at the time of grant, and
presently range from three to five years. The expiration date of options
granted under the 1992 and 1996 Plans are determined at the time of grant
and may not exceed ten years from the date of the grant.
As of June 30, 1997, there were no options available for grant under the
1992 Plan, and there were 131,752 options available for grant under the
1996 Plan.
On March 4, 1996, pursuant to the Underwriter's Agreement, the Company
issued options to the underwriter to purchase 107,000 units (consisting
of one share of common stock and one warrant to purchase one share of
common stock at an exercise price of $14.85). The options have an
exercise price per unit of $12.375 and expire March 4, 2001. The options
were assigned a fair value of $-0- when issued due to the stated exercise
prices which greatly exceeded the market value at the grant date. As of
June 30, 1997, 107,000 options were outstanding and exercisable.
The Company also issues options to members of the Board of Directors as
compensation for board representation and attendance. Options are issued
at the fair market value at the date of grant and vest immediately upon
issue as of the date of each board meeting attended. As of June 30, 1997,
35,388 of these options were outstanding of which 27,388 were
exercisable.
The per share weighted-average fair value of all stock options granted
during the years ended June 30, 1997 and 1996 was $4.48 and $1.83 on the
date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions: 1997 - expected dividend yield
0%, expected volatility 45%, risk-free interest rate of 5.8%, and an
expected life of 4 years; 1996 - expected dividend yield 0%, expected
volatility 45%, risk-free interest rate of 5.8%, and an expected life of
4 to 5 years.
The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for its stock
options issued at fair value in the financial statements. Had the Company
determined compensation cost based on the fair value at the grant date
for its stock options under SFAS No. 123, the Company's net loss would
have been adjusted by the pro forma amounts indicated below (in
thousands, except share data):
<TABLE>
<CAPTION>
June 30,
--------
1997 1996
---- ----
<S> <C> <C> <C>
Net loss attributable to common
shareholders As reported $ (4,190) (2,608)
Pro forma $ (4,447) (2,598)
Net loss per common share and
common share equivalent As reported $ (1.05) (.81)
Pro forma $ (1.11) (.80)
</TABLE>
F-17
<PAGE> 45
DIGITAL TRANSMISSION SYSTEMS, INC.
Notes to Financial Statements
Pro forma net loss reflects only options granted during the years ended
June 30, 1997 and 1996. Therefore, the full impact of calculating
compensation cost for stock options under SFAS 123 is not reflected in
the pro forma loss amounts presented above because compensation cost is
reflected over the options' vesting periods ranging from one to five
years, and compensation cost for options granted prior to July 1, 1995 is
not considered.
The following summarizes stock option activity, excluding underwriter
options, for the years ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
Number Exercise
of shares price per share
--------- ---------------
<S> <C> <C>
Outstanding at June 30, 1995 542,201 .0084 - 1.6750
Granted 313,335 .8710 - 10.5000
Exercised 45,327 .0084 - 1.1725
Canceled or expired 87,066 .0670 - 1.1725
--------- ----------------------
Outstanding at June 30, 1996 723,143 $ .0084 - 10.5000
======================
Granted 230,000 10.2500 - 12.8750
Exercised 199,661 .0085 - 4.1875
Canceled or expired 31,261 .0670 - 4.7300
--------- ----------------------
Outstanding at June 30, 1997 722,221 $ .0085 - 12.8750
========= ======================
</TABLE>
At June 30, 1997, the weighted-average remaining contractual life of
outstanding options, excluding underwriter options, was 7.8 years. At
June 30, 1997 and 1996, the number of options exercisable was 221,466 and
309,821, respectively, and the weighted-average exercise price of those
options was $1.22 and $.33, respectively.
Notes Receivable from Stock Sales
Notes receivable from stock sales result from the exercise of stock
options for notes during the year ended June 30, 1997. The notes are full
recourse promissory notes bearing interest at 8% per annum. All accrued
interest and the entire principal amount of each note is payable on
November 7, 1997.
Stock Compensation Expense
Unearned compensation expense of $269,000 was recorded as a reduction of
shareholders' equity for the fiscal year ended June 30, 1996 for 62,089
options issued at an exercise price less than fair market value.
Compensation expense of approximately $64,000 and $81,000 was recorded in
the Statement of Operations during the years ended June 30, 1997 and
1996, respectively, for the options that vested during these years.
F-18
<PAGE> 46
DIGITAL TRANSMISSION SYSTEMS, INC.
Notes to Financial Statements
Employee Stock Purchase Plan
Effective November 7, 1996, the Board of Directors adopted the 1996
Employee Stock Purchase Plan (the "Plan"), under which, the Company is
authorized to issue up to 150,000 shares of common stock to its full-time
employees. Substantially all of the Company's employees are eligible to
participate. Under the terms of the Plan, employees can choose each year
to have up to 10% of their annual base earnings withheld to purchase the
Company's common stock. The purchase price of the stock is 85% of the
lower of its beginning-of-year or end-of-year market price. Under the
plan, the Company sold 782 shares to employees in 1997.
Under FASB Statement 123, compensation cost is recognized for the fair
value of the employees' purchase rights, which was estimated using the
Black-Scholes model with the following assumptions for 1997: dividend
yield of 0%; an expected life of one year; expected volatility of 45%;
and risk-free interest rate of 5.8%. The weighted-average fair value of
those purchase rights granted during the year ended June 30, 1997 was
approximately $2,500.
(9) Concentration of Sales and Credit Risks
For the years ended June 30, 1997 and 1996, 45% and 66%, respectively, of
the Company's revenues were derived from two customers. Additionally, the
Company's accounts receivable from these customers represented 44% and
60% of total accounts receivable at June 30, 1997 and 1996, respectively.
For the years ended June 30, 1997 and 1996, international sales were
approximately 26% and 10%, respectively, of total sales of the Company.
International sales and gross profit were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Sales $ 3,766 1,200
Gross profit 1,120 254
</TABLE>
(10) Commitments and Contingencies
(a) Leases
The Company leases a building and certain equipment under
noncancelable operating lease agreements which expire at various
times through 2001 and provide for minimum annual rentals as follows:
<TABLE>
<CAPTION>
Year ending
June 30, (in thousands)
-------- --------------
<S> <C>
1998 $ 197
1999 159
2000 15
2001 3
--------
$ 374
========
</TABLE>
Rental expense under all lease agreements for the years ended June
30, 1997 and 1996 was approximately $415,000 and $450,000, respectively.
F-19
<PAGE> 47
F-20
DIGITAL TRANSMISSION SYSTEMS, INC.
Notes to Financial Statements
(b) 401(k) Plan
The Company sponsors the Digital Transmission Systems, Inc. 401(k)
Savings Plan (the "Plan") for the benefit of eligible employees and
their beneficiaries. Employees may elect to contribute from 1% to 20%
of their gross compensation to the Plan. The Plan was amended during
the year ended June 30, 1997 to provide for a Company match of 25% of
employee contributions up to 6% of their eligible compensation. The
Company can also make an additional annual discretionary contribution
that is allocated to employees based upon relative levels of
compensation. The Company recorded matching expense of $23,505 and
$-0- for the years ended June 30, 1997 and 1996, respectively. The
Company elected to make no discretionary contributions to the Plan
during the years ended June 30, 1997 and 1996.
(c) Product Development Agreements
The Company has agreements with certain outside subcontractors for
the development of new product technology. The agreements define
milestones which, upon completion, call for the payment of
agreed-upon fees. Portions of these payments are capitalized as
product development cost, as discussed in note 1. There were no firm
commitments remaining in effect as of June 30, 1997.
(11) Subsequent Events
On September 25, 1997, the Company issued $4 million of 11.5%
subordinated debentures due September 25, 2002. The Debenture Purchase
Agreement (the "Debenture Agreement") contains numerous rights,
privileges, conditions, etc., in favor of the lender, only certain of
which have been included herein. Accordingly, the Debenture Agreement
should be read in conjunction with this summary note. The debentures are
convertible at any time by the lender into common stock of the Company at
a conversion price of $10.25 per share, subject to adjustment in certain
events. The debentures are redeemable by the Company after September 1999
provided that (a) the Company pays the lender additional interest such
that the lender would receive an effective compounded 20% interest rate
from inception of the loan or (b) the 20-day average bid price for the
Company's stock exceeds $15.00 per share.
The debentures may be required to be redeemed by the Company at the
option of the lender at any time prior to maturity if there is a change
in control, as defined in the Debenture Agreement, at the repayment
prices set forth in the Debenture Agreement, subject to adjustment,
together with accrued interest. The Debenture Agreement specifies certain
covenants with which the Company must comply.
F-20
<PAGE> 48
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders of
Digital Transmission Systems, Inc.
We have audited the accompanying balance sheets of Digital Transmission Systems,
Inc. as of June 30, 1997 and 1996, and the related statements of operations,
shareholders' equity, and cash flows for the years then ended. 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Digital Transmission Systems,
Inc. as of June 30, 1997 and 1996, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ KPMG PEAT MARWICK LLP
Atlanta, Georgia
July 17, 1997, except as to note 11,
which is as of September 25, 1997
F-21
<PAGE> 49
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
*3.1 - Form of Amended and Restated Certificate of Incorporation of the Company.
*3.2 - Form of Amended and Restated Bylaws of the Company.
*4.1 - See Article 4 of the Company's Amended and Restated Certificate of Incorporation -- located within
Exhibit 3.1.
*4.2 - See Article 3 of the Company's Amended and Restated Bylaws located within Exhibit 3.2.
*10.1 - Loan Agreement, dated October 10, 1995, by and between the Company and SunTrust Bank.
*10.2 - Lease Agreement, dated September 14, 1994, by and between the Company and Advanta Leasing Corp.
*10.3 - The Company's 401 (K) Savings Plan.
*10.4 - Lease Agreement, dated January 28, 1991, by and between the Company and Colonial Pacific Leasing
Corporation.
*10.5 - Lease Agreement, dated January 4, 1994, by and between the Company and Amplicon, Inc.
*10.6 - Form of Reseller Agreement.
*10.7 (1) - Proprietary Information, Noncompetition and Inventions Agreement, dated August 20, 1990, by and
between the Company and Thomas C. Mock
*10.8 - Form of Confidentiality and Invention Assignment Agreement.
*10.9 (1) - Proprietary Information, Noncompetition and Invention Agreement, dated August 20, 1990, by and
between the Company and James W. Chamberlin
*10.10 - Acquisition Agreement, dated December 1, 1995, by and between the Company and Technology Ventures
International, Inc.
*10.11 - Lease Agreement, dated March 19, 1993, by and between New England Mutual Life Insurance Company and
the Company.
*10.12 - Manufacturing Agreement, dated May 8, 1995, by and between the Company and Comptronix Corporation.
*10.13 (1) - FY95 Employee Profit Sharing Plan.
*10.14 (1) - FY96 Management Bonus Plan.
*10.15 (1) - 1992 Stock Incentive Plan.
*10.16 (1) - FY96 Sales Commission Plan for Bobby Boykin.
*10.17 - Equipment Lease, dated December 17, 1991, by and between the Company and General Electric Capital
Corporation.
*10.18 (1) - Form of Employment Agreement to be entered into by and between the Company and each of Mr.
Salazar, Mr. Boykin and Mr. Nelson.
*10.19 (1) - 1996 Incentive Compensation Plan.
*10.20 - Form of Consent of Series C Preferred Stockholders.
*10.21 - Agreement, dated January 7, 1994, by and between the Company and Wiltron Company.
</TABLE>
E-1
<PAGE> 50
<TABLE>
<S> <C>
10.22 (1) - Form of Digital Transmission Systems, Inc. Employee Stock Purchase Plan
(previously filed with Form 10-KSB for the fiscal year ended June 30,
1996 and incorporated herein by reference)
10.23 - Form of Amendment to the Company's 401 (K) Savings Plan (previously
filed with Form 10-KSB for the fiscal year ended June 30, 1996 and
incorporated herein by reference)
10.24 - Form of Debenture Agreement between Sirrom Capital d/b/a Tandem Capital and the Company
11.1 - Statement of computation of per share earnings (loss)
*23.1 - Consent of Price Waterhouse LLP
*23.2 - Consent of Sutherland, Asbill & Brennan (included in the opinion filed as Exhibit No. 5.1
to the Registration Statement.)
27 - Financial Data Schedule (for SEC use only)
</TABLE>
* Incorporated by reference to the corresponding exhibit of the
Registrant's registration statement on Form SB-2 (File Number 1-14198 ).
(1) Constitutes a management contract or compensatory plan or
arrangement required to be filed.
E-2
<PAGE> 1
EXHIBIT 10.24
THIS DEBENTURE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT") OR ANY APPLICABLE STATE SECURITIES LAW AND MAY
NOT BE TRANSFERRED UNLESS (i) THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OR (ii) IN THE OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY,
REGISTRATION UNDER THE SECURITIES ACT OR SUCH APPLICABLE STATE SECURITIES LAWS
IS NOT REQUIRED IN CONNECTION WITH SUCH TRANSFER.
DIGITAL TRANSMISSION SYSTEMS, INC.
11.50% SUBORDINATED DEBENTURE DUE SEPTEMBER 25, 2002
No. ____ Atlanta, Georgia
$4,000,000.00 September 25, 1997
FOR VALUE RECEIVED, Digital Transmission Systems, Inc., a Delaware
corporation (the "Company"), promises to pay to the order of Sirrom Capital
Corporation d/b/a Tandem Capital, a Tennessee corporation ("Purchaser"),
pursuant to the Debenture Purchase Agreement (as hereinafter defined) at such
place as Purchaser may from time to time designate in writing, in lawful money
of the United States of America and in immediately available funds, by automatic
debit, the principal sum of Four Million Dollars ($4,000,000.00) and any accrued
but unpaid interest thereon.
This Debenture is referred to in and is executed and delivered pursuant
to, a Debenture Purchase Agreement dated of even date herewith between the
Company and Purchaser (the "Debenture Purchase Agreement"), to which reference
is hereby made for a statement of the terms and conditions under which this
Debenture may be repaid and accelerated. Capitalized terms not otherwise defined
herein shall have the meanings ascribed to them in the Debenture Purchase
Agreement.
Interest shall accrue from the date of issue of this Debenture at the
rate of 11.50% per annum, payable quarterly by automatic debit on the first day
of each March, June, September and December, commencing December 1, 1997, and
ending at maturity, to mature on September 25, 2002.
Interest shall be computed on the basis of a 360-day year and the
actual number of days elapsed.
Any principal payment due under this Debenture not paid when due,
whether at stated maturity, by notice of repayment, by acceleration or
otherwise, and any accrued but unpaid interest shall, to the extent permitted by
applicable law, thereafter bear interest (compounded monthly and payable upon
demand) at an annual rate of 15% in respect of
<PAGE> 2
such principal and such unpaid interest until such unpaid amounts have been paid
in full (whether before or after judgment).
This Debenture is subject to (i) optional redemption by the Company
without penalty and as provided by Section 1.2 of the Debenture Purchase
Agreement, and (ii) mandatory redemption at the election of the holder and as
provided by Section 1.3 of the Debenture Purchase Agreement. All payments made
hereunder shall be applied first to interest and then to outstanding principal.
If payment hereunder becomes due and payable on a Saturday, Sunday, or
legal holiday, under the laws of the State of Tennessee, the due date thereof
shall be extended to the next succeeding business day.
Demand, presentment, protest, diligence, notice of dishonor, and any
other formality are hereby expressly waived by the Company and any endorser or
guarantor.
If there is any default under this Debenture, and this Debenture is
placed in the hands of an attorney for collection, or is collected through any
court, including any bankruptcy court, the Company promises to pay to the order
of the holder hereof such holder's reasonable attorneys' fees and court costs
actually incurred in collecting or attempting to collect or securing or
attempting to secure this Debenture or enforcing the holder's rights with
respect to the Collateral, to the extent allowed by the laws of the State of
Tennessee or any state in which any Collateral is situated.
THIS DEBENTURE HAS BEEN DELIVERED IN, AND SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF, THE STATE OF GEORGIA APPLICABLE TO
CONTRACTS MADE AND TO BE PERFORMED THEREIN WITHOUT REGARD TO THE CONFLICTS OF
LAW PROVISIONS THEREOF.
The holder of this Debenture may, with or without notice to any party,
and without affecting the obligations of any maker, surety, guarantor, endorser,
accommodation party, or any other party to this Debenture (i) extend the time
for payment of either principal or interest from time to time, (ii) release or
discharge any one or more parties liable on this Debenture, (iii) suspend the
right to enforce this Debenture with respect to any persons, (iv) change,
exchange, or release any property in which the holder has any interest securing
this Debenture, (v) justifiably or otherwise, impair any of the Collateral or
suspend the right to enforce against any such Collateral, and (vi) at any time
it deems it necessary or proper, call for and, should it be made available,
accept, as additional security, the signature or signatures of additional
parties or a security interest in property of any kind or description or both.
This Debenture is subordinated to certain other indebtedness of the
Company to the extent and with the effect set forth in the Debenture Purchase
Agreement.
<PAGE> 3
This Debenture is registered on the books of the Company and is
transferable only by surrender thereof at the principal office of the Company at
3000 Northwoods Parkway, Building 330, Norcross, Georgia 30071, or such other
address as the Company shall have advised the holder of the Debenture in
writing, duly endorsed or accompanied by a written instrument of transfer duly
executed by the registered holder of this Debenture or its attorney duly
authorized in writing. Payment of or on account of principal, premium, if any,
and interest on this Debenture shall be made only to or upon the order in
writing of the registered holder thereof.
Any provision herein, or in the Debenture Purchase Agreement, or any
other document executed or delivered in connection herewith or therewith, or in
any other agreement or commitment, whether written or oral, expressed or
implied, to the contrary notwithstanding, neither the Purchaser nor any holder
hereof shall in any event be entitled to receive or collect, nor shall any
amounts received hereunder be credited, so that Purchaser or any holder hereof
shall be paid, as interest, a sum greater than the maximum amount permitted by
applicable law to be charged to the person primarily obligated to pay this
Debenture at the time in question. If any construction of this Debenture or the
Debenture Purchase Agreement, or any and all other papers, agreements or
commitments, indicate a different right given to Purchaser or any holder hereof
to ask for, demand, or receive any larger sum as interest, such is a mistake in
calculation or wording which this clause shall override and control, it being
the intention of the parties that this Debenture, the Debenture Purchase
Agreement, and all other documents executed or delivered in connection herewith
shall in all ways comply with applicable law and proper adjustments shall
automatically be made accordingly. If Purchaser or any holder hereof ever
receives, collects, or applies as interest, any sum in excess of the maximum
amount permitted by applicable law, if any, such excess amount shall be applied
to the reduction of the unpaid principal balance of this Debenture, and if this
Debenture is paid in full, any remaining excess shall be paid to the Company. In
determining whether or not the interest paid or payable, under any specific
contingency, exceeds the maximum amount permitted by applicable law, if any, the
Company and any holder hereof shall, to the maximum extent permitted under
applicable law; (i) characterize any non-principal payment as an expense or fee
rather than as interest, and (ii) "spread" the total amount of interest
throughout the entire term of this Debenture.
[REST OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 4
IN WITNESS WHEREOF, the Company has caused this Debenture to be executed in its
corporate name by the undersigned officer, thereunto duly authorized.
DIGITAL TRANSMISSION SYSTEMS, INC.
By: /s/Andres C. Salazar
-------------------------
Name: Andres C. Salazar
-----------------------
Title: President and CEO
----------------------
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. Sale and Purchase of Debentures. 1
1.1 Debentures. 1
1.2 Optional Redemption. 1
1.3 Mandatory Redemption. 3
1.4 Commitment; Closing Date. 3
1.5 Processing Fee. 3
2. Representations and Warranties of the Company. 3
2.1 Corporate Status. 3
2.2 Capitalization. 4
2.3 Authorization. 5
2.4 Validity and Binding Effect. 5
2.5 Contracts and Other Commitments. 5
2.6 Litigation. 6
2.7 Financial Statements. 6
2.8 SEC Reports. 6
2.9 Absence of Changes. 6
2.10 No Defaults. 7
2.11 Compliance With Law. 7
2.12 Taxes. 7
2.13 Certain Transactions. 7
2.14 Title to Property. 8
2.15 Intellectual Property. 8
2.16 Environmental Matters. 9
2.17 Accounting Matters. 9
2.18 [Reserved]. 10
2.19 Prior Sales. 10
2.20 Regulatory Compliance. 10
2.21 Margin Regulations. 10
2.22 [Reserved]. 10
2.23 Limited Offering. 10
2.24 Registration Obligations. 10
2.25 Insurance. 10
2.26 Governmental Consents. 11
2.27 Employees 11
2.28 ERISA 11
2.29 Fees/Commissions 12
2.30 Survival. 12
3. Representations and Warranties of Purchaser 12
3.1 Corporate Status. 12
</TABLE>
<PAGE> 6
<TABLE>
<S> <C> <C>
3.2 Authorization. 12
3.3 Validity and Binding Effect 12
3.4 Accredited Investor, Investment Intent 13
3.5 Survival 13
4. Conditions Precedent to the Obligations of Purchaser 13
4.1 Representations and Warranties 13
4.2 Officer's Certificate 13
4.3 Satisfactory Proceedings & Secretary's Certificate 13
4.4 Legal Opinion 14
4.5 Authorization Agreement 14
4.6 Existence and Authority 14
4.7 Delivery of Operative Documents 14
4.8 [Reserved]. 14
4.9 Required Consents 14
4.10 Waiver of Conditions 14
5. Covenants of Company. 15
5.1 Use of Proceeds 15
5.2 Corporate Existence, Etc 15
5.3 Maintenance of Properties, Etc. 15
5.4 Nature of Business 15
5.5 Insurance 15
5.6 Taxes, Claims for Labor and Materials. 15
5.7 Compliance with Laws, Agreements, Etc 16
5.8 ERISA Matters 16
5.9 Books and Records: Rights of Inspection 16
5.10 Reports 16
5.11 Limitations on Debt and Obligations. 18
5.12 Guaranties 19
5.13 Limitation on Liens 19
5.14 Restricted Payments 20
5.15 Investments 20
5.16 Mergers, Consolidations and Sales of Assets 21
5.17 Transactions with Affiliates 23
5.18 Notice 23
5.19 Board of Directors; Observer Rights. 23
5.20 Annual Plan. 24
5.21 Further Assurances. 24
</TABLE>
<PAGE> 7
<TABLE>
<S> <C> <C>
6. SUBORDINATION OF DEBENTURES 24
6.1 Subordination. 24
6.2 Liquidation, Etc. 24
6.3 Senior Indebtedness Default. 25
6.4 Subrogation. 25
7. Conversion of Debentures. 25
7.1 Conversion Privilege 25
7.2 Reservation of Shares. 26
7.3 Conversion Procedure 26
8. Restrictions on Transfer; Registration Rights. 32
8.1 Legends; Restrictions on Transfer. 32
8.2 Registration Rights. 32
9. Events of Default; Remedies 32
9.1 Events of Default 32
9.2 Remedies Upon Default 34
9.3 Acceleration of Maturities 34
10. Amendments, Waivers and Consents 35
10.1 Consent Required. 35
10.2 Solicitation of Debenture Holders 35
10.3 Effect of Amendment or Waiver 35
11. Interpretation of Agreement; Definitions 35
11.1 Definitions. 35
11.2 Accounting Principles 38
11.3 Directly or Indirectly 38
12. Miscellaneous 38
12.1 Expenses, Stamp Tax Indemnity 38
12.2 Powers and Rights Not Waived;
Remedies Cumulative 39
12.3 Notices 39
12.4 Assignments 40
12.5 Survival of Covenants and Representations 40
12.6 Severability. 40
12.7 Governing Law. 41
12.8 Captions; Counterparts. 41
12.9 Confidentiality. 41
12.10 Publicity. 41
</TABLE>
<PAGE> 8
DEBENTURE PURCHASE AGREEMENT
BETWEEN
SIRROM CAPITAL CORPORATION
d/b/a
TANDEM CAPITAL
AND
DIGITAL TRANSMISSION SYSTEMS, INC.
September 25, 1997
<PAGE> 9
DEBENTURE PURCHASE AGREEMENT
This DEBENTURE PURCHASE AGREEMENT (the "Agreement ") entered into the
25th day of September, 1997, by and between DIGITAL TRANSMISSION SYSTEMS, INC. a
Delaware corporation (the "Company"), and SIRROM CAPITAL CORPORATION d/b/a
TANDEM CAPITAL, a Tennessee corporation (the "Purchaser").
W I T N E S S E T H:
WHEREAS, the Company desires to obtain additional capital for use in
connection with its business through the issue and sale of certain securities,
and Purchaser is willing to purchase such obligations from the Company, on the
terms and conditions set forth herein.
NOW, THEREFORE, in mutual consideration of the premises and the
respective representations, warranties, covenants and agreements contained
herein, the parties agree as follows:
1. Sale and Purchase of Debentures.
1.1 Debentures. The Company has authorized the issue and
sale of Four Million Dollars ($4,000,000.00) aggregate principal amount of its
11.5% Subordinated Debentures due September 25, 2002 (the "Debentures"), to be
dated the date of issue, to bear interest from such date at the rate of 11.5%
per annum, payable quarterly by automatic debit on the first day of each March,
June, September, and December in each year, commencing December 1, 1997, and
ending at maturity, to mature on September 25, 2002, and to bear such other
terms as are set forth in the form attached hereto as Exhibit A-1. Interest on
the Debentures shall be computed on the basis of a 360-day year of twelve 30-day
months. The Debentures are subject to (i) optional redemption by the Company
without penalty and as provided by Section 1.2, and (ii) mandatory redemption at
the election of the holder and as provided by Section 1.3. The Debentures are
convertible at any time by the holder into shares of the Company's Common Stock
at an initial Conversion Price of $10.25 per share and as provided by Section 7.
The term "Debenture" and "Debentures" as used herein includes the initial
Debenture in the form of Exhibit A-1 and each additional Debenture delivered
pursuant to this Agreement. Capitalized terms shall have the meanings assigned
by Section 11 unless otherwise defined herein.
1.2 Optional Redemption.
(a) The Debentures may be redeemed at the option of the
Company (i) at any time on or after September 25, 1999, provided the average
closing bid price (as defined below) of the Company's Common Stock for the 20
trading days preceding the
<PAGE> 10
date of the Redemption Notice (which such 20-trading day period may include
trading days that fall on or prior to September 25, 1999) exceeds $15.00 per
share (adjusted for stock splits, stock dividends, and similar
recapitalizations), at a Redemption Price equal to the sum of (A) the aggregate
principal amount of the Debentures then outstanding, plus (B) all accrued but
unpaid interest, plus (C) interest on any principal payment not paid when due
and any accrued but unpaid interest at an annual rate of 15% in respect of such
principal and such unpaid interest, plus (D) any expenses or costs of collection
to which the holder of the Debentures is entitled pursuant to the Debenture, or
(ii) at any time on or after September 25, 1999, at a Redemption Price equal to
the sum of (A) the aggregate principal amount of the Debentures then
outstanding, plus (B) all accrued but unpaid interest, plus (C) interest on any
principal payment not paid when due and any accrued but unpaid interest at an
annual rate of 15% in respect of such principal and such unpaid interest, plus
(D) any expenses or costs of collection to which the holder of the Debentures is
entitled pursuant to the Debenture, plus (E) an amount equal to (x) a 20%
compounded annual return on the aggregate principal amount of the Debentures
then outstanding, computed from the Closing Date to the Redemption Date, minus
(y) all interest previously paid on such Debentures being redeemed plus amounts
payable under clause (B). For purposes of this Section and Section 7 of this
Agreement, the "closing bid price" on any trading day shall mean the last
reported closing bid price of the Common Stock of the Company on such day on the
principal securities exchange or Nasdaq National Market on which the Common
Stock is listed or, if the Common Stock is not so listed, the last reported bid
price of the Common Stock as reported on the Nasdaq SmallCap Market on such date
or, if the Common Stock is neither so listed nor so reported, the last reported
bid price of the Common Stock as quoted by a registered broker-dealer for which
such quotes are available on such date.
(b) In case of each redemption at the Company's option
hereunder, the Company shall give written notice (the "Redemption Notice") to
each holder of a Debenture to be redeemed not less than 30 nor more than 45 days
prior to the date fixed for such redemption (the "Redemption Date"), in each
case specifying the Redemption Date, the aggregate principal amount of the
Debentures to be redeemed on such date, the principal amount of Debentures held
by such holder to be redeemed on such date, and the Redemption Price. The
Redemption Notice may be given on or prior to the date on which redemption is
permissible at the Company's option, provided that the Redemption Date falls on
or after the date on which redemption is first permissible at the Company's
option. Notwithstanding the receipt of such notice, prior to and in lieu of
redemption, any holder of Debentures may convert all or any part of such
Debentures into Common Stock in accordance with Section 7 provided that the
Conversion Date occurs prior to the Redemption Date. After the Redemption Notice
is mailed, Debentures called for redemption become due and payable on the
Redemption Date at the Redemption Price.
(c) Neither the Company nor any Subsidiary or Affiliate,
directly or indirectly, may repurchase or make any offer to repurchase any
Debentures unless the offer has been made to repurchase Debentures, pro rata,
from all holders of the Debentures at the same time and upon the same terms. If
the Company repurchases or
<PAGE> 11
otherwise acquires any Debentures, such Debentures shall immediately thereafter
be canceled, and no Debentures shall be issued in substitution therefor. Without
limiting the foregoing, upon the purchase or other acquisition of any Debentures
by the Company or any Subsidiary or Affiliate, such Debentures shall no longer
be outstanding for purposes of any Section of this Agreement relating to the
taking by the holders of the Debentures of any actions with respect hereto.
1.3 Mandatory Redemption. Holders of Debentures may at
any time require the Company to redeem part or all of the Debentures if (i)
there occurs a Change In Control (as defined in Section 11) (ii) the Company's
Common Stock is de-listed from NASDAQ, or (iii) the Company's Common Stock
ceases to be publicly traded. In such case, holders of Debentures may give
notice to the Company of mandatory redemption not less than 15 nor more than 30
days prior to the Redemption Date, in each case specifying the Redemption Date,
the aggregate principal amount of the Debentures to be redeemed on such date,
the principal amount of Debentures held by such holder to be redeemed on such
date, and the Redemption Price, which shall be equal to the sum of (A) the
aggregate principal amount of the Debentures tendered for redemption, plus (B)
all accrued but unpaid interest on such Debentures, plus (C) interest on any
principal payment not paid when due and any accrued but unpaid interest at an
annual rate of 15% in respect of such principal and such unpaid interest, plus
(D) any expenses or costs of collection to which the holder of the Debentures is
entitled pursuant to the Debenture.
1.4 Commitment; Closing Date. Subject to the terms and
conditions hereof and on the basis of the representations and warranties
hereinafter set forth, the Company agrees to issue and sell to Purchaser, and
Purchaser agrees to purchase from the Company, Debentures in the aggregate
principal amount of Four Million Dollars ($4,000,000.00) at a purchase price
equal to 100% of the principal amount thereof. Delivery of the Debentures will
be made at the offices of Tandem Capital, Inc., Nashville, Tennessee, against
payment therefor by federal funds wire transfer in immediately available funds
and to the accounts and in the amounts set forth in the Company's wire
instructions in the form of Exhibit B hereto, at 10:00 A.M., Nashville time, on
September 25, 1997, or such later date as the Company and Purchaser shall agree
(the "Closing Date"). The Debentures delivered to Purchaser on the Closing Date
shall be delivered to Purchaser in the form of a single Debenture for the full
amount of such purchase (unless different denominations are specified by
Purchaser), registered on the books of the Company in Purchaser's name or in the
name of such nominee as Purchaser may specify and, with appropriate insertions,
in the form attached hereto as Exhibit A-1, all as Purchaser may specify at
least 24 hours prior to the date fixed for delivery.
1.5 Processing Fee. The Company shall pay to Purchaser
on or before the Closing Date a processing fee in an amount equal to $100,000.
2. Representations and Warranties of the Company. The Company
hereby represents and warrants to Purchaser as follows:
<PAGE> 12
2.1 Corporate Status.
(a) The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware, and has
the corporate power to own and operate its properties, to carry on its business
as now conducted and to enter into and to perform its obligations under this
Agreement, the Debentures, the Registration Rights Agreement, and any other
document executed and delivered by the Company in connection herewith or
therewith (collectively, the "Operative Documents"). The Company is qualified to
do business and is in good standing in each state or other jurisdiction in which
such qualification is necessary under applicable law, except where the failure
to so qualify would not have a Material Adverse Effect (as defined in Section
11) on the financial condition or results of operations of the Company.
(b) Schedule 2.1(b) sets forth a complete list of each
corporation, partnership, joint venture, limited liability company or other
business organization in which the Company owns, directly or indirectly, any
capital stock or other equity interest in excess of $1,000 (the "Subsidiary" or,
collectively, the "Subsidiaries"), or with respect to which the Company or any
Subsidiary, alone or in combination with others, is in a control position, which
list shows the jurisdiction of incorporation or other organization and the
percentage of stock or other equity interest of each Subsidiary owned by the
Company. Each Subsidiary is duly organized, validly existing and in good
standing under the laws of the jurisdiction of incorporation or other
organization as indicated on Schedule 2.1(b), each has all requisite power and
authority and holds all material licenses, permits and other required
authorizations from government authorities necessary to own its properties and
assets and to conduct its business as now being conducted, and each is qualified
to do business as a foreign corporation (or business organization) and is in
good standing in every jurisdiction in which such qualification is necessary
under applicable law, except where the failure to so qualify would not have a
Material Adverse Effect on the financial condition or results of operations of
the Company. All of the outstanding shares of capital stock, or other equity
interest, of each Subsidiary owned, directly or indirectly, by the Company have
been validly issued, are fully paid and nonassessable, and are owned by the
Company free and clear of all liens, charges, security interests, or
encumbrances.
2.2 Capitalization.
(a) The authorized capital stock of the Company consists
of (i) 3,000,000 shares of Preferred Stock, none of which are issued and
outstanding, and (ii) 15,000,000 shares of Common Stock, $.01 par value,
4,132,180 of which are issued and outstanding as of the date hereof. All shares
of Common Stock outstanding have been validly issued and are fully paid and
nonassessable. There are no statutory or contractual preemptive rights, rights
of first refusal, antidilution rights, or any similar rights held by any party
with respect to the issuance of the Debentures.
(b) The Company has not granted, or agreed to grant or
issue, any
<PAGE> 13
options, warrants or rights to purchase or acquire from the Company any shares
of capital stock of the Company, there are no securities outstanding or
committed to be issued by the Company or any Subsidiary which are convertible
into or exchangeable for any shares of capital stock or other securities of the
Company, and there are no contracts, commitments, agreements, understandings,
arrangements or restrictions as to which the Company is a party, or by which it
is bound, relating to any shares of capital stock or other securities of the
Company, whether or not outstanding except for (i) the Debentures to be issued
pursuant to this Agreement, and (ii) such options, warrants and other rights to
acquire capital stock of the Company set forth on Schedule 2.2(b). Except as set
forth on Schedule 2.2(b), all such shares have been duly reserved for issuance,
have been duly and validly authorized, and upon issuance in accordance with the
terms of the respective instruments and receipt of payment therefor, will be
validly issued, fully paid, and nonassessable.
(c) The Common Stock issuable upon conversion of the
Debentures being purchased under this Agreement has been duly and validly
reserved for issuance and, upon issuance in accordance with the terms of this
Agreement, will be duly and validly issued, fully paid, and nonassessable and
will be free of restrictions on transfer other than restrictions on transfer
under this Agreement and under applicable state and federal securities laws.
2.3 Authorization. The Company has full legal right,
power and authority to enter into and perform its obligations under the
Operative Documents without the consent or approval of any other person, firm,
governmental agency, or other legal entity. The execution and delivery of this
Agreement, the issuance of the Debentures hereunder, the execution and delivery
of each other document in connection herewith or therewith to which the Company
is a party, and the performance by the Company of its obligations hereunder or
thereunder are within the corporate powers of the Company and have been duly
authorized by all necessary corporate action properly taken, have received all
necessary governmental approvals, if any were required, and do not and will not
contravene or conflict with (i) the Certificate of Incorporation or Bylaws of
the Company, (ii) any material agreement to which the Company or any of its
Subsidiaries is a party or by which any of them or their properties is bound, or
constitute a default thereunder, or result in the creation or imposition of any
lien, charge, security interest, or encumbrance of any nature upon any of the
property or assets of the Company or any of its Subsidiaries pursuant to the
terms of any such agreement or instrument, or (iii) violate any provision of law
or any applicable judgment, ordinance, regulation or order of any court or
governmental agency. The officer executing this Agreement, the Debentures, and
any other document executed and delivered by the Company in connection herewith
or therewith, is duly authorized to act on behalf of the Company.
2.4 Validity and Binding Effect. Each of the Operative
Documents is the legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, subject to such limitations on
enforceability as may exist under equitable principles of law or the application
of bankruptcy or insolvency laws.
<PAGE> 14
2.5 Contracts and Other Commitments. Except as disclosed
on Schedule 2.5 and other than as filed by the Company with the Securities and
Exchange Commission ("SEC") as an exhibit pursuant to Item 601(b)(10) of
Regulation S-K under the Securities Act (each such disclosed or filed agreement
an "Applicable Contract"), the Company and its Subsidiaries are not bound by any
loans, liens, pledges, security interests, agreements, indentures, or
instruments defining the rights of security holders under any securities or
other financings upon which the Company or any Subsidiary is obligated or by
which the Company is bound.
2.6 Litigation. Except as set forth on Schedule 2.6,
there is no litigation, arbitration, claim, proceeding or investigation pending
or threatened in writing to which the Company or any Subsidiary is a party or of
which any of its respective properties or assets is the subject which, if
determined adversely to the Company or such Subsidiary, would individually or in
the aggregate have a Material Adverse Effect on the financial position, results
of operations, or business of the Company and its Subsidiaries.
2.7 Financial Statements. Except as set forth on
Schedule 2.7, the consolidated financial statements of the Company and its
Subsidiaries for the fiscal years ended June 30, 1996 and 1995, and the
unaudited consolidated financial statements as of and for the nine months ended
March 31, 1997, and the related notes, copies of which the Company previously
has delivered to Purchaser, fairly present the financial position, results of
operations, cash flows and changes in stockholders' equity of the Company and
its consolidated Subsidiaries, at the respective dates of and for the periods
to which they apply in such financial statements, and have been prepared in
accordance with generally accepted accounting principles ("GAAP") consistently
applied throughout the periods indicated, subject, in the case of interim
financial statements, to normal recurring year-end adjustments (the effect of
which will not, individually or in the aggregate, be materially adverse) and
the absence of notes (that, if presented, would not differ materially from
those included in the most recent audited consolidated financial statements).
No financial statements of any other person(s) are required by GAAP to be
included in the consolidated financial statements of the Company.
2.8 SEC Reports. The Company's Common Stock is listed for
trading on the NASDAQ SmallCap Market and has been duly registered with the SEC
under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Since March 1996, the Company has timely filed all reports, registrations, proxy
or information statements, and all other documents, together with any amendments
required to be made thereto, required to be filed with the SEC under the
Securities Act and the Exchange Act (collectively, the "SEC Reports"). As of
their respective dates, the SEC Reports complied (or will comply, as the case
may be) in all material respects with all rules and regulations promulgated by
the SEC and did not (or will not, as the case may be) contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
<PAGE> 15
2.9 Absence of Changes. Since March 31, 1997, (i)
neither the Company nor any of its Subsidiaries have incurred any liabilities
or obligations, direct or contingent, or entered into any transactions, not in
the ordinary course of business, that are material to the Company or any of its
Subsidiaries, (ii) neither the Company nor any of its Subsidiaries have
purchased any of its outstanding capital stock or declared, or paid any
dividend or other distribution or payment in respect of its capital stock,
(iii) there has not been any change in the authorized or issued capital stock,
long-term debt, or short-term debt of the Company, and (iv) there has not been
any material adverse change in or affecting the business, operations,
properties, assets, or condition (financial or otherwise) of the Company or any
Subsidiary.
2.10 No Defaults. Except as set forth on Schedule 2.10 and
except where a default or event of default does not and would not constitute a
Material Adverse Event (as defined in Section 11), no default or event of
default by the Company or any Subsidiary exists under this Agreement or any of
the other Operative Documents, or under any Applicable Contract, or other
material instrument or agreement to which the Company or any Subsidiary is a
party or by which the Company or any Subsidiary or its respective properties are
bound or, to the knowledge of the Company, affected, and to the knowledge of the
Company no event has occurred and is continuing that with notice or the passage
of time or both would constitute a default or event of default thereunder.
2.11 Compliance With Law. The Company and any Subsidiary
are in compliance with all foreign, federal, state or local laws, regulations,
decrees and orders applicable to them (including but not limited to the Foreign
Corrupt Practices Act, occupational and health standards and controls,
antitrust, monopoly, restraint of trade or unfair competition) to the extent
that noncompliance, in the aggregate, cannot reasonably be expected to cause a
Material Adverse Event.
2.12 Taxes. Except as set forth on Schedule 2.12, the
Company and its Subsidiaries have filed or caused to be filed all federal, state
and local income, excise and franchise tax returns for the 1994, 1995 and 1996
taxable years required to be filed (except for returns that have been
appropriately extended), and have paid, or provided for the payment of, all
taxes shown to be due and payable on said returns and all other taxes,
impositions, assessments, fees or other charges imposed on it by any
governmental authority, agency or instrumentality, prior to any delinquency with
respect thereto (other than taxes, impositions, assessments, fees and charges
currently being contested in good faith by appropriate proceedings, for which
appropriate amounts have been reserved), and the Company does not know of any
proposed assessment for additional taxes or any basis therefor. No tax liens
have been filed against the Company or its Subsidiaries or any of their
properties.
2.13 Certain Transactions. Except as set forth in the
filings made by the Company with the SEC and except as to indebtedness incurred
in the ordinary course of business and approved by the Board of Directors of the
Company, neither the Company
<PAGE> 16
nor any Subsidiary is indebted, directly or indirectly, to any of its officers
or directors, or to their respective spouses or children, or to any affiliate,
in excess of an aggregate amount of $60,000, and none of such officers or
directors or any member of their immediate families or affiliates, is indebted
to the Company or any Subsidiary in excess of an aggregate amount of $60,000, or
has any direct or indirect ownership interest in any firm or corporation with
which the Company or any Subsidiary is affiliated or with which the Company has
a business relationship, or any firm or corporation which competes with the
Company or any Subsidiary, except as set forth on Schedule 2.13. Except as set
forth in the proxy statements filed by the Company with the SEC, no officer or
director of the Company or any Subsidiary or any member of their immediate
families is, directly or indirectly, interested in any material contract with
the Company or any Subsidiary that would require disclosure under Item 404 of
Regulation S-K. Neither the Company nor any Subsidiary is a guarantor or
indemnitor of any indebtedness of any other person, firm or corporation.
2.14 Title to Property. The Company and each Subsidiary
has good and marketable title to all real and personal property owned by it,
free and clear of all liens, security interests, pledges, encumbrances, claims
and restrictions of every kind and nature whatsoever, except as disclosed on
Schedule 2.14. Any real property and buildings held under lease by the Company
or any Subsidiary are held under valid existing and enforceable leases, and to
the best of the Company's knowledge no default has occurred or is continuing
thereunder which might result in any material adverse change in the business,
prospects, financial conditions or results of operations of the Company.
2.15 Intellectual Property.
(a) Except as set forth in Schedule 2.15, or for items
that would not constitute a Material Adverse Event, to the Company's knowledge,
the Company is the lawful owner or has a valid right to use the proprietary
information used in its business free and clear of any claim, right, trademark,
patent or copyright protection of any third party; provided, however, that this
paragraph (a) shall not be deemed to include any representation regarding the
absence of infringements or conflicts with the rights of others, which
representation is made only in paragraph (c) hereof. As used herein,
"proprietary information" includes without limitation (i) any computer software
and any documentation, inventions, and technical and nontechnical data related
thereto, and (ii) other documentation, inventions and data related to patterns,
plans, methods, techniques, drawings, finances, customer lists, suppliers,
products, special pricing and cost information, designs, processes, procedures,
formulas, research data owned or used by the Company or any Subsidiary or
marketing studies conducted by the Company, all of which the Company considers
to be commercially important and competitively sensitive and which generally has
not been disclosed to third parties other than customers in the ordinary course
of business.
(b) Except as set forth in Schedule 2.15, to the
Company's knowledge, the Company has good and marketable title to or has a valid
right to use all patents,
<PAGE> 17
trademarks, trade names, service marks, copyrights or other intangible property
rights, and registrations or applications for registration thereof, owned by the
Company or any Subsidiary or used or required by the Company or any Subsidiary
in the operation of its business as presently being conducted; provided,
however, that this paragraph (b) shall not be deemed to include any
representation regarding the absence of infringements or conflicts with the
rights of others, which representation is made only in paragraph (c) hereof.
(c) The Company has no knowledge of any infringements or
conflicts with asserted rights of others with respect to copyrights, patents,
trademarks, service marks, trade names, trade secrets or other intangible
property rights or know-how which could cause a Material Adverse Event. To the
Company's knowledge, no products or processes of the Company infringe or
conflict with any rights of patent or copyright, or any discovery, invention,
product or process, that is the subject of a patent or copyright application or
registration known to the Company. The Company follows such procedures as the
Company deems necessary or appropriate to provide reasonable protection of the
Company's trade secrets and proprietary rights in intellectual property of all
kinds. To the knowledge of the Company, no person employed by or affiliated with
the Company has employed or proposes to employ any trade secret or any
information or documentation proprietary to any former employer, and to the
knowledge of the Company, no person employed by or affiliated with the Company
has violated any confidential relationship that such person may have had with
any third person, in connection with the development, manufacture or sale of any
product or proposed product or the development or sale of any service or
proposed service of the Company.
2.16 Environmental Matters. The Company has duly complied
in all material respects with, and its business, operations, assets, equipment,
property, leaseholds or other facilities are in compliance in all material
respects with, the provisions of all federal, state and local environmental,
health, and safety laws, codes and ordinances, and all rules and regulations
promulgated thereunder, except to the extent that the violation thereof would
not reasonably be expected to cause a Material Adverse Event. The Company has
been issued and will maintain all required material federal, state and local
permits, licenses, certificates and approvals relating to (i) air emissions;
(ii) discharges to surface water or groundwater; (iii) noise emissions; (iv)
solid or liquid waste disposal; (v) the use, generation, storage, transportation
or disposal of toxic or hazardous substances or wastes (which shall include any
and all such materials listed in any federal, state or local law, code or
ordinance and all rules and regulations promulgated thereunder as hazardous or
potentially hazardous); or (vi) other environmental, health or safety matters,
except to the extent that the violation thereof would not reasonably be expected
to cause a Material Adverse Event. Except as noted on Schedule 2.16, the Company
has not received notice of and does not know of a material violation of any
federal, state or local environmental, health or safety laws, codes or
ordinances, and any rules or regulations promulgated thereunder with respect to
its businesses, operations, assets, equipment, property, leaseholds, or other
facilities. Except in accordance with a valid governmental permit, license,
certificate or approval, there has
<PAGE> 18
been no emission, spill, release or discharge into or upon (i) the air; (ii)
soils, or any improvements located thereon; (iii) surface water or groundwater;
or (iv) the sewer, septic system or waste treatment, storage or disposal system
servicing the premises, of any toxic or hazardous substances or wastes at or
from the premises, except to the extent that the violation thereof would not
reasonably be expected to cause a Material Adverse Event. The Company does not
have any material indebtedness, obligation or liability (absolute or contingent,
matured or not matured), with respect to the storage, treatment, cleanup or
disposal of any solid wastes, hazardous wastes or other toxic or hazardous
substances (including without limitation any such indebtedness, obligation, or
liability with respect to any current regulation, law or statute regarding such
storage, treatment, cleanup or disposal).
2.17 Accounting Matters. The Company and each of its
Subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorization; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with GAAP and to maintain accountability for the assets of the
Company and each of its Subsidiaries; (iii) access to the assets of the Company
and each of its Subsidiaries is permitted only in accordance with management's
general or specific authorization; and (iv) the recorded accountability for
assets of the Company and each of its Subsidiaries are compared with the
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
2.18 [Reserved].
2.19 Prior Sales. All offers and sales of the Company's
capital stock prior to the date hereof were at all relevant times (i) exempt
from the registration requirements of the Securities Act or were duly registered
under the Securities Act, and (ii) were duly registered or were the subject of
an available exemption from the registration requirements of all applicable
state securities or Blue Sky laws.
2.20 Regulatory Compliance. Except as set forth on
Schedule 2.20, the conduct of the business and the ownership of the assets of
the Company is not dependent on any license, permit, approval, waiver or other
authorization of any federal, state or local governmental or regulatory body
which the Company has not obtained, except to the extent that the absence
thereof would not reasonably be expected to cause a Material Adverse Event. All
material licenses, permits and authorizations held by the Company are in full
force and effect.
2.21 Margin Regulations. The Company is not engaged in the
business of extending credit for the purpose of purchasing or carrying margin
stock. No proceeds received pursuant to this Agreement will be used to purchase
or carry any equity security of a class which is registered pursuant to Section
12 of the Exchange Act.
2.22 [Reserved].
<PAGE> 19
2.23 Limited Offering. Subject in part to the truth and
accuracy of Purchaser's representations set forth in this Agreement, the offer,
sale and issuance of the Debentures is exempt from the registration requirements
of the Securities Act, and neither the Company nor any authorized agent acting
on its behalf has taken or will take any action hereafter that would cause the
loss of such exemption.
2.24 Registration Obligations. Except as described in
Schedule 2.24, the Company is not under any obligation to register under the
Securities Act or the Trust Indenture Act of 1939, as amended, any of its
presently outstanding securities or any of its securities that are proposed to
be subsequently issued.
2.25 Insurance. The Company has maintained, and has caused
each Subsidiary to maintain, insurance coverage with respect to their respective
properties and business in such forms and amounts and against such risks,
casualties and contingencies as the Company believes are customary for
corporations of comparable size and condition (financial and otherwise) engaged
in the same or a similar business and owning and operating similar properties.
2.26 Governmental Consents. No consent, approval,
qualification, order or authorization of, or filing with, any local, state, or
federal governmental authority is required on the part of the Company in
connection with the Company's valid execution, delivery, or performance of this
Agreement by the Company, except such filings as have been made prior to the
Closing, and except notices of sale required to be filed with the Securities and
Exchange Commission under Regulation D of the Securities Act or such
post-closing filings as may be required under applicable state securities laws,
which will be timely filed within the applicable periods therefor.
2.27 Employees. To the best of the Company's knowledge,
there is no strike, labor dispute or union organization activity pending or
threatened between the Company and its employees. None of the Company's
employees belongs to any union or collective bargaining unit. The Company has
complied in all material respects with all applicable state and federal equal
opportunity and other laws related to employment. To the best of the Company's
knowledge, no employee of the Company is in violation of any judgment, decree,
or order, or any term of any employment contract, patent disclosure agreement,
or other contract or agreement relating to the relationship of any such employee
with the Company, or any other party because of the nature of the business
conducted or presently proposed to be conducted by the Company or to the use by
the employee of his best efforts with respect to such business. Other than as
set forth on Schedule 2.27, the Company is not a party to or bound by any
employment contract, deferred compensation agreement, bonus plan, incentive
plan, profit sharing plan, retirement agreement. The Company is not aware that
any officer or key employee, or that any group of key employees, intends to
terminate employment with the Company, nor does the Company have a present
intention to terminate the employment of any of the foregoing. Subject to
general principles related to wrongful termination of employees and to existing
employment contracts set forth on Schedule 2.27, the employment of each
<PAGE> 20
officer and employee of the Company is terminable at the will of the Company.
2.28 ERISA. The Company is in compliance in all material
respects with all applicable provisions of Title IV of the Employee Retirement
Income Security Act of 1974, Pub. L. No. 93-406, September 2, 1974, 88 Stat.
829, 29 U.S.C.A. SS 1001 et seq. (1975), as amended from time to time ("ERISA").
Except as disclosed in Schedule 2.28, neither a reportable event nor a
prohibited transaction (as defined in ERISA) has occurred and is continuing with
respect to any "pension plan" (as such term is defined in ERISA, a "Plan"); no
notice of intent to terminate a Plan has been filed nor has any Plan been
terminated; no circumstances exist which constitute grounds entitling the
Pension Benefit Guaranty Corporation (together with any entity succeeding to or
all of its functions, the 'PBGC") to institute proceedings to terminate, or
appoint a trustee to administer, a Plan, nor has the PBGC instituted any such
proceedings; neither the Company nor any commonly controlled entity (as defined
in ERISA) has completely or partially withdrawn from a multiemployer plan (as
defined in ERISA). The Company and each commonly controlled entity has met its
minimum funding requirements under ERISA with respect to all of its Plans and
the present fair market value of all Plan property exceeds the present value of
all vested benefits under each Plan, as determined on the most recent valuation
date of the Plan and in accordance with the provisions of ERISA and the
regulations thereunder for calculating the potential liability of the Company or
any commonly controlled entity to the PBGC or the Plan under Title IV or ERISA;
and neither the Company nor any commonly controlled entity has incurred any
liability to the PBGC under ERISA.
2.29 Fees/Commissions. Except as set forth on Schedule
2.29, the Company has not agreed to pay any finder's fee, commission,
origination fee or other fee or charge to any person or entity with respect to
or as a result of the consummation of the transactions contemplated hereunder,
except for (i) the processing fee due to Purchaser under Section 1.5, and (ii)
reimbursement of Purchaser's expenses under Section 12.1.
2.30 Survival. The representations and warranties of the
Company contained in this Agreement are made as of the date hereof and shall
survive until this Agreement terminates in accordance with Section 12.5 hereof.
3. Representations and Warranties of Purchaser. The Purchaser
hereby represents to the Company as follows:
3.1 Corporate Status. Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Tennessee and has the corporate power to own and operate its properties, to
carry on its business as now conducted and to enter into and to perform its
obligations under this Agreement and any other document executed or delivered by
Purchaser in connection herewith.
3.2 Authorization. Purchaser has full legal right, power
and authority to enter into and perform its obligations under this Agreement and
any other document
<PAGE> 21
executed and delivered by Purchaser in connection herewith, without the consent
or approval of any other person, firm, governmental agency or other legal
entity. The execution and delivery of this Agreement and any other document
executed and delivered by Purchaser in connection herewith, and the performance
by Purchaser of its obligations hereunder and/or thereunder are within the
corporate powers of Purchaser, have received all necessary governmental
approvals, if any were required, and do not and will not contravene or conflict
with (i) the Charter or Bylaws of Purchaser, (ii) any material agreement to
which Purchaser is a party or by which it or any of its properties is bound, or
constitute a default thereunder, or result in the creation or imposition of any
lien, charge, security interest or encumbrance of any nature upon any of the
property or assets of Purchaser pursuant to the terms of any such agreement or
instrument, or (iii) violate any provision of law or any applicable judgment,
ordinance, regulation or order of any court or governmental agency. The
officer(s) executing this Agreement and any other document executed and
delivered by Purchaser in connection herewith, is duly authorized to act on
behalf of Purchaser.
3.3 Validity and Binding Effect. This Agreement and any
other document executed and delivered by Purchaser in connection herewith have
been authorized by all requisite corporate action, and are the legal, valid and
binding obligations of the Purchaser, enforceable against it in accordance with
their respective terms, subject to such limitations on enforceability as may
exist under equitable principles of law or the application of bankruptcy or
insolvency laws.
3.4 Accredited Investor, Investment Intent. Purchaser is
a registered investment company under the Investment Company Act and as such is
an "accredited investor" under Rule 501(a) under the Securities Act. Purchaser
is acquiring the Debentures for its own account, for investment, and not with a
view to the distribution or resale thereof, in whole or in part, in violation of
the Securities Act or any applicable state securities law, and Purchaser has no
present intention of selling, negotiating or otherwise disposing of the
Debentures; it being understood that Purchaser intends to transfer and assign
the Debentures and all Purchaser's rights and obligations under this Agreement
to one or more wholly-owned Subsidiaries of Purchaser. Purchaser has relied
solely upon an independent investigation made by it and its representatives, if
any, and has, prior to the date hereof, been given access to and the opportunity
to examine all books and records of the Company, and all material contracts and
documents of the Company. In making its investment decision to purchase the
Debentures, Purchaser is not relying on any oral or written representations or
assurances from the Company or any other person or any representation of the
Company or any other person other than as set forth in this Agreement, or on any
information other than that contained in the Company's Annual Report on Form
10-K for the year ended June 30,1996 and (ii) Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997. Purchaser has such experience in business and
financial matters that it is capable of evaluating the risk of its investment
and determining the suitability of its investment.
3.5 Survival. The representations and warranties of the
Purchaser contained in this Agreement shall survive until this Agreement
terminates in accordance
<PAGE> 22
with Section 12.5 hereof.
4. Conditions Precedent to the Obligations of Purchaser. The
obligation of Purchaser to purchase and pay for the Debentures on the Closing
Date shall be subject to the satisfaction, on or before the Closing Date, of
each of the conditions set forth below. These conditions are for Purchaser's
sole benefit and may be waived by Purchaser at any time in its sole discretion.
4.1 Representations and Warranties. The representations
and warranties of the Company contained in this Agreement and in any Schedule
hereto or any document or instrument delivered to Purchaser or its
representatives hereunder, shall have been true and correct when made and shall
be true and correct in all material respects as of the Closing Date as if made
on such date, except to the extent such representations and warranties expressly
relate to a specific date. The Company shall have duly performed all of the
covenants and agreements to be performed by it hereunder on or prior to the
Closing Date.
4.2 Officer's Certificate. The Company shall have
delivered to Purchaser a certificate, dated the Closing Date, signed by the
President of the Company, substantially in the form attached hereto as Exhibit
C.
4.3 Satisfactory Proceedings and Secretary's Certificate.
All proceedings taken in connection with the transactions contemplated by this
Agreement, and all documents necessary to the consummation thereof, shall be
satisfactory in form and substance to Purchaser and Purchaser's counsel, and the
Company shall have delivered to Purchaser a certificate, dated the Closing Date,
signed by the Secretary of the Company, substantially in the form attached
hereto as Exhibit D.
4.4 Legal Opinion. Purchaser shall have received the
opinion of Sutherland, Asbill & Brennan, L.L.P., counsel for the Company, dated
the Closing Date, addressed to Purchaser, in form and substance satisfactory to
Purchaser's counsel, and covering the matters set forth in Exhibit E hereto.
4.5 Authorization Agreement. The Company shall have
delivered to Purchaser an Authorization Agreement for Pre-Authorized Payments
(Debit), dated the Closing Date, executed by a duly authorized officer of the
Company, in the form attached hereto as Exhibit F.
4.6 Existence and Authority. The Company shall have
delivered to Purchaser the following certificates of public officials, in each
case as of a date within ten days of the Closing Date:
(a) the certificate or articles of incorporation of the
Company and each of the Subsidiaries, certified by the Secretary of State or
other appropriate official in the jurisdiction by which each such entity is
incorporated; and
<PAGE> 23
(b) a certificate as to the legal existence and good
standing of the Company and each of the Subsidiaries issued by the Secretary of
State or other appropriate official of the jurisdiction by which each such
entity is incorporated.
4.7 Delivery of Operative Documents. The Company shall
have delivered to Purchaser the following documents, executed by the Company and
dated the Closing Date:
(a) the Debenture; and
(c) the Registration Rights Agreement between the Company
and the Purchaser.
4.8 [Reserved].
4.9 Required Consents. Any consents or approvals required
to be obtained from any third party, including any holder of indebtedness or any
outstanding security of the Company, and any amendments of agreements which
shall be necessary to permit the consummation of the transactions contemplated
hereby on the Closing Date, shall have been obtained and all such consents or
amendments shall be satisfactory in form and substance to Purchaser and
Purchaser's counsel.
4.10 Waiver of Conditions. If on the Closing Date the
Company fails to tender to Purchaser the Debentures to be issued to Purchaser,
or if the conditions specified in this Section 4 have not been fulfilled,
Purchaser may thereupon elect to be relieved of all further obligations under
this Agreement and shall (i) retain the processing fee provided by Section 1.5,
and (ii) be paid the expense allowance provided by Section 12.1. Without
limiting the foregoing, if the conditions specified in this Section 4 have not
been fulfilled, Purchaser may waive compliance by the Company with any such
condition to such extent as Purchaser, in Purchaser's sole discretion, may
determine. Nothing in this Section 4.10 shall operate to relieve the Company of
any of its obligations hereunder, or to waive any of Purchaser's rights against
the Company.
5. Covenants of Company. From and after the Closing Date and
continuing so long as any amount remains unpaid on any of the Debentures,
5.1 Use of Proceeds. The Company shall use the proceeds
of the Debentures for general corporate purposes, including working capital and
debt repayment.
5.2 Corporate Existence, Etc. The Company will preserve
and keep in force and effect, and will cause each Subsidiary to preserve and
keep in force and effect, its corporate existence and good standing in the state
of incorporation thereof, its qualification and good standing as a foreign
corporation in each jurisdiction where such
<PAGE> 24
qualification is required by applicable law except where the failure to so
qualify would not have a Material Adverse Effect on the financial condition or
results of operations of the Company and its Subsidiaries, taken as a whole, and
all licenses and permits necessary to the proper conduct of its business.
5.3 Maintenance of Properties, Etc. The Company will
maintain, preserve and keep, and will cause each Subsidiary to maintain,
preserve and keep, its properties and assets which are used or useful in the
conduct of its business (whether owned in fee or pursuant to a leasehold
interest) in good repair and working order and from time to time will make all
necessary repairs, replacements, renewals and additions required in the opinion
of the Company to maintain the efficiency thereof.
5.4 Nature of Business. Neither the Company nor any
Subsidiary will engage in any business if, as a result, the general nature of
the business, taken on a consolidated basis, which would then be engaged in by
the Company and its Subsidiaries would be substantially changed from the general
nature of the business engaged in by the Company and its Subsidiaries on the
date of this Agreement.
5.5 Insurance. The Company will maintain, and will cause
each Subsidiary to maintain, insurance coverage with respect to their respective
properties and business in such forms and amounts and against such risks,
casualties and contingencies as the Company believes are customary for
corporations of comparable size and condition (financial and otherwise) engaged
in the same or a similar business and owning and operating similar properties.
5.6 Taxes, Claims for Labor and Materials. The Company
will promptly pay and discharge, and will cause each Subsidiary promptly to pay
and discharge, (i) all lawful taxes, assessments and governmental charges or
levies imposed upon the property or business of the Company or such Subsidiary,
respectively, (ii) all trade accounts payable in accordance with usual and
customary business terms, and (iii) all claims for work, labor or materials,
which if unpaid might become a lien or charge upon any property of the Company
or such Subsidiary; provided the Company or such Subsidiary shall not be
required to pay any such tax, assessment, charge, levy, account payable or claim
if (i) the validity, applicability or amount thereof is being contested in good
faith by appropriate actions or proceedings which will prevent the forfeiture or
sale of any property of the Company or such Subsidiary or any material
interference with the use thereof by the Company or such Subsidiary, and (ii)
the Company or such Subsidiary shall set aside on its books, reserves deemed by
it to be adequate with respect thereto.
5.7 Compliance with Laws, Agreements, Etc. Except where
failure to do so does not and would not constitute a Material Adverse Event, the
Company shall maintain its business operations and property owned or used in
connection therewith in compliance with (i) all applicable federal, state and
local laws, regulations and ordinances, and such laws, regulations and
ordinances of foreign jurisdictions, governing such business operations and the
use and ownership of such property, and (ii) all
<PAGE> 25
agreements, licenses, franchises, indentures and mortgages to which the Company
is a party or by which the Company or any of its properties is bound.
5.8 ERISA Matters. If the Company has in effect, or
hereafter institutes, a pension plan that is subject to the requirements of
Title IV of ERISA (a "Plan"), then the following covenants shall be applicable
during such period as any such Plan shall be in effect: (i) throughout the
existence of the Plan, the Company's contributions under the Plan will meet the
minimum funding standards required by ERISA and the Company will not institute a
distress termination of the Plan; and (ii) the Company will send to Purchaser a
copy of any notice of a reportable event (as defined in ERISA) required by ERISA
to be filed with the Labor Department or the PBGC, at the time that such notice
is so filed.
5.9 Books and Records: Rights of Inspection. The Company
will keep, and will cause each Subsidiary to keep, proper books of record and
account in which entries will be made of all dealings or transactions of or in
relation to the business and affairs of the Company or such Subsidiary, in
accordance with GAAP consistently maintained. The Company shall permit a
representative of Purchaser to visit any of its properties and inspect its
corporate books and financial records, and will discuss its accounts, affairs
and finances with a representative of Purchaser, during reasonable business
hours, at all such times as Purchaser may reasonably request, subject to
Purchaser's duties of confidentiality.
5.10 Reports. The Company will furnish to Purchaser the
following information, which information shall be subject to confidential
treatment by Purchaser:
(a) Monthly Statements. Within 30 days after the end of
each month, beginning the month of September, 1997, monthly internal financial
reports which at a minimum shall consist of a balance sheet of the Company as of
the close of such month and related statements of income and cash flows for the
one-month period then ended, as well as any additional financial reports for
such period routinely prepared with respect to the Company and the Subsidiaries;
(b) Quarterly Statements. As soon as available and in
any event within 45 days after the end of each quarterly fiscal period (except
the last) of each fiscal year, copies of:
(i) consolidated balance sheets of the Company and
Subsidiaries as of the close of the three-month period then ended,
setting forth in comparative form the consolidated figures at the end
of the preceding fiscal year,
(ii) consolidated statements of income of the Company
and Subsidiaries for the three-month period then ended, setting forth
in comparative form the consolidated figures for the corresponding
period of the preceding fiscal year, and
<PAGE> 26
(iii) consolidated statements of cash flows of the
Company and Subsidiaries for the portion of the fiscal year ending with
such three-month period, setting forth in comparative form the
consolidated figures for the corresponding period of the preceding
fiscal year,
all in reasonable detail and accompanied by a certificate of an authorized
financial officer of the Company that such financial statements fairly present
the financial condition and results of operations and cash flows of the Company
at and for the periods presented, subject to normal year-end adjustment;
(c) Annual Statements. As soon as available and in any
event within 90 days after the close of each fiscal year of the Company, copies
of:
(i) consolidated balance sheets of the Company and
Subsidiaries as of the close of such fiscal year, and
(ii) consolidated statements of income and
consolidated statements of changes in stockholders' equity and cash flows of the
Company and Subsidiaries for such fiscal year,
in each case setting forth in comparative form the consolidated figures for the
preceding fiscal year, all in reasonable detail and accompanied by an
unqualified report thereon of a firm of independent public accountants of
recognized national standing;
(d) Special Audit Reports. Promptly upon receipt
thereof, one copy of each interim or special audit made by independent
accountants of the books of the Company or any Subsidiary;
(e) SEC and Other Reports. Promptly upon their becoming
available, one copy of each financial statement, report, notice or proxy
statement sent by the Company to stockholders generally and of each periodic or
current report, and any registration statement or prospectus filed by the
Company to any Subsidiary with any securities exchange or the SEC or any
successor agency, and copies of any orders in any proceedings to which the
Company or any of its Subsidiaries is a party, issued by any governmental
agency, federal or state, having jurisdiction over the Company or any of its
Subsidiaries. The Company specifically covenants to timely file each such item
required to be filed with the SEC and each state requiring securities laws
filings; and
(f) Requested Information. With reasonable promptness,
such financial data and other information relating to the business of the
Company as Purchaser may from time to time reasonably request.
5.11 Limitations on Debt and Obligations. Except as to
<PAGE> 27
(i) Indebtedness existing on the date hereof and
reflected on (a) the Company's unaudited balance sheet as of March 31,
1997, and (b) Schedule 5.11, as the same Indebtedness may be extended
or renewed (but not increased);
(ii) the Indebtedness incurred pursuant to the
Debentures;
(iii) accounts payable and other trade payables
incurred in the ordinary course of business;
(iv) purchase money indebtedness incurred by the
Company in the purchase of equipment and other property used by the
Company in the ordinary course of business, such purchase money
indebtedness not to exceed an aggregate amount of principal and accrued
interest thereon of $1,000,000 at any time outstanding; (v) obligations
of the Company pursuant to capitalized leases;
(vi) Indebtedness that refinances secured
Indebtedness under clause (i) above, provided that the collateral for
such new Indebtedness is the collateral for the refinanced secured
Indebtedness and the aggregate principal amount of such Indebtedness
does not exceed the principal amount outstanding under the refinanced
Indebtedness; and
(vii) Indebtedness incurred in connection with the
acquisition of a business (including the assets of a business),
provided such Indebtedness is secured solely by the assets of the
business so acquired;
the Company and its Subsidiaries shall not, on a consolidated basis, incur
additional indebtedness which is senior to or pari passu with the Debentures in
excess of an aggregate amount of principal and interest of $4,000,000 at any
time outstanding without the prior written consent of Purchaser. Notwithstanding
the foregoing, the aggregate principal amount of any Indebtedness secured by the
accounts receivable and/or inventory of the Company and its Subsidiaries
(whether such Indebtedness is permitted under clause (i) or clause (vi)), may be
increased based upon the amount of the accounts receivable and/or inventory
eligible as collateral, so long as the ratio of the outstanding principal amount
of such Indebtedness to "eligible receivables" and/or "inventory" remains the
same (howsoever such terms are defined but provided such definitions remain
consistent).
5.12 Guaranties. Without the prior written consent of
Purchaser, the Company will not, and will not permit any Subsidiary to, become
or be liable in respect of any Guaranty except Guaranties by the Company which
are limited in maximum financial exposure to the amounts set forth in, and are
incurred in compliance with, the provisions of Section 5.11 of this Agreement.
<PAGE> 28
5.13 Limitation on Liens. Without the prior written
consent of Purchaser, the Company will not, and will not permit any Subsidiary
to, create or incur, or suffer to be incurred or to exist, any mortgage, pledge,
security interest, encumbrance, lien or charge of any kind (collectively,
"Liens") on its or their property or assets, whether now owned or hereafter
acquired, or upon any income or profits therefrom, or transfer any property for
the purpose of subjecting the same to the payment of obligations in priority to
the payment of its or their general creditors, or acquire or agree to acquire,
or permit any Subsidiary to acquire, any property or assets upon conditional
sales agreement or other title retention devices, except those Liens which exist
as of the date hereof as set forth on Schedule 2.14, and except:
(a) purchase money liens on and security interests in
equipment hereafter acquired securing Indebtedness permitted by Section 5.11(iv)
of this Agreement, provided that such liens and security interests attach only
to the equipment so acquired and do not encumber any other property of the
Company or any Subsidiary;
(b) liens for taxes (excluding federal and state income
taxes) not yet payable or being contested in good faith by appropriate
proceedings and for which adequate reserves have been provided on the books of
the Company or a Subsidiary;
(c) mechanics', materialmen's, warehousemen's, carriers'
or other like liens arising in the ordinary course of business of the Company or
any Subsidiary, if any, arising with respect to obligations which are not
overdue for a period longer than 90 days or which are being contested in good
faith by appropriate proceedings and for which adequate reserves have been
provided on the books of the Company or a Subsidiary;
(d) deposits or pledges to secure the performance of
bids, tenders, contracts, leases, public or statutory obligations, surety or
appeal bonds or other deposits or pledges for purposes of a like general nature
or given in the ordinary course of business by the Company or any Subsidiary;
and
(e) other encumbrances consisting of zoning restrictions,
easements, restrictions on the use of real property or minor irregularities in
the title thereto, which do not arise in connection with the borrowing of, or
any obligation for the payment of, money and which, in the aggregate, do not
materially detract from the value of the premises or the business, properties or
assets of the Company or any Subsidiary.
5.14 Restricted Payments. Except as set forth on
Schedule 5.14, the Company will not, without the prior written consent of
Purchaser and except as hereinafter provided:
(a) declare or pay any dividends, either in cash or
property, on any shares of its capital stock of any class except dividends or
other distributions payable solely in shares of Common Stock of the Company; or
<PAGE> 29
(b) directly or indirectly, or through any Subsidiary,
purchase, redeem or retire any shares of its capital stock of any class or any
warrants, rights or options to purchase or acquire any shares of its capital
stock (other than in exchange for or out of the net proceeds to the Company from
the substantially concurrent issue or sale of other shares of capital stock of
the Company or warrants, rights or options to purchase or acquire any shares of
its capital stock); or
(c) make any other payment or distribution, either
directly or indirectly or through any Subsidiary, in respect of its capital
stock, provided, that distributions from a Subsidiary to the Company, or from a
Subsidiary to another Subsidiary, shall be permitted.
5.15 Investments. The Company will not, and will not
permit any Subsidiary to, make any Investments outside the ordinary course of
business of the Company or any Subsidiary, without the prior written consent of
Purchaser, except:
(a) Investments in direct obligations of the United
States of America, or any agency or instrumentality of the United States of
America, the payment or guaranty of which constitutes a full faith and credit
obligation of the United States of America, in either case maturing in twelve
months or less from the date of acquisition thereof;
(b) Investments in certificates of deposit maturing
within one year from the date of origin, issued by a bank or trust company
organized under the laws of the United States or any state thereof, having
capital, surplus and undivided profits aggregating at least $100,000,000 and
whose long-term certificates of deposit are, at the time of acquisition thereof
by Company or a Subsidiary, rated AA or better by Standard & Poor's Corporation
or AA or better by Moody's Investors Service, Inc.;
(c) Investments in commercial paper maturing in 270 days
or less from the date of issuance which, at the time of acquisition by the
Company or any Subsidiary, is accorded the highest rating by Standard & Poor's
Corporation, Moody's Investors Service, Inc. or another nationally recognized
credit rating agency of similar standing;
(d) loans or advances in the usual and ordinary course of
business to officers, directors and employees for expenses (including moving
expenses related to a transfer) incidental to carrying on the business of the
Company or any Subsidiary;
(e) receivables arising from the sale of goods and
services in the ordinary course of business of the Company and its Subsidiaries;
and
(f) acquisitions, mergers, and consolidations permissible
under Section 5.16(a)(ii).
5.16 Mergers, Consolidations and Sales of Assets.
(a) Without the prior written consent of Purchaser, the
Company will
<PAGE> 30
not, and will not permit any Subsidiary to (i) consolidate with or be a party to
a merger or share exchange with any other corporation, or (ii) sell, lease or
otherwise dispose of all or any substantial part (as defined in paragraph (d) of
this Section 5.16) of the assets of Company and its Subsidiaries; provided,
however, that:
(i) any Subsidiary may merge or consolidate
into the Company or any wholly-owned Subsidiary so long as in any
merger or consolidation involving the Company, the Company shall be the
surviving or continuing corporation; and
(ii) the Company may consolidate or merge with
any other corporation, or acquire all or a substantial portion of the
assets of any other entity, provided that such corporation or entity is
engaged primarily in the Company's general line of business on a
consolidated basis as conducted on the date hereof, and further
provided that (A) Company shall be the surviving or continuing
corporation, (B) at the time of such consolidation or merger and after
giving effect thereto, no Default or Event of Default shall have
occurred and be continuing, (C) such consolidation or merger shall be
deemed in the good faith estimate of the Board of Directors to be a
consolidation or merger that will be accretive to earnings per share in
the fiscal year following the consolidation or merger, and (D) such
consolidation or merger shall be approved by the Company's Board of
Directors; and
(iii) any Subsidiary may sell, lease or
otherwise dispose of all or any substantial part of its assets to the
Company or any other Wholly-owned Subsidiary.
(b) Without the prior written consent of Purchaser, the
Company will not permit any Subsidiary to issue or sell any shares of stock of
any class (including as "stock" for the purposes of this Section 5.16, any
warrants, rights or options to purchase or otherwise acquire stock or other
securities exchangeable for or convertible into stock) of such Subsidiary to any
person other than the Company or a Wholly-owned Subsidiary, except for the
purpose of qualifying directors, or except in satisfaction of the validly
preexisting preemptive rights of minority shareholders in connection with the
simultaneous issuance of stock to the Company and/or a Subsidiary whereby the
Company and/or such Subsidiary maintain their same proportionate interest in
such Subsidiary.
(c) Without the prior written consent of Purchaser, the
Company will not sell, transfer or otherwise dispose of any shares of stock in
any Subsidiary (except to qualify directors) or any indebtedness of any
Subsidiary, and will not permit any Subsidiary to sell, transfer or otherwise
dispose of (except to the Company or a Wholly-owned Subsidiary) any shares of
stock or any indebtedness of any other Subsidiary, unless all of the following
conditions are met:
<PAGE> 31
(i) simultaneously with such sale, transfer or
disposition, all shares of stock and all indebtedness of such
Subsidiary at the time owned by the Company and by every other
Subsidiary shall be sold, transferred or disposed of as an entirety;
(ii) the Board of Directors of the Company shall
have determined, as evidenced by a resolution thereof, that the
retention of such stock and indebtedness is no longer in the best
interests of the Company;
(iii) such stock and Indebtedness is sold,
transferred or otherwise disposed of to a person, for a cash
consideration and on terms reasonably deemed by the Board of Directors
to be adequate and satisfactory;
(iv) the Subsidiary being disposed of shall not
have any continuing investment in the Company or any other Subsidiary
not being simultaneously disposed of; and
(v) such sale or other disposition does not
involve a substantial part (as hereinafter defined) of the assets of
the Company and its Subsidiaries taken as a whole.
(d) As used in this Section 5.16, a sale, lease
or other disposition of assets shall be deemed to be a "substantial
part" of the assets of the Company and its Subsidiaries only if the
book value of such assets, when added to the book value of all other
assets sold, leased or otherwise disposed of by the Company and its
Subsidiaries (other than in the ordinary course of business) during
the twelve month period ending on the date of such sale, lease or
other disposition, exceeds 50 percent of the consolidated net
tangible assets of the Company and its Subsidiaries determined as of
the end of the immediately preceding fiscal year.
(e) Provided, however, that transactions otherwise
requiring Purchaser's consent under Section 5.16(a) may be effected without such
consent if the Company shall, prior to the effective date of any such
transaction, offer to redeem all outstanding Debentures prior to such effective
date in accordance with the procedures of Section 1.2, and at a Redemption Price
determined under Section 1.2(a)(ii) as if the Redemption Date were September 25,
1999.
5.17 Transactions with Affiliates. Except as set forth on
Schedule 5.17, without the prior written consent of Purchaser, the Company will
not, and will not permit any Subsidiary to, enter into or be a party to any
transaction or arrangement with any officer, director or Affiliate (including,
without limitation, the purchase from, sale to, or exchange of property with, or
the rendering of any service by or for, any Affiliate), except in the ordinary
course of and pursuant to the reasonable requirements of the Company's or such
Subsidiary's business and upon fair and reasonable terms no less favorable to
the
<PAGE> 32
Company or such Subsidiary than could be obtained in an arm's-length transaction
with a person other than an Affiliate, in each case as determined in good faith
by a majority of the disinterested directors of the Company.
5.18 Notice. The Company shall promptly upon the discovery
thereof give written notice to Purchaser of (i) the occurrence of any Default or
Event of Default under this Agreement, (ii) the occurrence of any material
default or material event of default under any other agreement providing for
Indebtedness of the Company or any Subsidiary or under a capitalized lease
obligation, (iii) any material actions, suits or proceedings instituted by any
person against the Company or a Subsidiary or affecting any of the assets of the
Company or any Subsidiary, or (iv) any investigation initiated by, or any
dispute between and any governmental regulatory body, on the one hand, and the
Company or any Subsidiary, on the other hand, which dispute might interfere with
the normal operations of the Company or any Subsidiary; provided, however, that
Purchaser shall not be required by this Agreement to disclose any such
information provided in (iii) or (iv) above to any third party other than
Purchaser's counsel and except to the extent compelled by law or otherwise
authorized by the Company.
5.19 Board of Directors; Observer Rights.
(a) As soon as practicable, and in no case later than 30
days after the Closing of the transactions contemplated hereby, (i) the size of
the Board of Directors of the Company shall be increased to six directors, and
(ii) a nominee of Purchaser shall be elected a director in accordance with the
Company's Articles of Incorporation and Bylaws and as reasonably acceptable to
the Company. For so long as the initial Purchaser or any Affiliate of Purchaser
owns Debentures representing at least 25 percent of the original principal
amount of the Debentures, the Company agrees to include a nominee of Purchaser
in management's slate of nominees to be elected to the Board of Directors and to
recommend to the stockholders the election of such nominee. Any nominee of
Purchaser hereunder shall be reimbursed for all reasonable expenses incurred as
a director and shall be entitled to receive such compensation as may be received
by other non-employee directors of the Company, including indemnity and
advancement of expenses to the fullest extent permitted under applicable law.
(b) For so long as the Purchaser or any Affiliate owns
Debentures representing at least 25% of the original principal amount of the
Debentures, provided that no nominee of the Purchaser is elected a director as
set forth in paragraph (a) of this Section 5.19, the Company shall invite one
representative of Purchaser to attend, at the Company's expense, all meetings of
the Company's Board of Directors and all committees of the Company's Board of
Directors in a nonvoting observer capacity and, in this respect, shall provide
such representative copies of all notices and meeting agenda in advance of such
meetings and shall permit such representative to review all documents and other
materials provided to directors at such meetings. The Company shall also provide
Purchaser, in advance, with copies of all actions proposed to be taken by the
Board of Directors in lieu of meeting.
<PAGE> 33
5.20 Annual Plan. The Board of Directors shall adopt no
later than the sixtieth day of each fiscal year, a financial plan for the
Company, which shall include at least a projection of income and expenses
(including capital expenditures) and a projected cash flows statement for each
month in such fiscal year, and a projected balance sheet as of the end of each
month in such fiscal year (the "Annual Plan"). The Annual Plan may only be
amended or revised, in any material manner, with the approval of the Board of
Directors.
5.21 Further Assurances. The Company will take all
actions reasonably requested by Purchaser to effect the transactions
contemplated by this Agreement and the other Operative Documents.
6. SUBORDINATION OF DEBENTURES.
6.1 Subordination. The indebtedness evidenced by the
Debentures, including principal and interest, shall be subordinate and junior to
the prior payment of the indebtedness of the Company for borrowed money only as
set forth on Schedule 6.1 (the "Senior Indebtedness"), and the indebtedness
evidenced by the Debentures shall be senior in right of payment to all other
Indebtedness of the Company which is expressly stated to be subordinate or
junior in any respect to other Indebtedness of the Company, including the
Debentures.
6.2 Liquidation, Etc.
(a) Upon any distribution of assets of the Company in
connection with any dissolution, winding up, liquidation or reorganization of
the Company (whether in bankruptcy, insolvency, or receivership proceedings or
upon an assignment for the benefit of creditors or otherwise), the holders of
all Senior Indebtedness shall first be entitled to receive payment in full of
the principal thereof, premium, if any, and interest due thereon, and all costs
and expenses (including attorneys' fees) related thereto, before the holders of
the Debentures shall be entitled to receive any payment on account of the
principal of or interest on or any other amount owing with respect to the
Debentures (other than payment in shares of capital stock of the Company as
reorganized or readjusted, or securities of the Company or any other corporation
provided for by a plan of reorganization or readjustment, which stock and
securities are subordinated to the payment of all Senior Indebtedness and
securities received in lieu thereof which may at the time be outstanding). Under
the circumstances provided herein, the holders of the Senior Indebtedness shall
have the right to receive and collect any distributions made with respect to the
Debentures until such time as the Senior Indebtedness is paid in full, and shall
have the further right to take such actions as may be deemed necessary or
required to so receive and collect such distributions including making or filing
any proofs of claim relating thereto.
(b) Without in any way modifying the provisions of this
Section 6 or
<PAGE> 34
affecting the subordination effected hereby if such notice is not
given, the Company shall give prompt written notice to the Purchaser of any
contemplated dissolution, winding up, liquidation or reorganization of the
Company (whether in bankruptcy, insolvency or receivership proceedings or upon
an assignment for the benefit of creditors or otherwise).
6.3 Senior Indebtedness Default. The Company shall not declare
or pay any dividends or make any distributions to the holders of capital stock
of the Company, or purchase or acquire for value, any of the Debentures if any
default has occurred and is continuing with respect to the payment of principal
of, premium if any, or interest on any Senior Indebtedness.
6.4 Subrogation. Upon the prior payment in full of all Senior
Indebtedness, the Purchaser shall be subrogated to the rights of the holders of
the Senior Indebtedness to receive payments or distributions of assets of the
Company applicable to the Senior Indebtedness until all amounts owing on the
Debentures shall be paid in full, and for the purpose of such subrogation, no
payments or distributions to the Purchaser otherwise payable or distributable to
the holders of Senior Indebtedness shall, as between the Company, its creditors,
other than the holders of Senior Indebtedness, and Purchaser, be deemed to be
payment by the Company to or on account of the Debentures, it being understood
that the provisions of this Section 6 are and are intended solely for the
purpose of defining the relative rights of Purchaser, on the one hand, and the
holders of the Senior Indebtedness, on the other hand.
6.5 Company's Obligations Not Impaired. Nothing contained in
this Section 6 or in the Debentures is intended to or shall impair, as between
the Company and Purchaser, the obligation of the Company, which is absolute and
unconditional, to pay the Purchaser the principal of and interest on the
Debentures as and when the same shall become due and payable in accordance with
the terms of the Debentures, or is intended to or shall affect the relative
rights of the Purchaser other than with respect to the holders of the Senior
Indebtedness, nor, except as expressly provided in this Section 6, shall
anything herein or therein prevent the Purchaser from exercising all remedies
otherwise permitted by applicable law upon the occurrence of an Event of Default
under this Agreement or under the Debentures.
7. Conversion of Debentures.
7.1 Conversion Privilege. The Debentures shall be convertible
at any time into shares of Common Stock at the Conversion Ratio. The initial
Conversion Price shall be $10.25 per share, so that immediately after the
Closing the Debentures shall be convertible into 390,243.9 shares of Common
Stock. Any portion of the outstanding principal balance of the Debentures may be
converted at the election of the holder of any Debenture into shares of Common
Stock at any time and from time to time, at the Conversion Ratio and the
Conversion Price then in effect, from and after the Closing and until the
repayment in full of the principal amount , all accrued but unpaid interest
under, and all expenses and other costs required to be paid by the Company under
the
<PAGE> 35
Debentures. Upon such conversion, that portion of principal so converted shall
be deemed to be paid in full upon the delivery to the holder of Debentures of a
certificate representing the proper number of shares of Common Stock to be
issued to such holder upon such conversion. Conversion of any portion of the
principal balance of the Debentures shall not relieve the Company to pay any
accrued but unpaid interest through the date of conversion on the portion of the
principal balance of the Debentures so converted. In no case shall interest be
convertible into Common Stock
7.2 Reservation of Shares. The Company shall take all such
corporate action as may be required to validly reserve for issuance a sufficient
number of shares of Common Stock into which the Debentures may be converted.
7.3 Conversion Procedure.
(a) Debentures shall be convertible into shares of Common
Stock at the Conversion Ratio at the option of the holder, in whole or in part,
at any time. The holder shall effect conversions by delivering to the Company a
written notice (the "Conversion Notice"), accompanied by the certificate
representing the Debentures to be converted. Each Conversion Notice shall
specify the principal amount of Debentures to be converted and the date on which
such conversion is to be effected (the "Conversion Date"), which shall in no
event be earlier than the date such Conversion Notice is given in accordance
with Section 7.3(i) below. Each Conversion Notice, once given, shall be
irrevocable. If the holder is converting less than all Debentures held by such
holder, the Company shall promptly deliver to the holder a certificate for such
number of Debentures as have not been converted.
(b) Within ten trading days after the Conversion Date, the
Company shall deliver to the holder (i) a certificate or certificates which
shall be free of restrictive legends and trading restrictions (other than those
then required by law), representing the number of shares of Common Stock being
acquired upon the conversion of Debentures, and (ii) a certificate representing
the number of Debentures not converted; provided, however, that the Company
shall not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon conversion of any Debentures, until certificates evidencing
such Debentures are either delivered to the Company or any transfer agent for
the Common Stock, or the holder notifies the Company that such certificates have
been lost, stolen or destroyed and provides a bond (or other adequate security
acceptable to the Company) satisfactory to the Company to indemnify the Company
from any loss incurred by it in connection therewith.
(c) (i) The initial Conversion Price shall be $10.25 per
share, but shall automatically be adjusted to the average closing bid price for
the Common Stock for the 20 consecutive trading days ending immediately prior to
September 25,1998, if such average is less than $10.25 per share (adjusted for
stock splits, stock dividends, and similar recapitalizations), unless the
Conversion Price is then lower than $8.00; provided that such adjustment shall
in no event reset the Conversion Price below $8.00.
<PAGE> 36
(ii) If the Company, at any time while any
Debentures are outstanding, (a) shall pay a stock dividend or otherwise make a
distribution or distributions on shares of its Common Stock payable in shares of
its capital stock (whether payable in shares of its Common Stock or of capital
stock of any class), (b) subdivide outstanding shares of Common Stock into
larger number of shares, (c) combine outstanding shares of Common Stock into a
smaller number of shares, or (d) issue by reclassification of shares of Common
Stock any shares of capital stock of the Company, the Conversion Price
designated in Section 7.3(c)(i) shall be multiplied by a fraction of which the
numerator shall be the number of shares of Common Stock of the Company
outstanding before such event and of which the denominator shall be the number
of shares of Common Stock outstanding after such event. Any adjustment made
pursuant to this Section 7.3(c)(ii) shall become effective immediately after the
record date in the case of a dividend or distribution and shall become effective
immediately after the effective date in the case of a subdivision, combination
or reclassification.
(iii) If the Company, at any time while any Debentures are
outstanding, shall issue rights or warrants to all holders of Common Stock
entitling them to subscribe for or purchase shares of Common Stock at a price
per share less than the Per Share Market Value of Common Stock at the record
date mentioned below, the Conversion Price designated in Section 7.3(c)(i) shall
be multiplied by a fraction, of which the denominator shall be the number of
shares of Common Stock (excluding treasury shares, if any) outstanding on the
date of issuance of such rights or warrants plus the number of additional shares
of Common Stock offered for subscription or purchase, and of which the numerator
shall be the number of shares of Common Stock (excluding treasury shares, if
any) outstanding on the date of issuance of such rights or warrants plus the
number of shares which the aggregate offering price of the total number of
shares so offered would purchase at such Per Share Market Value. Such adjustment
shall be made whenever such rights or warrants are issued, and shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such rights or warrants. However, upon the
expiration of any right or warrant to purchase Common Stock the issuance of
which resulted in an adjustment in the Conversion Price pursuant to this Section
7.3(c)(iii), if such right or warrant shall expire and shall not have been
exercised, the Conversion Price shall immediately upon such expiration be
recomputed and effective immediately upon such expiration be increased to the
price which it would have been (but reflecting any other adjustments in the
Conversion Price made pursuant to the provisions of this Section 7.3 after the
issuance of such rights or warrants) had the adjustment of the Conversion Price
made upon the issuance of such rights or warrants been made on the basis of
offering for subscription or purchase only that number of shares of Common Stock
actually purchased upon the exercise of such rights or warrants actually
exercised.
(iv) If the Company, at any time while any Debentures are
outstanding, shall issue (A) options or warrants entitling the holder to
subscribe for or purchase shares of Common Stock at an exercise price less than
the Conversion Price, or (B) securities
<PAGE> 37
convertible into Common Stock at a conversion price less than the Conversion
Price, then the Conversion Price designated in Section 7.3(c)(i) shall be
automatically reset to such lower conversion price. Provided, that the
adjustment provided by this Section 7.3(c)(iv) shall not apply to issuance of
securities pursuant to options, warrants, or conversion rights outstanding on
the Closing Date, and further, shall not be applicable until the Company shall
have issued options, warrants, or convertible securities, exercisable or
convertible into 150,000 shares of Common Stock at an exercise or conversion
price less than the Conversion Price, provided that such exercise or conversion
price is equal to or greater than the Per Share Market Value on the date of
issuance. Such adjustment shall be made whenever such options, warrants or
convertible securities are issued at an exercise or conversion price less than
the Conversion Price, and such adjustment shall become effective immediately
after the date on which such options, warrants or convertible securities are
issued at an exercise or conversion price less than the Conversion Price.
Provided, that the Company may, prior to the effective date of any adjustment
under this Section 7.3(c)(iv), and on or after September 25, 1999 redeem all
(but not less than all) of the then outstanding Debentures in accordance with
the procedures of Section 1.2 and in such case the Redemption Price shall be
equal to the sum of (A) the aggregate principal amount of the Debentures then
outstanding, plus (B) all accrued but unpaid interest, plus (C) interest on any
principal payment not paid when due and any accrued but unpaid interest at an
annual rate of 15% in respect of such principal and such unpaid interest, plus
(D) any expenses or costs of collection to which the holder of the Debentures is
entitled pursuant to the Debenture, plus (E) an amount equal to (x) a 20%
compounded annual return on the aggregate principal amount of the Debentures
then outstanding, computed from the Closing Date to the Redemption Date, minus
(y) all interest previously paid on such Debentures being redeemed plus amounts
payable under clause B.
(v) In case the Company, at any time while Debentures are
outstanding, shall distribute to all holders of Common Stock (and not to holders
of Debentures) evidences of its indebtedness, or assets or rights or warrants,
to subscribe for or purchase any security (excluding those referred to in
Section 7.3(c)(iii) above) then in each such case the Conversion Price at which
Debentures shall thereafter be convertible shall be determined by multiplying
the Conversion Price in effect prior to the record date fixed for determination
of stockholders entitled to receive such distribution by a fraction of which the
denominator shall be the Per Share Market Value of Common Stock determined as of
the record date mentioned above, and of which the numerator shall be such Per
Share Market Value of the Common Stock on such record date less the then fair
market value at such record date of the portion of such assets or evidence of
indebtedness so distributed applicable to one outstanding share of Common Stock
as determined by the Board of Directors of the Company in good faith; provided,
however that in the event of a distribution exceeding ten percent of the net
assets of the Company, then such fair market value shall be determined by a
nationally recognized or major regional investment banking firm or firm of
independent certified public accountants of recognized standing (which may be
the firm that regularly examines the financial statements of the Company) (an
"Appraiser") selected in good faith by the holders of a majority in interest of
the
<PAGE> 38
Debentures; and provided, further, that the Company, after receipt of the
determination by such Appraiser shall have the right to select an additional
Appraiser, in which case the fair market value shall be equal to the average of
the determination by each such Appraiser. In either case the adjustments shall
be described in a statement provided to all holders of Debentures of the portion
of assets or evidences of indebtedness so distributed or such subscription
rights applicable to one share of Common Stock. Such adjustment shall be made
whenever any such distribution is made and shall become effective immediately
after the record date mentioned above.
(vi) All calculations under this Section 7.3 shall be made
to the nearest cent or the nearest 1/100th of a share, as the case may be.
(vii) Whenever the Conversion Price is adjusted pursuant to
Section 7.3(c)(ii), (iii), (iv) or (v), the Company shall promptly mail to each
holder of Debentures, a notice setting forth the Conversion Price after such
adjustment and setting forth a brief statement of the facts requiring such
adjustment.
(viii) In case of any reclassification of the Common Stock,
any consolidation or merger of the Company with or into another person, any sale
or transfer of all or substantially all of the assets of the Company or any
compulsory share exchange pursuant to which share exchange the Common Stock is
converted into other securities, cash or property, then the holders of the
Debentures then outstanding shall have the right thereafter to convert such
Debentures only into the kind and amount of shares of stock and other securities
and property receivable upon or deemed to be held following such
reclassification, consolidation, merger, sale, transfer or share exchange by a
holder of a number of shares of the Common Stock of the Company into which such
Debentures could have been converted immediately prior to such reclassification,
consolidation, merger, sale, transfer or share exchange. The terms of any such
consolidation, merger, sale transfer or share exchange shall include such terms
so as to continue to give to the holder of shares of Debentures the right to
receive the securities or property set forth in this Section 7.3(c)(viii) upon
any conversion following such consolidation, merger, sale, transfer or share
exchange. This provision shall similarly apply to successive reclassifications,
consolidations, mergers, sales, transfers of share exchanges.
(ix) In case:
(A) the Company shall declare a dividend (or any
other distribution) on its Common Stock; or
(B) the Company shall declare a special
nonrecurring cash dividend on or a redemption of its Common Stock; or
(C) the Company shall authorize the granting
to all holders of the Common Stock rights or warrants to subscribe for or
purchase any shares of capital stock of any class or of any rights; or
<PAGE> 39
(D) the approval of any stockholders of
the Company shall be required in connection with any reclassification of the
Common Stock of the Company (other than a subdivision or combination of the
outstanding shares of Common Stock), any consolidation or merger to which the
Company is a party, any sale or transfer of all or substantially all of the
assets of the Company, or any compulsory share exchange whereby the Common Stock
is converted into other securities, cash or property; or
(E) of the voluntary or involuntary
dissolution, liquidation or winding up of the affairs of the Company;
then the Company shall cause to be filed at each office or agency maintained for
the purpose of conversion of Debentures, and shall cause to be mailed to the
holders of Debentures at their last addresses as they shall appear upon the
stock books of the Company, at least 10 calendar days prior to the applicable
record or effective date hereinafter specified, a notice stating (i) the date on
which a record is to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be taken, the date as
of which the holders of Common Stock of record to be entitled to such dividend,
distributions, redemption, rights or warrants are to be determined, or (ii) the
date on which such reclassification, consolidation, merger, sale, transfer,
share exchange, dissolution, liquidation or winding-up is expected to become
effective, and the date as of which it is expected that holders of Common Stock
of record shall be entitled to exchange their shares of Common Stock for
securities or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution, liquidation
or winding-up (but no failure to mail such notice or any defect therein or in
the mailing thereof shall affect the validity of the corporate action required
to be specified in such notice).
(d) In case at any time conditions shall arise by reason of
action taken by the Company which in the opinion of the Board of Directors of
the Company are not adequately covered by the other provisions hereof and which
might materially and adversely affect the rights of the holders of Debentures
(different than or distinguished from the effect generally on the rights of
holders of any indebtedness of the Company) or in case at any time any such
conditions are expected to arise in the opinion of the Board of Directors of the
Company by reason of any action contemplated by the Company, an Appraiser
selected by the holders of more than 50% of the principal amount of the
Debentures shall give its opinion as to the adjustment, if any (not inconsistent
with the standards established in this Section 7.3), of the Conversion Price
(including, if necessary, any adjustment as to the securities into which
Debentures may thereafter be convertible) and any distribution which is or would
be required to preserve without diluting the rights of the holders of the
Debentures; provided, however, that the Company, after receipt of the
determination by such Appraiser, shall have the right to select an additional
Appraiser, in which case the adjustment shall be equal to the average of the
adjustments recommended by each such Appraiser. The Board of Directors of the
Company shall make the adjustment recommended forthwith upon the receipt of such
<PAGE> 40
opinion or opinions or the taking of any such action contemplated, as the case
may be; provided, however, that no such adjustment of the Conversion Price shall
be made which in the opinion of the Appraiser(s) giving the aforesaid opinion or
opinions would result in an increase of the Conversion Price then in effect.
(e) The Company covenants that it will at all times reserve
and keep available, out of its authorized and unissued Common Stock solely for
the purpose of issuance upon conversion of Debentures as herein provided, free
from preemptive rights or any other actual contingent purchase rights of persons
other than the holders of Debentures, such number of shares of Common Stock as
shall be issuable (taking into account the adjustments and restrictions of
Section 7.3(c) hereof) upon the conversion of all outstanding Debentures. The
Company covenants that all shares of Common Stock that shall be so issuable
shall, upon issue, be duly and validly issued and fully paid and nonassessable.
(f) The Company shall not be required to issue stock
certificates representing fractions of shares of Common Stock, but may if
otherwise permitted, make a cash payment in respect of any final fraction of a
share based on the Per Share Market Value at such time.
(g) The issuance of certificates for shares of Common Stock on
conversion of Debentures shall be made without charge to the holders thereof for
any documentary stamp or similar taxes that may be payable in respect of the
issue or delivery of such certificate, provided that the Company shall not be
required to pay any tax that may be payable in respect of any transfer involved
in the issuance and delivery of any such certificate in a name other than that
of the holder of the shares of Debentures converted and the Company shall not be
required to issue or deliver such certificates unless or until the person or
persons requesting the issuance thereof shall have paid to the Company the
amount of such tax or shall have established to the satisfaction of the Company
that such tax has been paid.
(h) For purposes of this Agreement,
(A) "Conversion Ratio" means, at any time, a fraction, of
which the numerator is the aggregate principal amount of Debentures to be
converted into Common Stock, and of which the denominator is the Conversion
Price at such time.
(B) "Per Share Market Value" means on any particular date (i)
the last sale price per share of the Common Stock on such date on the Nasdaq
National Market or other stock exchange on which the Common Stock has been
listed or if there is no such price on such date, then the last price on such
exchange on the date nearest preceding such date, or (ii) if the Common Stock is
not listed on the Nasdaq National Market or any stock exchange, the average of
the bid and asked price for a share of Common Stock in the over-the-counter
market, as reported by the Nasdaq SmallCap Market at the close of business on
such date, or (iii) if the Common Stock is not quoted on the Nasdaq
<PAGE> 41
SmallCap Market, the average of the bid and asked price for a share of Common
stock in the over-the-counter market as reported by the National Quotation
Bureau Incorporated (or similar organization or agency succeeding to its
functions of reporting prices), or (iv) if the Common Stock is no longer
publicly traded the fair market value of a share of Common Stock as determined
by an Appraiser (as defined in Section 7(c)(v) above) selected in good faith by
the holders more than 50% of the principal amount of the Debentures then
outstanding; provided, however, that the Company, after receipt of the
determination by such Appraiser, shall have the right to select an additional
Appraiser, in which case, the fair market value shall be equal to the average of
the determinations by each such Appraiser.
(C) "Trading day" means (i) a day on which the Common Stock is
traded on the Nasdaq National Market or principal stock exchange on which the
Common Stock has been listed, or (ii) if the Common Stock is not listed on the
Nasdaq National Market or any stock exchange, a day on which the Common Stock is
traded in the over-the-counter market, as reported by the Nasdaq SmallCap
Market, or (c) if the Common Stock is not quoted on the Nasdaq SmallCap Market,
a day on which the Common Stock is quoted in the over-the-counter market as
reported by the National Quotation Bureau Incorporated (or any similar
organization or agency succeeding its functions of reporting prices).
(i) Each Conversion Notice shall be given by facsimile or by mail,
postage prepaid, addressed to the attention of the Chief Financial Officer of
the Company at the facsimile telephone number or address of the principal place
of business of the Company. Any such notice shall be deemed given and effective
upon the earliest to occur of (i) receipt of such facsimile at such facsimile
telephone number, (ii) three days after deposit in the United States mail, or
(iii) upon actual receipt by the party to whom such notice is required to be
given.
8. Restrictions on Transfer; Registration Rights.
8.1 Legends; Restrictions on Transfer. Neither the Debentures
nor the shares of Common Stock issuable upon conversion of Debentures have been
registered under the Securities Act or any state securities laws. Each Debenture
issued pursuant to this Agreement and each stock certificate issued upon
conversion of Debentures shall bear a legend in substantially the following
form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED , OR
ANY APPLICABLE STATE SECURITIES LAW, AND MAY NOT BE
TRANSFERRED IN THE ABSENCE OF (I) AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933 AND SUCH APPLICABLE
STATE SECURITIES LAWS, OR (II) AN OPINION OF COUNSEL
ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED.
<PAGE> 42
8.2 Registration Rights.
The Purchaser shall be entitled to register Common Stock issuable upon
conversion of Debentures as provided in the Registration Rights Agreement.
9. Events of Default; Remedies.
9.1 Events of Default. The occurrence of any one of
the following shall constitute an "Event of Default" under this Agreement:
(a) Default shall occur in the payment of interest on any
Debenture when the same shall have become due, provided, that any such default
shall be curable within two business days if the failure to make such payment
when due was caused by a financial institution's error in effecting an automatic
debit transaction against an account containing sufficient funds; or
(b) Default shall occur in the making of any payment of the
principal of any Debenture or the premium, if any, by the Company thereon at the
expressed or any accelerated maturity date or at any date fixed by the Company
for prepayment, provided, that any such default shall be curable within two
business days if the failure to make such payment when due was caused by a
financial institution's error in effecting an automatic debit transaction
against an account containing sufficient funds; or
(c) Default shall be made in the payment of the principal of
or interest on any material Indebtedness (other than the Debentures) of the
Company or any Subsidiary and such default shall continue beyond the period of
grace, if any, allowed with respect thereto; or
(d) Default or the happening of any event shall occur under
any contract, agreement, lease, indenture or other instrument under which any
material Indebtedness (other than the Debentures) of the Company or any
Subsidiary may be issued and such default or event shall continue for a period
of time sufficient to permit the acceleration of the maturity of any such
Indebtedness of the Company or any Subsidiary outstanding thereunder; or
(e) Default shall occur in the observance or performance of
any covenant or agreement contained in Sections 5.11 through 5.20 hereof which
is not remedied within 30 days; or
(f) Default shall occur in the observance or performance of
any other provision of this Agreement which is not remedied within 30 days after
the earlier of (i) the date on which the Company first obtains knowledge of such
default, and (ii) the date on which written notice thereof is given to the
Company by the holder of any Debenture; or
<PAGE> 43
(g) Any representation or warranty made by the Company herein,
or made by the Company in any statement or certificate furnished by the Company
in connection with the consummation of the issuance and delivery of the
Debentures or furnished by the Company pursuant hereto, is untrue in any
material respect as of the date of the issuance or making thereof and would have
a Material Adverse Effect, subject to the limitations on survival of Section
12.5; or
(h) Final judgments for the payment of money aggregating in
excess of $100,000, are outstanding against the Company or any Subsidiary or
against any property or assets of either and any one of such judgments has
remained unpaid, unvacated, unbonded or unstayed by appeal or otherwise for a
period of 30 days from the date of its entry; or
(i) The Company or any Subsidiary becomes insolvent or
bankrupt, is generally not paying its debts as they become due or makes an
assignment for the benefit of creditors, or the Company or any Subsidiary
applies for or consents to the appointment of a custodian, trustee, liquidator,
or receiver for the Company or such Subsidiary or for the major part of the
property of either; or
(j) A custodian, trustee, liquidator, or receiver is appointed
for the Company or any Subsidiary or for the major part of the property of
either and is not discharged within 60 days after such appointment; or
(k) Bankruptcy, reorganization, arrangement or insolvency
proceedings, or other proceedings for relief under any bankruptcy or similar law
or laws for the relief of debtors, are instituted by or against the Company or
any Subsidiary and, if instituted against the company or any Subsidiary, are
consented to or are not dismissed within 60 days after such institution.
(l) Andres C. Salazar shall resign or be terminated, other
than for cause, as President and Chief Executive Officer of the Company, and a
successor reasonably acceptable to Purchaser shall not have been elected within
180 days after such resignation or termination; provided, that if no such
successor is elected, an Event of Default shall be deemed to have occurred and
have been continuing from and after the date of such resignation or termination.
9.2 Remedies Upon Default.
(a) If an Event of Default (other than described by Section
9.1(a) or Section 9.1(b)) shall occur, and for so long as such Event of Default
continues, the interest rate on the Debentures shall increase by 2% per annum
until such Event of Default is cured.
(b) [Reserved]
<PAGE> 44
(c) When any Event of Default has occurred, or if the holder
of any Debenture or of any other evidence of indebtedness of the Company gives
any notice or takes any other action with respect to a claimed default, the
Company agrees to give notice within three Business Days of such event to all
holders of the Debentures then outstanding.
9.3 Acceleration of Maturities. When any Event of Default
described in paragraph (a), (b) or (c) of Section 9.1 has occurred and is
continuing, any holder of any Debenture may, and when any Event of Default
described in paragraphs (d) through (i), inclusive, and (l) of Section 9.1 has
occurred and is continuing, the holder or holders of 50% or more of the
principal amount of Debentures at the time outstanding may, by notice to the
Company, declare the entire principal and all interest accrued on all Debentures
to be, and all Debentures shall thereupon become, forthwith due and payable,
without any presentment, demand, protest or other notice of any kind, all of
which are hereby expressly waived. When any Event of Default described in
paragraph (j) or (k) of Section 9.1 has occurred, then all outstanding
Debentures shall immediately become due and payable without presentment, demand
or notice of any kind, all of which are hereby expressly waived. Upon the
Debentures becoming due and payable as a result of any Event of Default as
aforesaid, the Company will forthwith pay to the holders of the Debentures the
entire principal and interest accrued on the Debentures. No course of dealing on
the part of any Debenture holder nor any delay or failure on the part of any
Debenture holder to exercise any right shall operate as a waiver of such right
or otherwise prejudice such holder's rights, powers and remedies. The Company
further agrees, to the fullest extent permitted by law, to pay to the holder or
holders of the Debentures all costs and expenses, including reasonable
attorneys' fees, incurred by them in the collection of any Debentures upon any
default hereunder or thereon.
10. Amendments, Waivers and Consents.
10.1 Consent Required. Any term, covenant, agreement or
condition of this Agreement may, with the consent of the Company, be amended or
compliance therewith may be waived (either generally or in a particular instance
and either retroactively or prospectively), if the Company shall have obtained
the consent in writing of the holders of at least 50% in aggregate principal
amount of outstanding Debentures; provided that without the written consent of
the holders of all of the Debentures then outstanding, no such waiver,
modification, alteration or amendment shall be effective (i) which will change
the time of payment of the principal of or the interest on any Debenture or
reduce the principal amount thereof or change the rate of interest thereon, (ii)
which will change any of the provisions with respect to optional prepayments, or
(iii) which will change the percentage of holders of the Debentures required to
consent to any such amendment, modification or waiver of any of the provisions
of Section 9 or Section 10.
10.2 Solicitation of Debenture Holders. The Company will not,
directly
<PAGE> 45
or indirectly, pay or cause to be paid any remuneration, whether by way of
supplemental or additional interest, fee or otherwise, to any holder of the
Debentures as consideration for or as an inducement to the entering into by any
holder of the Debentures of any waiver or amendment of any of the terms and
provisions of this Agreement, unless such remuneration is concurrently paid, on
the same terms, ratably to the holders of all of the Debentures then
outstanding.
10.3 Effect of Amendment or Waiver. Any such amendment or
waiver shall apply equally to all of the holders of the Debentures and shall be
binding upon them, upon each future holder of any Debenture, and upon the
Company, whether or not such Debenture shall have been marked to indicate such
amendment or waiver. No such amendment or waiver shall extend to or affect any
obligation not expressly amended or waived or impair any right consequent
thereon.
11. Interpretation of Agreement; Definitions.
11.1 Definitions. As used herein,
"Affiliate" means any person (i) which directly or indirectly through
one or more intermediaries controls, or is controlled by, or is under common
control with, the Company, (ii) which beneficially owns or holds 10 % or more of
any class of the Voting Stock of the Company or (iii) 10 % or more of the Voting
Stock (or in the case of a person which is not a corporation, 10% or more of the
equity interest) of which is beneficially owned or held by the Company or a
Subsidiary.
"Business Day" means any day other than a Saturday, Sunday, or other
day on which banks in Tennessee are authorized to close.
"Change in Control" means when any person or entity, including a
"group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934,
as amended, other than the Company or a wholly-owned subsidiary thereof or any
employee benefit plan of the Company or any of its subsidiaries, becomes the
beneficial owner of the Company's securities having 50% or more of the combined
voting power of the then outstanding securities of the Company that may be cast
for the election of directors of the Company (other than as a result of an
issuance of securities initiated by the Company in the ordinary course of
business).
The term "control" (including the terms "controlling," "controlled by"
and "under common control") means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of a
person, whether through the ownership of Voting Stock, by contract, or
otherwise.
"Default" means any event or condition, the occurrence of which
would, with the lapse of time or the giving of notice, or both, constitute an
Event of Default as defined in Section 9. 1.
<PAGE> 46
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended and any successor statute of similar import, together with the
regulations thereunder, in each case as in effect from time to time. References
to sections of ERISA shall be construed to also refer any successor sections.
"Guaranties" by any person means all obligations (other than
endorsements in the ordinary course of business of negotiable instruments for
deposit or collection) of such person guaranteeing, or in effect guaranteeing,
any Indebtedness, dividend or other obligation of any other person (the "primary
obligor") in any manner, whether directly or indirectly, including, without
limitation, all obligations incurred through an agreement, contingent or
otherwise, by such person: (i) to purchase such Indebtedness or obligation or
any property or assets constituting security therefor, (ii) to advance or supply
funds (A) for the purchase or payment of such Indebtedness or obligation, (B) to
maintain working capital or other balance sheet condition or (C) otherwise to
advance or make available funds for the purchase or payment of such Indebtedness
or obligation, or (iii) to lease property or to purchase securities or other
property or services primarily for the purpose of assuring the owner of such
Indebtedness or obligation of the ability of the primary obligor to make payment
of the Indebtedness or obligation, or (iv) otherwise to assure the owner of the
Indebtedness or obligation of the primary obligor against loss in respect
thereof. For the purposes of all computations made under this Agreement, a
Guaranty in respect of any Indebtedness for borrowed money shall be deemed to be
Indebtedness equal to the principal amount of such Indebtedness for borrowed
money which has been guaranteed, and a Guaranty in respect of any other
obligation or liability or any dividend shall be deemed to be Indebtedness equal
to the maximum aggregate amount of such obligation, liability or dividend.
"Hazardous Substance" means any hazardous or toxic material, substance
or waste, pollutant or contaminant which is regulated under any statute, law,
ordinance, rule or regulation of any local, state, regional or Federal authority
having jurisdiction over the property of the Company and its Subsidiaries or its
use, including but not limited to any material, substance or waste which is: (i)
defined as a hazardous substance under Section 311 of the Federal Water
Pollution Control Act (33 U.S. C. SS 1317. 1) as amended; (ii) regulated as a
hazardous waste under Section 1004 or Section 3001 of the Federal Solid Waste
Disposal Act, as amended by the Resource Conservation and Recovery Act (42
U.S.C. SS 6901 et seq.) as amended; (iii) defined as a hazardous substance under
Section 101 of the Comprehensive Environmental Response, Compensation and
Liability Act (42 U.S.C. SS 9601 et seq.) as amended; or (iv) defined or
regulated as a hazardous substance or hazardous waste under any rules or
regulations promulgated under any of the foregoing statutes.
"Indebtedness" of any person means and includes all obligations of such
person which in accordance with GAAP shall be classified upon a balance sheet of
such person as liabilities of such person, and in any event shall include all
(i) obligations of such person for borrowed money or which have been incurred in
connection with the
<PAGE> 47
acquisition of property or assets, (ii) obligations secured by any lien or other
charge upon property or assets owned by such person, even though such person has
not assumed or become liable for the payment of such obligations, (iii)
obligations created or arising under any conditional sale or other title
retention agreement with respect to property acquired by such person,
notwithstanding the fact that the rights and remedies of the seller, lender or
lessor under such agreement in the case of default are limited to repossession
or sale or property, (iv) capitalized rentals, and (v) Guaranties of obligations
of others of the character referred to in this definition.
"Investments" means all investments, in cash or by delivery of property
made, directly or indirectly in any person, whether by acquisition of shares of
capital stock, indebtedness or other obligations or securities or by loan,
advance, capital contribution or otherwise; provided, however that "Investments"
shall not mean or include routine investments in property to be used or consumed
in the ordinary course of business.
"Material Adverse Event" means any event or circumstance, or set of
events or circumstances, individually or collectively, that reasonably could be
expected to result in any (i) material adverse effect upon the validity or
enforceability of any of the Operative Documents, or (ii) material and adverse
effect on the financial condition or results of operations of the Company (a
"Material Adverse Effect"), or (iii) material default or potential material
default under any of the Operative Documents.
"Person" means an individual, partnership, corporation, limited
liability company, trust or unincorporated organization, and a government or
agency or political subdivision thereof.
"Plan" means a "pension plan," as such term is defined in ERISA,
established or maintained by the Company or any ERISA Affiliate or as to which
the Company or any ERISA Affiliate contributed or is a member or otherwise may
have any liability.
"Registration Rights Agreement" means the Registration Rights Agreement
between the Company and the Purchaser of even date herewith.
"Security" shall have the same meaning as in Section 2(1) of the
Securities Act of 1933, as amended.
The term "subsidiary" means, as to any particular parent corporation,
any corporation of which more than 50% (by number of votes) of the Voting Stock
shall be owned by such parent corporation and/or one or more corporations which
are themselves subsidiaries of such parent corporation. The term "Subsidiary"
shall mean a subsidiary of the Company.
"Voting Stock" means securities of any class or classes the holders of
which are ordinarily, in the absence of contingencies, entitled to elect a
majority of the corporate directors (or persons performing similar functions).
<PAGE> 48
"Wholly-owned" when used in connection with any Subsidiary shall mean a
Subsidiary of which all of the issued and outstanding shares of stock (except
shares required as directors' qualifying shares) shall be owned by the Company
and/or one or more of its Subsidiaries.
11.2 Accounting Principles. Where the character or amount of
any asset or liability or item of income or expense is required to be determined
or any consolidation or other accounting computation is required to be made for
the purposes of this Agreement, the same shall be done in accordance with GAAP,
to the extent applicable, except where such principles are inconsistent with the
requirements of this Agreement.
11.3 Directly or Indirectly. Where any provision in this
Agreement refers to action to be taken by any person, or which such person is
prohibited from taking such provision shall be applicable whether the action in
question is taken directly or indirectly by such person.
12. Miscellaneous.
12.1 Expenses, Stamp Tax Indemnity. Whether or not the
transactions herein contemplated shall be consummated, the Company agrees to pay
to Purchaser (i) up to $35,000 as reimbursement for Purchaser's out-of-pocket
expenses in connection with the entering into of this Agreement and the
consummation of the transactions contemplated hereby, including but not limited
to the reasonable fees, expenses and disbursements of Purchaser's counsel, and
(ii) so long as Purchaser holds any of the Debentures, all such expenses
relating to any amendment, waiver or consent pursuant to the provisions hereof
(whether or not the same are actually executed and delivered), including,
without limitation, any amendments, waivers or consents resulting from any
work-out, restructuring or similar proceedings relating to the performance by
the Company of its obligations under this Agreement and the Debentures. The
Company also agrees that it will pay and hold Purchaser harmless against any and
all liability with respect to stamp and other taxes, if any, which may be
payable in connection with the execution and delivery of this Agreement or the
Debentures, whether or not any Debentures are then outstanding. The Company
agrees to protect and indemnify Purchaser against any liability for any and all
brokerage fees and commissions payable or claimed to be payable to any person as
a result of any actions of the Company or its agents in connection with the
transactions contemplated by this Agreement.
12.2 Powers and Rights Not Waived; Remedies Cumulative. No
delay or failure on the part of the holder of any Debenture in the exercise of
any power or right shall operate as a waiver thereof; nor shall any single or
partial exercise of the same preclude any other or further exercise thereof, or
the exercise of any other power or right. The rights and remedies of the holder
of any Debenture are cumulative to and are not exclusive of any rights or
remedies any such holder would otherwise have, and no waiver or consent, given
or extended hereunder, shall extend to or affect any obligation or right
<PAGE> 49
not expressly waived or consented to.
12.3 Notices. All communications provided for hereunder shall
be in writing and shall be delivered personally, or mailed by registered mail,
or by prepaid overnight air courier, or by facsimile communication, in each case
addressed:
If to Purchaser: Tandem Capital, Inc.
500 Church Street, Suite 200
Nashville, Tennessee 37219
Attention: Craig Macnab
Facsimile No.: 615-726-1208
with a copy to: C. Christopher Trower, Esq.
3159 Rilman Road, N.W.
Atlanta, Georgia 30327-1503
Facsimile No.: 404-816-6854
If to the Company: Digital Transmission Systems, Inc.
3000 Northwoods Parkway, Building 330
Norcross, Georgia 30071
Attention: Andres C. Salazar
Facsimile No.: 770-798-1325
with a copy to: Sutherland, Asbill & Brennan, L.L.P.
999 Peachtree Street, N.E.
Atlanta, Georgia 30309
Attention: Mark D. Wasserman
Facsimile No.: 404-853-8806
or such other address as Purchaser or the subsequent holder of any Debenture
initially issued to Purchaser may designate to the Company in writing, or such
other address as the Company may in writing designate to Purchaser or to a
subsequent holder of the Debenture initially issued to Purchaser, provided,
however, that a notice sent by overnight air courier shall only be effective if
delivered at a street address designated for such purpose by such person and a
notice sent by facsimile communication shall only be effective if made by
confirmed transmission at a telephone number designated for such purpose by such
person or, in either case, as Purchaser or a subsequent holder of any Debentures
initially issued to Purchaser may designate to the Company in writing or at a
telephone number herein set forth.
12.4 Assignments. This Agreement, the Debentures and the other
Operative Documents may be endorsed, assigned and/or transferred in whole or in
part by Purchaser, and any such holder and/or assignee of the same shall succeed
to and be possessed of the rights and powers of Purchaser under all of the same
to the extent transferred and assigned; provided, however Purchaser shall not
make any such transfer to a competitor of the Company without the prior written
consent of the Company. The
<PAGE> 50
Company shall not assign any of its rights nor delegate any of its duties under
this Agreement or any of the other Operative Documents by operation of law or
otherwise without the prior express written consent of Purchaser, which may be
withheld in Purchaser's sole and unfettered discretion, and if the Company
obtains such consent, this Agreement and the other Operative Documents shall be
binding upon such assignee.
12.5 Survival of Covenants and Representations. All
representations and warranties made by the Company and the Purchaser herein and
in any instruments or certificates delivered pursuant hereto shall survive for a
period of thirteen months following the Closing Date, except the representations
and warranties made in Sections 2.1, 2.2, 2.3, and 2.4 by the Company, and in
Sections 3.1, 3.2, 3.3, and 3.4 by Purchaser, which shall survive until payment
in full of the principal amount of, all accrued but unpaid interest under, and
all expenses and other costs required to be paid by the Company under, the
Debentures. All covenants made by the Company and the Purchaser herein and in
any instruments or certificates delivered pursuant hereto shall survive the
closing and the delivery of this Agreement and the Debentures, until the
termination of this Agreement, which shall terminate and be of no further force
or effect upon the payment in full of the principal amount of, all accrued but
unpaid interest under, and all expenses and other costs required to be paid by
the Company under, the Debentures.
12.6 Severability. Should any part of this Agreement for any
reason be declared invalid or unenforceable, such decision shall not affect the
validity of any remaining portion, which remaining portion shall remain in force
and effect as if this Agreement had been executed with the invalid or
unenforceable portion thereof eliminated and it is hereby declared the intention
of the parties hereto that they would have executed the remaining portion of
this Agreement without including therein any such part, parts or portion which
may for any reason, be hereafter declared invalid or unenforceable.
12.7 Governing Law. This Agreement and the Debentures
issued and sold hereunder shall be governed by and construed in accordance with
Georgia law, without regard to its conflicts of law rules.
12.8 Captions; Counterparts. The descriptive headings of the
various Sections or parts of this Agreement are for convenience only and shall
not affect the meaning or construction of any of the provisions hereof. This
Agreement may be executed in counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
12.9 Confidentiality. Each party hereto agrees that, except
with the prior written permission of the other party hereto, it shall at all
times keep confidential and not divulge, furnish or make accessible to anyone
any confidential information, knowledge or data concerning or relating to the
business or financial affairs of the other party to which such party has been or
shall become privy by reason of this Agreement, discussions or negotiations
relating to this Agreement, the performance of its obligations
<PAGE> 51
hereunder or the ownership of the Debenture purchased hereunder, except as such
disclosure may be required by law.
12.10 Publicity. The Company and Purchaser shall consult with
each other in issuing any press releases or otherwise making public statements
with respect to the transactions contemplated hereby. Neither party shall issue
any press release or otherwise make any public statement without the prior
written consent of the other, which consent shall not be unreasonably withheld
or delayed.
[REST OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 52
IN WITNESS WHEREOF, the parties hereto have caused this Debenture
Purchase Agreement to be executed and delivered by their duly authorized
officers as of the date first written above.
DIGITAL TRANSMISSION SYSTEMS, INC.
By:/s/ Andres C. Salazar
------------------------------------------
Title: President and Chief Executive Officer
---------------------------------------
SIRROM CAPITAL CORPORATION
d/b/a TANDEM CAPITAL
By: /s/ Craig MacNab
------------------------------------------
Title: President
---------------------------------------
<PAGE> 53
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") dated this 25th
day of September, 1997, is by and between DIGITAL TRANSMISSION SYSTEMS, INC., a
Delaware corporation (the "Company"), and SIRROM CAPITAL CORPORATION d/b/a
TANDEM CAPITAL, a Tennessee corporation (the "Holder"). Capitalized terms not
otherwise defined shall have the meanings assigned by Section 11.
W I T N E S S E T H:
WHEREAS, the Company and the Holder have entered into a certain
Debenture Purchase Agreement (the "Debenture Purchase Agreement") of even date
herewith that provides for, among other things, the Company to grant to Holder
certain registration rights with respect to shares of the Company's common
stock, $.01 par value (the "Common Stock"), as set forth herein; and
NOW, THEREFORE, in consideration of the mutual covenants and
undertakings contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Demand Registration.
1.1 Demand Rights. At any time after March 25, 1998 and during
the term of this Agreement, if the holders of at least 25% of the Registrable
Securities outstanding ("Initiating Holders") request in writing (a "Demand
Request") that the Company register an offering of Registrable Securities under
the Securities Act of 1933, as amended (the "Securities Act") by underwriters
selected by the Initiating Holders , subject to the approval of the Company
which approval will not be unreasonably withheld, with anticipated gross
offering proceeds of at least $2,000,000 (or such lesser amount, at least
$500,000, sufficient to register the public sale of all remaining Registrable
Securities), the Company shall:
(i) promptly give Notice of the Demand Request to
all other holders of Registrable Securities; and
(ii) use its best efforts to effect the registration
and sale of such Registrable Securities, together with all other
Registrable Securities specified in any written request received by the
Company within 20 days after the date of the Notice of Demand Request,
in accordance with the intended method of disposition thereof, and in
accordance with the procedures set forth in Section 6.
Provided, that if a Demand Request is made with respect to Registrable
Securities with anticipated gross offering proceeds of less than $2,000,000, the
Company may at its option repurchase such Registrable Securities at a purchase
price per share equal to the Per Share Market Value (as defined in the Debenture
Purchase Agreement) of the
<PAGE> 54
Company's Common Stock on the trading day immediately preceding the closing date
for the repurchase. The Company shall give written notice of its exercise of the
option within 10 days after receipt of such Demand Request. The notice shall
specify (i) a closing date not more than 30 days after the date of the notice,
and (ii) the place of closing. The repurchase price shall be paid at the closing
to the Initiating Holders, against delivery of certificates representing the
Registrable Securities, by wire transfer of immediately available funds.
1.2 Number of Demand Registrations. The holders of
registration rights under this Agreement shall be entitled to request an
aggregate of three registrations of Registrable Securities pursuant to this
Section 1; and the Company shall pay all Registration Expenses in connection
with each such registration request. The Company shall not be required to effect
more than one registration pursuant to Section 1.1 in any twelve month period. A
registration shall not count towards the maximum of three registration requests
held by the Holder hereunder unless the registration statement for such
requested registration has become effective and an offering closed in which all
Registrable Securities requested to be included in such registration by the
Initiating Holders shall have been sold. Provided, however, that the Company in
any event shall pay all Registration Expenses in connection with any requested
registration whether or not the registration statement becomes effective (unless
the failure to become effective is such as to require the Initiating Holders to
pay all Registration Expenses for such aborted or withdrawn registration
pursuant to Section 4 below, in which case (i) such Initiating Holders shall
reimburse the Company for all such Registration Expenses incurred and paid by
the Company in connection with such registration, and (ii) such withdrawn
request shall not count as a requested registration hereunder). Further
provided, that if (i) the Initiating Holders withdraw from or abort more than
one registration in any consecutive 12-month period, and (ii) the Initiating
Holders are required to pay Registration Expenses pursuant to Section 4 for more
than one such withdrawn or aborted registration, only one such registration
shall not be counted.
1.3 Other Securities and Priority. The registration statement
filed pursuant to the Demand Request may, subject to the prior written consent
of the Initiating Holders, include other securities of the Company, provided
that all Registrable Securities for which the Initiating Holders have requested
registration shall be covered by such registration statement and sold in such
offering before any such other securities are included and sold.
1.4 Limitations. The Company shall not be obligated to effect,
or to take any action to effect, any demand registration:
(i) in any jurisdiction in which the Company would be
required to execute a general consent to service of process, unless the
Company is already subject to service in such jurisdiction and except
as may be required by the Securities Act;
<PAGE> 55
(ii) during the period beginning 45 days prior to
the Company's good faith estimate of the date of filing of, and ending
180 days after the effective date of, a Company-initiated registration,
provided that the Company is actively employing in good faith all
reasonable efforts to cause such registration statement to become
effective; or
(iii) if the Initiating Holders propose to dispose of
shares of Registrable Securities which may be immediately registered on
Form S-3 pursuant to a request made under Section 3 hereof.
1.5 Deferral of Registration. If in the good faith judgment of
the Board of Directors of the Company, the filing of a registration statement as
soon as practicable after receipt of the Demand Request would be materially
detrimental to the Company and the Board of Directors of the Company concludes,
as a result, that it is essential to defer the filing of such registration
statement at such time, in which case the Company shall furnish to the
Initiating Holders a certificate signed by the President of the Company stating
that in the good faith judgment of the Board of Directors of the Company, it
would be materially detrimental to the Company for such registration statement
to be filed in the near future and that it is essential to defer the filing of
such registration statement, then the Company shall have the right to defer such
filing for a period of not more than 120 days after receipt of the Demand
Request of the Initiating Holders, provided that the Company shall not defer its
obligations in this manner for more than an aggregate of 120 days in any
twelve-month period, and provided further that the Initiating Holders shall be
entitled to withdraw the request for registration within 30 days after receipt
of such certificate and, if such request is withdrawn, such registration shall
not count as a requested registration hereunder and the Company shall pay all
Registration Expenses incurred in connection with such withdrawn registration
request.
1.6 Underwriting. The right of any other holders of
Registrable Securities to join in a request for registration shall be
conditioned upon such holders' participation in such registration on the same
terms as the Initiating Holders (unless otherwise agreed by a majority in
interest of the Initiating Holders).
1.7 Inclusion of Other Securities. In any demand registration,
if the Company shall request inclusion of securities to be sold for its own
account, or if other persons entitled to incidental registrations shall request
inclusion in such registration, the Initiating Holders shall offer to include
such securities in the underwriting and may condition such offer on the
acceptance by the Company or such other persons of the provisions of this
Agreement and the underwriting. The Company and all such other persons proposing
to distribute securities through such underwriting shall enter into an
underwriting agreement in customary form with the underwriters selected by a
majority in interest of the Initiating Holders subject to the approval of the
Company, which approval will not be unreasonably withheld.
2. Piggyback Registration.
<PAGE> 56
2.1 Notice and Procedures. If the Company proposes to register
under the Securities Act any of its Common Stock for sale to the public, either
for its own account or for the account of other security holders (other than
holders of Registrable Securities), the Company will:
(i) promptly give written notice thereof to each
holder of Registrable Securities; and
(ii) use its best efforts to include in such
registration and in any underwriting involved therein, all Registrable
Securities specified in any written request from holders of Registrable
Securities received by the Company within 15 days after such notice.
2.2 Limitations. The provisions of this Section 2 shall not
apply to any registration relating solely to employee benefit plans (as defined
under Rule 405 of the Securities Act), or a registration relating solely to
securities issued in connection with an acquisition or merger, or a registration
on any registration form not available for registering the Registrable
Securities for sale to the public or that does not permit secondary sales.
2.3 Underwriting. The right of any holder of Registrable
Securities to participate in a piggyback registration shall be conditioned upon
such holder's agreement to enter into an underwriting agreement in customary
form with the underwriters selected by the Company.
2.4 Underwriters' Cutback. Notwithstanding any other provision
of this Section 2, if the underwriters of any piggyback registration advise the
Company of the need for an Underwriters' Cutback, the underwriters may (subject
to the limitations set forth below) limit the number of Registrable Securities
to be included in the registration and sold. The Company shall advise all
holders of securities requesting registration of the Underwriters' Cutback, and
the number of shares of securities that are entitled to be included in the
registration and underwriting shall be allocated first to the Company for
securities being sold for its own account and thereafter as set forth in Section
9.
2.5 Other Provisions. If holders of Registrable Securities
request participation in a piggyback registration, the provisions of Section 1.4
shall apply to such registration, and if the piggyback registration is for an
underwritten offering, the provisions of Sections 1.6 and 1.7 shall also apply
to such registration. Notwithstanding the foregoing provisions, the Company may
withdraw any registration statement referred to in this Section 2 without
incurring any liability to the holders of the Registrable Securities.
3. Registration on Form S-3. After the Company has qualified for the
use of Form S-3, and for so long as the Company continues to be so qualified, in
addition to the rights contained in the foregoing provisions of this Agreement,
the holders of the
<PAGE> 57
Registrable Securities shall have the right to request registrations on Form S-3
or any comparable or successor form. Each such request shall be in writing and
shall state the anticipated number of shares of Registrable Securities to be
disposed of, the anticipated gross proceeds of the offering, and the intended
methods of disposition of such shares by such holders, including whether sales
are to be made on a delayed or continuous basis pursuant to Rule 415. The
Company shall not be obligated to effect any registration pursuant to this
Section 3 if (i) the holders of Registrable Securities, together with the
holders of any other securities of the Company entitled to inclusion in such
registration, propose to sell Registrable Securities and such other shares of
Common Stock (if any) on Form S-3 at an aggregate price to the public of less
than $500,000, or (ii) the Company will be required to obtain an audit (other
than for its normal year-end audit) for such registration to become effective.
Sections 1.4(ii) and 1.5 shall apply to all requests for registration under this
Section 3. The Company shall only be required to effect two registrations of
Registrable Securities pursuant to this Section 3 in each calendar year,
provided, however, that if the offering is to be effected on a continuous or
delayed basis pursuant to Rule 415 (or any successor rule), and the registration
statement is kept effective for a period in excess of 180 days, then the Company
shall not be required to effect another registration in that calendar year.
4. Expenses of Registration. All Registration Expenses incurred
in connection with any registration, qualification or compliance pursuant to
this Agreement, shall be borne by the Company; provided, however, that a holder
of Registrable Securities shall bear the Registration Expenses for any
registration process begun pursuant to Section 1 and subsequently withdrawn by
such holder, unless such withdrawal is based upon (i) material adverse
information relating to the Company that is different from the information known
or available (upon request from the Company or otherwise) to the Initiating
Holders at the time of the request for registration under Section 1, or (ii)
material adverse changes in the financial markets which result in a decline of
at least 20 percent in the public market price for the Company's Common Stock
from the date of the request to the date of such withdrawal. All Selling
Expenses relating to securities registered pursuant to this Agreement shall be
borne by the holders of such securities pro rata on the basis of the number of
shares of securities so registered on their behalf.
5. Holdback Agreements.
5.1 By Holders. If requested in writing by the Company and the
managing underwriter of an underwritten registered public offering under this
Agreement by the Company of its Common Stock, the holders of Registrable
Securities shall agree not to sell or otherwise transfer or dispose of any
Common Stock of the Company held by such holders (other than those included in
the registration statement) for a period not to exceed 180 days following the
effective date of a registration statement of the Company filed under the
Securities Act, provided that all officers and directors of the Company, all
other holders of the Registrable Securities, and all other holders of rights to
registration of any other security of the Company, if they also register their
shares in such offering, enter into similar agreements identical in terms to
that of the holders of Registrable Securities.
<PAGE> 58
5.2 By Company. In connection with any underwritten
registration, the Company shall not effect any public sale or distribution of
its equity securities, or any securities convertible into or exchangeable or
exercisable for such securities, during the seven days prior to and during the
90-day period after the effective date of any underwritten registration pursuant
to this Agreement.
6. Registration Procedures. In the case of each registration effected
by the Company pursuant to this Agreement, the Company will use its best efforts
to effect the registration and sale of Registrable Securities in accordance with
the intended method of disposition thereof, and pursuant thereto the Company
shall as expeditiously as possible:
(i) prepare and file a registration statement with
respect to such offering of Registrable Securities, and use its best
efforts to cause such registration statement to become effective,
(ii) notify each holder of Registrable Securities of
the effectiveness of each registration statement hereunder and prepare
and file with the Securities and Exchange Commission such amendments
and supplements to such registration statement and the prospectus used
in connection therewith as may be necessary to keep such registration
statement effective for a period of not less than 90 days or until all
Registrable Securities included in the registration have been sold,
whichever occurs first, and comply with the provisions of the
Securities Act with respect to the disposition of all securities
covered by such registration statement during such period in accordance
with the intended methods of disposition the sellers thereof set forth
in such registration statement;
(iii) furnish to each seller of Registrable
Securities such number of copies of such registration statement, each
amendment and supplement thereto, the prospectus included in such
registration statement (including each preliminary prospectus) and such
other documents as such seller may reasonably request in order to
facilitate the disposition of the Registrable Securities owned by such
seller;
(iv) use its best efforts to register or qualify
such Registrable Securities under such other securities or blue sky
laws of such jurisdictions as any seller reasonably requests and do any
and all other acts and things which may be reasonably necessary or
advisable to enable such seller to consummate the disposition in such
jurisdictions of the Registrable Securities owned by such seller;
(v) notify each seller of such Registrable
Securities, at any time when a prospectus relating thereto is required
to be delivered under the Securities Act, of the happening of any event
as a result of which the prospectus included in such registration
statement contains an untrue statement of a material fact or omits
<PAGE> 59
any fact necessary to make there statements therein not misleading,
and, at the request of any such seller, the Company shall prepare a
supplement or amendment to such prospectus so that, as thereafter
delivered to the purchasers of such Registrable Securities, such
prospectus shall not contain an untrue statement of a material fact or
omit to state any fact necessary to make the statements therein not
misleading;
(vi) cause all such Registrable Securities to be
listed on each securities exchange on which similar securities issued
by the Company are then listed and, if not so listed, to be listed on
the NASD automated quotation system and, if listed on the NASD
automated quotation system, use its best efforts to secure designation
of all such Registrable Securities covered by such registration
statement as a NASDAQ "national market system security" within the
meaning of Rule 11a2-1 of the Securities and Exchange Commission or,
failing that, to secure NASDAQ authorization for such Registrable
Securities;
(vii) provide a transfer agent and registrar for all
such Registrable Securities not later than the effective date of such
registrations statement;
(viii) enter into such customary agreements
(including underwriting agreements in customary form) and take all such
other actions as the holders of a majority of the Registrable
Securities being sold or the underwriters, if any, reasonably request
in order to expedite or facilitate the disposition of such Registrable
Securities (including effecting a stock split or combination of
shares);
(ix) make available for inspection by any seller of
Registrable Securities, any underwriter participating in any
disposition pursuant to such registration statement and any attorney,
accountant or other agent retained by any such seller or underwriter,
all financial and other records, pertinent corporate documents and
properties of the Company, and cause the Company's officers, directors,
employees and independent accountants to supply all information
reasonably requested by any such seller, underwriter, attorney,
accountant or agent in connection with such registration statement,
provided that any recipient of such records, documents or information
executes such confidentiality agreement as the Company reasonably
requests;
(x) otherwise use its best efforts to comply with
all applicable rules and regulations of the Securities and Exchange
Commission, and make available to its security holders, as soon as
reasonably practicable, an earnings statement covering the period of at
least twelve months beginning with the first day of the Company's first
full calendar quarter after the effective date of the registration
statement, which earning statement shall satisfy the provisions of
Section 11(a) of the Securities Act and Rule 158 thereunder;
<PAGE> 60
(xi) permit any holder of Registrable Securities
which holder, in its sole and exclusive judgment, might be deemed to be
an underwriter or controlling person of the Company, to participate in
the preparation of such registration or comparable statement and to
require the insertion therein of material, furnished to the Company in
writing, which (i) with respect to matters relating to such holder of
Registrable Securities, should be included in the reasonable judgment
of such holder and its counsel, and (ii) with respect to matters
relating to the Company, should be included in the reasonable judgment
of such holder, subject in the case of clause (ii) to the approval of
the Company and any managing underwriter of the offering (which
approval shall not be unreasonably withheld); and
(xii) use its best efforts to cause such Registrable
Securities covered by such registration statement to be registered with
or approved by such other governmental agencies or authorities as may
be necessary to enable the sellers thereof to consummate the
disposition of such Registrable Securities.
7. Indemnification.
7.1 By Company. The Company shall indemnify each holder of
Registrable Securities, each of its officers, directors, employees, agents, and
Affiliates, and each underwriter, and each of its officers, directors,
employees, agents, and Affiliates, against all expenses, claims, losses,
damages, and liabilities (or actions, proceedings, or settlements in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any prospectus (including any related
registration statement, notification, or the like) incident to any registration
under this Agreement, or based on any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or any violation by the Company of the
Securities Act or any rule or regulation thereunder applicable to the Company
and relating to action or inaction required of the Company in connection with
any such registration, and will reimburse such persons for any legal and any
other expenses reasonably incurred in connection with investigating and
defending or settling any such claim, loss, damage, liability or action;
provided however, that the Company will not be liable in any such case to the
extent that any such claim, loss, damage, liability or expense arises out of or
is based on any untrue statement or omission based upon written information
furnished to the Company by such holder or underwriter and stated to be
specifically for use therein; provided, further, however that the holders of
Registrable Securities shall consent to such indemnity defense being conducted
by counsel to the Company unless in the good faith opinion of counsel to Holder,
Company's counsel will be unable to effectively defend such holders due to a
conflict of interest, in which event, such defense may be conducted by counsel
selected by the holders of a majority of the Registrable Securities provided
that the Company will only be obligated to pay for the fees and expenses owing
to one such counsel. It is agreed that the indemnity agreement contained in this
Section shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability, or action if such settlement is
<PAGE> 61
effected without the prior written consent of the Company (which consent shall
not be unreasonably withheld).
7.2 By Holders. In connection with the registration or sale of
shares of Registrable Securities pursuant to this Agreement, each holder whose
Registrable Securities are included in such registration being effected under
this Agreement, shall indemnify the Company, and each of its directors,
officers, employees, agents, and Affiliates, and each underwriter, and each of
its directors, officers, employees, agents, and Affiliates, against all claims
losses, damages and liabilities (or actions in respect thereof) arising out of
or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any such registration statement or prospectus, or any omission
(or alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and will
reimburse such persons for any legal or any other expenses reasonably incurred
in connection with investigating or defending any such clam, loss, damage,
liability, or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement or prospectus, in reliance upon
and in conformity with written information furnished to the Company by such
holder of the Registrable Securities, and stated to be specifically for use
therein; provided, however, that the obligations of such holder hereunder shall
not apply to amounts paid in settlement of any such claims, losses, damages, or
liabilities if such settlement is effected without the prior written consent of
such holder, which consent shall not be unreasonably withheld; and provided that
in no event shall any indemnity under this Section 7.2 exceed the net amount of
proceeds from the offering received by such holder.
7.3 Procedure. Each party entitled to indemnification under
this Section (the "Indemnified Party") shall give notice to the party or parties
required to provide indemnification (the "Indemnifying Party") promptly after
such Indemnified Party has actual knowledge of any claim as to which indemnity
may be sought, and shall permit the Indemnifying Party to assume the defense of
such claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or any
litigation resulting therefrom, shall be reasonably acceptable to the
Indemnified Party. Failure to give notice as provided herein shall not relieve
the Indemnifying Party of its obligations under this section to the extent such
failure is not prejudicial. No Indemnifying Party, in the defense of any such
claim or litigation, shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement that does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such Indemnified Party of a release from all liability in respect to such
claim or litigation. Each Indemnified Party shall furnish such information
regarding itself or the claim in question as an Indemnifying Party may
reasonably request in writing and as shall be reasonably required in connection
with defense of such claim and litigation resulting therefrom.
7.4 Contribution. If the indemnification provided for in this
Section is held by a court of competent jurisdiction to be unavailable to an
Indemnified Party with
<PAGE> 62
respect to any loss, liability, claim, damage, or expense referred to therein,
then the Indemnifying Party, in lieu of indemnifying such Indemnified Party
hereunder, shall contribute to the amount paid or payable by such Indemnified
Party as a result of such loss, liability, claim, damage, or expense in such
proportion as is appropriate to reflect the relative fault of the Indemnifying
Party on the one hand and of the Indemnified Party on the other in connection
with the statements or omissions that resulted in such loss, liability, claim,
damage, or expense as well as any other relevant equitable considerations. The
relative fault of the Indemnifying Party and of the Indemnified Party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission to state a material fact
relates to information supplied by the Indemnifying Party or by the Indemnified
Party and parties' relative intent, knowledge, access to information, and
opportunity to correct or prevent such statement or omission.
7.5 Conflicting Provisions. Notwithstanding the foregoing, to
the extent that the provisions on indemnification and contribution contained in
any underwriting agreement entered into in connection with a registration are in
conflict with the foregoing provisions, the provisions of the underwriting
agreement shall control.
8. Information by Holder. Each holder of Registrable Securities shall
furnish to the Company in writing such information regarding such holder and the
distribution proposed by such holder as the Company or underwriters may
reasonably request in writing and as shall be reasonably required in connection
with any registration, qualification, or compliance referred to in this
Agreement in order to assure compliance with federal and applicable state
securities laws.
9. Allocation of Registration Opportunities. In any circumstance in
which all of the Registrable Securities and other outstanding shares of Common
Stock of the Company (the "Other Shares") requested and entitled to be included
in a demand registration cannot be so included as a result of limitations on the
aggregate number of shares of Registrable Securities and Other Shares that may
be so included, or in case of an Underwriters' Cutback, the number of shares of
Registrable Securities and Other Shares that may be so included shall be
allocated among the holders of Registrable Securities and other selling
stockholders pro rata on the basis of the number of shares of Registrable
Securities and Other Shares held by such holders and other selling stockholders.
If any holder of Registrable Securities or other selling stockholder does not
request inclusion of the maximum number of shares of Registrable Securities and
Other Shares allocated to him pursuant to this procedure, the remaining portion
of his allocation shall be reallocated among those requesting holders of
Registrable Securities and other selling stockholders whose allocations did not
satisfy their requests pro rata on the basis of the number of shares of
Registrable Securities and Other Shares held by such holders and other selling
stockholders, and this procedure shall be repeated until all of the shares of
Registrable Securities and Other Shares which may be included in the
registration on behalf of the holders of Registrable Securities and other
selling stockholders have been so allocated. Provided, however, the Company
shall not limit the number of Registrable
<PAGE> 63
Securities to be included in a registration pursuant to this Agreement in order
to include shares held by stockholders with no registration rights or to include
in that registration shares of stock issued to employees, officers, directors,
or consultants pursuant to any Company stock option plan, and in such case all
Registrable Securities covered by the registration shall be sold before any such
other securities are sold.
10. Survival of Rights. The right of any holder of Registrable
Securities to request registration or inclusion in any registration pursuant to
this Agreement shall terminate on the earlier of (i) such date as all shares of
Registrable Securities held by Holder shall equal less than 25% of the
outstanding Registrable Securities, or (ii) five years from the date a Demand
Request may first be made under Section 1.1.
11. Definitions. As used herein,
"Debenture Purchase Agreement" means the Debenture Purchase Agreement
between the Company and Sirrom Capital Corporation d/b/a Tandem Capital dated
September 25, 1997.
"Holder" means any person who holds Registrable Securities and any
holder of Registrable Securities to whom the registration rights conferred by
this Agreement have been transferred in compliance herewith.
"Initiating Holders" means holders of the Registrable Securities who in
the aggregate hold not less than 25 percent of the outstanding Registrable
Securities.
"Person" means an individual, corporation, partnership, limited
liability company, joint venture, sole proprietorship, trust or other entity,
business association or organization.
"Register," "registered" and "registration" refers to a registration
effected by preparing and filing a registration statement in compliance with the
Securities Act of 1933 and applicable rules and regulations thereunder, and such
other actions as may be required to cause such registration statement to become
effective or with respect to registration, qualification or compliance under
applicable state securities laws.
"Registration Expenses" means all expenses incurred in effecting any
registration pursuant to this Agreement, including, without limitation, all
registration, qualification, and filing fees, printing expenses, fees and
disbursements of custodians, fees and disbursements of counsel for the Company
and its independent certified public accountants, blue sky fees and expenses,
and reasonable fees and disbursements of one counsel chosen by the holders of a
majority of the Registrable Securities included in such registration, but shall
not include Selling Expenses.
"Registrable Securities" means shares of the Company's Common Stock
issued or issuable (i) upon conversion of the Debentures under the Debenture
Purchase Agreement,
<PAGE> 64
and (ii) as a dividend or other distribution with respect to, or in exchange
for, or in replacement of, the shares referred to in clause (i) or (ii);
provided, however, that shares shall cease to be Registrable Securities if and
when (x) they are sold pursuant to Rule 144 under the Securities Act or a
registration statement under the Securities Act, or (y) such shares are eligible
for resale pursuant to Rule 144 under the Securities Act without regard to any
volume limitations thereunder.
"Rule 144" means Rule 144 as promulgated by the SEC under the
Securities Act, as such Rule may be amended from time to time, or any similar
successor rule that may be promulgated by the SEC.
"Rule 145" means Rule 145 as promulgated by the SEC under the
Securities Act, as such Rule may be amended from time to time, or any similar
successor rule that may be promulgated by the SEC.
"Security" has the same meaning as in Section 2(1) of the Securities of
1933, as amended.
"Selling Expenses" means all underwriting discounts, selling
commissions and stock transfer taxes applicable to the sale of Registrable
Securities, and fees and disbursements of counsel for any stockholder (other
than the fees and disbursements of one counsel for the holders of Registrable
Securities, as selling stockholders, included in Registration Expenses).
"Underwriters' Cutback" means a reduction in the number of shares to be
included in any underwritten offering as the result of receipt of written notice
from the representative(s) of the underwriters to the effect that the number of
shares requested to be included in such registration exceeds the number which,
in the representative's judgment, can be sold in an orderly manner in such
offering within a price range acceptable to either the Company (in a primary
registration) or the majority of the holders initially requesting such
registration (in a secondary registration).
12. Notice of Transfer. The registration rights granted to the Holder
hereunder may be transferred to any transferee of not less than 200,000 shares
(adjusted appropriately for stock splits, stock dividends and the like) of
Registrable Securities; provided, however, that the registration rights of the
Holder may be transferred to a wholly-owned subsidiary of the Holder without
regard to the number of shares transferred. Each such permitted transferee must
agree in a written instrument provided to the Company to be bound hereby and
shall thereupon be deemed to be a "Holder" for purposes hereunder.
[REST OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 65
IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights
Agreement to be executed by their duly authorized officers as of the date first
above written.
DIGITAL TRANSMISSION SYSTEMS, INC.
By: /s/ Andres C. Salazar
---------------------------------
Name: Andres C. Salazar
---------------------------------
Title: President & CEO
---------------------------------
SIRROM CAPITAL CORPORATION
d/b/a TANDEM CAPITAL
By: /s/ Craig Macnab
--------------------------------
Name: Craig Macnab
--------------------------------
Title: President
--------------------------------
<PAGE> 1
EXHIBIT 11.1
DIGITAL TRANSMISSION SYSTEMS, INC.
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS (LOSS)
For the years ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Net Loss (4,190,000) $(2,608,000)
========== ===========
Weighted average outstanding common shares 3,999,005 1,770,085
Increased due to assumed issuance of shares
related to outstanding stock options issued
within one year of initial public offering 0 163,296
Increase due to assumed conversion to common
stock of redeemable convertible preferred
shares outstanding 0 1,294,660
---------- -----------
Adjusted weighted average outstanding common
shares and common share equivalents 3,999,005 3,228,041
========== ===========
Net loss per common share and common
share equivalent $ (1.05) $ (0.81)
========== ===========
</TABLE>
E-?
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF DIGITAL TRANSMISSION FOR THE TWELVE MONTHS ENDED JUNE
30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 712
<SECURITIES> 0
<RECEIVABLES> 4,449
<ALLOWANCES> 226
<INVENTORY> 2,440
<CURRENT-ASSETS> 7,684
<PP&E> 2,974
<DEPRECIATION> 1,788
<TOTAL-ASSETS> 10,311
<CURRENT-LIABILITIES> 5,768
<BONDS> 0
0
0
<COMMON> 41
<OTHER-SE> 4,502
<TOTAL-LIABILITY-AND-EQUITY> 10,311
<SALES> 14,484
<TOTAL-REVENUES> 14,484
<CGS> 9,845
<TOTAL-COSTS> 9,845
<OTHER-EXPENSES> 8,789
<LOSS-PROVISION> 226
<INTEREST-EXPENSE> 68
<INCOME-PRETAX> (4,190)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,190)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,190)
<EPS-PRIMARY> (1.05)
<EPS-DILUTED> (1.05)
</TABLE>
