PROSPECTUS
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC.
$25,000,000 9% Senior Subordinated Convertible Debentures Due 2003
------------------
This Prospectus relates to $25,000,000 aggregate principal amount of
9% Senior Subordinated Convertible Debentures Due 2003 (the "Debentures")
of Diagnostic/Retrieval Systems, Inc. (the "Company"), and the shares of
Common Stock (as defined herein) of the Company which are issuable from
time to time upon conversion of the Debentures. The Debentures or Common
Stock issued upon conversion may be offered from time to time for the
account of holders of the Debentures named herein (the "Selling Security
Holders"). The Debentures were originally issued by the Company on
September 29, 1995 in a private placement (including the over-allotment
option for $5,000,000 aggregate principal amount of the Debentures which
was exercised on November 3, 1995) (the "Debenture Offering"). The Company
will not receive any proceeds from this offering. On March 26, 1996, the
stockholders of the Company approved the reclassification (the
"Reclassification") of each share of the Company's Class A Common Stock,
par value $.01 per share (the "Class A Common Stock"), and each share of
the Company's Class B Common Stock, par value $.01 per share (the "Class B
Common Stock"), into one share of the Company's new single class of common
stock, par value $.01 per share (the "Common Stock"). The Reclassification
became effective on April 1, 1996.
Interest on the Debentures is payable semi-annually on April 1 and
October 1 of each year, commencing April 1, 1996. The Debentures are
convertible at any time prior to maturity, unless previously redeemed or
repurchased, into shares of Common Stock of the Company, at a conversion
price of $8.85 per share, subject to adjustment under certain
circumstances. Prior to this offering there has not been any public market
for the Debentures. The Debentures are eligible for trading in the Private
Offerings, Resale and Trading through Automated Linkages ("PORTAL") Market.
The Debentures and the shares of Common Stock which are issuable upon
conversion of the Debentures are listed on the American Stock Exchange (the
"AMEX"). The Company has been advised by Forum Capital Markets L.P. (the
"Initial Purchaser") that it intends to make a market in the Debentures.
The Initial Purchaser is, however, under no obligation to do so and may
discontinue any such market making activity at any time without notice.
There can be no assurance that a secondary market in the Debentures will
develop or be maintained. The Company's Common Stock is listed on the AMEX
under the symbol "DRS." On February 4, 1997, the last reported sale price
of the Common Stock on the AMEX was $11 1/4 per share.
The Debentures are unsecured and subordinate to all Senior
Indebtedness (as defined herein) and are effectively subordinated to all
obligations of the subsidiaries of the Company. The Indenture (as defined
herein) governing the Debentures provides that the Company will not (i)
issue or incur any Debt (other than Senior Indebtedness or Capitalized
Lease Obligations) unless such Debt is subordinate in right of payment to
the Debentures at least to the same extent that the Debentures are
subordinate to Senior Indebtedness or (ii) permit any of its subsidiaries
to issue or incur any Debt (other than Senior Indebtedness or Capitalized
Lease Obligations) unless such Debt provides that it will be subordinate in
right of payment to distributions and dividends from such subsidiary to the
Company in an amount sufficient to satisfy the Company's obligations under
the Debentures at least to the same extent that the Debentures are
subordinate to Senior Indebtedness. At September 30, 1996, Senior
Indebtedness (excluding current installments) was approximately $2.5
million and the indebtedness (excluding liability for income taxes) of the
Company's subsidiaries was approximately $19.3 million. The Debentures will
mature on October 1, 2003. The Company may not redeem the Debentures prior
to October 1, 1998. On or after such date, the Company may redeem the
Debentures, in whole or in part, at the redemption prices set forth herein
plus accrued but unpaid interest to the date of redemption. Upon a Change
of Control (as defined herein), the Company will offer to repurchase the
Debentures at 100% of the principal amount thereof plus accrued but unpaid
interest to the date of repurchase. In addition, upon a Net Worth
Deficiency (as defined herein), the Company will offer to repurchase up to
10% of the aggregate principal amount of Debentures at 100% of the
principal amount thereof plus accrued but unpaid interest to the date of
repurchase. See "Description of the Debentures."
------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS FOR
INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COM-
MISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
The Company has been advised by the Selling Security Holders that the
Selling Security Holders, acting as principals for their own account,
directly, through agents designated from time to time, or through dealers
or underwriters also to be designated, may sell all or a portion of the
Debentures or shares of Common Stock offered hereby from time to time on
terms to be determined at the time of sale. To the extent required, the
aggregate principal amount of the Debentures or the number of shares of
Common Stock to be sold, the names of the Selling Security Holders, the
purchase price, the name of any such agent, dealer or underwriter and any
applicable commissions with respect to a particular offer will be set forth
in an accompanying Prospectus Supplement or, if appropriate, a
post-effective amendment to the Registration Statement of which this
Prospectus is a part. The aggregate proceeds to the Selling Security
Holders from the sale of Debentures and Common Stock offered by the Selling
Security Holders hereby will be the purchase price of such Debentures or
Common Stock less any commissions. For information concerning
indemnification arrangements between the Company and the Selling Security
Holders, see "Plan of Distribution."
The Selling Security Holders and any broker-dealers, agents or
underwriters that participate with the Selling Security Holders in the
distribution of the Debentures or shares of Common Stock may be deemed to
be "underwriters" within the meaning of the Securities Act of 1933, as
amended (the "Securities Act"), in which event any commissions received by
such broker-dealers, agents or underwriters and any profit on the resale of
the Debentures or shares of Common Stock purchased by them may be deemed to
be underwriting commissions or discounts under the Securities Act.
------------------
The date of this Prospectus is February 24, 1997
AVAILABLE INFORMATION
The Company is subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the
Securities and Exchange Commission (the "SEC") . Such reports and other
information filed by the Company with the SEC in accordance with the
Exchange Act may be inspected, without charge, at the Public Reference
Section of the SEC located at 450 Fifth Street, N.W., Washington, D.C.
20549 and at the regional offices of the SEC located at Seven World Trade
Center, 13th Floor, New York, New York 10048 and at Citicorp Center, 500
West Madison Street, Chicago, Illinois 60661. Copies of all or any portion
of the material may be obtained from the Public Reference Section of the
SEC upon payment of the prescribed fees. Materials can also be inspected at
the offices of the AMEX, 86 Trinity Place, New York, New York 10006, the
exchange on which the Debentures and the Company's Common Stock is listed.
The Company is required, pursuant to the terms of the Indenture under
which the Debentures were issued, to deliver to the Trustee and the holders
of the Debentures, within 15 days after the Company has filed the same with
the SEC, copies of the annual reports and information, documents and other
reports which the Company is required to file with the SEC pursuant to
Section 13 or 15(d) of the Exchange Act.
The Company has filed with the SEC a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act, with respect
to the Debentures and shares of Common Stock offered pursuant to this
Prospectus. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement, certain items of which are contained in the
exhibits and schedules thereto as permitted by the rules and regulations of
the SEC. For further information with respect to the Company, the
Debentures and the Common Stock, reference is made to the Registration
Statement, including the exhibits and schedules filed therewith. Statements
contained in this Prospectus concerning the provisions of certain documents
filed with the Registration Statement are not necessarily complete, each
statement being qualified in all respects by such reference. Copies of all
or any part of the Registration Statement, including exhibits thereto, may
be obtained, upon payment of the prescribed fees, at the offices of the SEC
as set forth above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed by the Company under the
Exchange Act with the SEC and are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1996.
2. The Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996.
3. The Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996.
4. The description of the Common Stock of the Company set forth as
Item 1 under caption "Description of Registrant's Securities to be
Registered" in the Company's Registration Statement on Form 8-A, filed
pursuant to Section 12(b) of the Exchange Act.
All documents filed by the Company subsequent to the date of this
Prospectus pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange
Act and prior to termination of the Registration Statement of which this
Prospectus is a part shall be deemed to be incorporated by reference in
this Prospectus and shall be part hereof from the date of filing of such
document.
Any statement contained herein or in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained in this Prospectus or in any other subsequently filed
document that is also incorporated or deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement
so modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon
their written or oral request, a copy of any or all of the documents
incorporated herein by reference (other than exhibits to such documents,
unless such exhibits are specifically incorporated by reference in such
documents). Written requests for such copies should be addressed to
Patricia Williamson, Corporate Communications, Diagnostic/Retrieval
Systems, Inc., 5 Sylvan Way, Parsippany, New Jersey 07054, telephone number
201-898-1500.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be
read in conjunction with, the more detailed information and financial
statements (including the notes thereto) appearing elsewhere in this
Prospectus. Unless the context otherwise requires, all references herein to
the "Company" include Diagnostic/Retrieval Systems, Inc. and its
consolidated subsidiaries.
THE COMPANY
Diagnostic/Retrieval Systems,Inc. ("DRS" or the "Company") designs,
manufactures and markets high-technology computer workstations for the
United States (the "U.S.") Department of Defense, electro-optical targeting
systems for military customers and image and data storage products for both
military and commercial customers. In response to a 1992 mandate by the
Joint Chiefs of Staff, the Company focuses on "commercial-off-the-shelf"
("COTS") product designs, whereby commercial electronic components are
adapted, upgraded and "ruggedized" for application in harsh military
environments. The Company believes that the nature of modern warfare has
changed, dictating increasing reliance on real-time, accurate battlefield
information derived from increasingly sophisticated defense systems and
electronics. Additionally, the nature of military procurement programs has
changed, requiring suppliers to become more efficient and adaptable to
current and future market needs.
In recent years, the Company has restructured its management team and
implemented strategies to exploit the changing nature of military
procurement programs brought on by the end of the cold war, military budget
constraints and the COTS mandate. The Company's strategies include:
o designing new products and adapting existing products for
use by all branches of the military;
o transferring technologies developed in the defense sector
to commercial and industrial markets; and
o acquiring businesses that will further strengthen and
complement the technology, product and market reach in the
electronic systems, data storage systems and electro-optical
systems segments of the marketplaces targeted by the Company.
To effect these strategies, the Company has (i) acquired several
businesses with complementary military and commercial products and
technologies over the last three years; (ii) forged strategic relationships
with other defense suppliers such as Lockheed-Martin Tactical Defense
Systems (formerly, Loral Corporation) and Northrop-Grumman (formerly
Westinghouse Electric Corporation), among others; (iii) emphasized the
development of COTS-based products as well as products and systems that
are easily adapted to similar weapons platforms for use by all branches of
the military; and (iv) implemented cost reduction programs to reduce its
fixed-cost base, allow for growth and maintain the flexibility of its
operations.
The implementation of these strategies has resulted in increasing
revenues and profits over the last three fiscal years. Although the Company
experienced operating losses in fiscal 1990 through 1992, primarily due to
cost overruns on a single fixed-price development contract, a shift over
the last several years in the nature of military development contracting
from fixed-price to cost-type contracts has reduced the Company's exposure
in this area. For the fiscal year ended March 31, 1996, the Company had
revenues of $101.5 million, net earnings of $4.1 million and fully diluted
earnings per share of $.69, representing increases of 45.2%, 57.6% and
38.0%, respectively, compared with the year ended March 31, 1995. For the
six months ended September 30, 1996 the Company had revenues of $60.9
million, net earnings of $2.5 million and fully diluted earnings per share
of $.38, representing increases of 51.9%, 60.2% and 35.7%, respectively,
compared with the same six-month period ended September 30, 1995.
THE OFFERING
Debentures Offered.................. $25,000,000 principal amount of
Senior Subordinated Convertible
Debentures Due 2003.
Maturity Date....................... October 1, 2003
Interest Payment Dates.............. April 1 and October 1
Interest............................ 9.0% per annum
Conversion.......................... Convertible into Common Stock at
any time prior to maturity,
unless previously redeemed or
repurchased, at a conversion
price of $8.85 per share, subject
to adjustment in certain
circumstances.
Redemption at the Option
of the Company...................... Redeemable at the option of the
Company, in whole or in part at
any time on or after October 1,
1998, upon not less than 30 nor
more than 60 days' notice, at the
redemption prices set forth
herein plus accrued but unpaid
interest to the date of
redemption. See "Description of
the Debentures -- Redemption."
Redemption at the Option
of the Holders...................... Upon a Change of Control (as
defined herein), the Company will
offer to repurchase the
Debentures at 100% of the
principal amount thereof plus
accrued but unpaid interest to
the date of repurchase. See
"Description of the Debentures --
Change of Control."
In the event the Company's
Consolidated Net Worth (as
defined herein) at the end of any
two consecutive fiscal quarters
is below $18.0 million (a "Net
Worth Deficiency"), the Company
will offer to repurchase up to
10% of the aggregate principal
amount of Debentures at 100% of
the principal amount thereof plus
accrued but unpaid interest to
the date of repurchase. See
"Description of the Debentures --
Maintenance of Consolidated Net
Worth."
Ranking............................. The Debentures are subordinated
to all Senior Indebtedness (as
defined herein) and will be
effectively subordinated to all
obligations of the subsidiaries
of the Company. The Indenture (as
defined herein) governing the
Debentures provides that the
Company will not (i) issue or
incur any Debt (other than Senior
Indebtedness or Capitalized Lease
Obligations) unless such Debt
(other than Senior Indebtedness
or Capitalized Lease Obligations)
is subordinate in right of
payment to the Debentures at
least to the same extent that the
Debentures are subordinate to
Senior Indebtedness or (ii)
permit any of its subsidiaries to
issue or incur any Debt (other
than Senior Indebtedness or
Capitalized Lease Obligations)
unless such Debt (other than
Senior Indebtedness or
Capitalized Lease Obligations)
provides that it will be
subordinate in right of payment
to distributions and dividends
from such subsidiary to the
Company in an amount sufficient
to satisfy the Company's
obligations under the Debentures
at least to the same extent that
the Debentures are subordinate to
Senior Indebtedness. At September
30, 1996, Senior Indebtedness
(excluding current installments)
was approximately $2.5 million
and the indebtedness (excluding
liability for income taxes) of
the Company's subsidiaries was
approximately $19.3 million.
See "Description of the
Debentures -- Ranking."
Registration Rights................. Pursuant to a registration rights
agreement (the "Registration
Rights Agreement") between the
Company and the Initial
Purchaser, the Company has agreed
to file a shelf registration
statement (the "Shelf
Registration Statement") relating
to the Debentures and the shares
of Common Stock which are
issuable from time to time upon
conversion of the Debentures. The
Company has agreed to use its
reasonable best efforts to
maintain the effectiveness of the
Shelf Registration Statement
until the third anniversary of
the issuance of the Debentures,
except that it will be permitted
to suspend the use of the Shelf
Registration Statement during
certain periods under certain
circumstances. Upon default by
the Company with respect to
certain of its obligations under
the Registration Rights
Agreement, liquidated damages
will be payable on the Debentures
and Common Stock affected by such
default. See "Description of the
Debentures -- Registration
Rights; Liquidated Damages."
Restrictive Covenants............... The indenture under which the
Debentures were issued (the
"Indenture") limits (i) the
issuance of additional debt by
the Company, (ii) the payment of
dividends on the capital stock of
the Company and investments by
the Company, (iii) certain
transactions with affiliates,
(iv) incurrence of liens, (v)
issuance of preferred stock by
the Company or its subsidiaries,
(vi) stock splits, consolidations
and reclassifications and (vii)
sales of assets and subsidiary
stock. The Indenture also
prohibits certain restrictions on
distributions from
subsidiaries. However, all these
limitations and prohibitions are
subject to a number of important
qualifications. See "Description
of the Debentures -- Certain
Covenants of the Company."
Use of Proceeds..................... The Company will not receive any
proceeds from the sale of the
Debentures or shares of Common
Stock offered pursuant to this
Prospectus. The Selling Security
Holders will receive all of the
net proceeds from any sale of the
Debentures or shares of Common
Stock offered hereby. See "Use of
Proceeds" and "Selling Security
Holders."
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should consider carefully the following factors
before purchasing the Debentures offered hereby.
AMOUNT AND RISKS OF GOVERNMENT BUSINESS
Substantially all the Company's revenues are derived from contracts
or subcontracts with domestic and foreign government agencies of which a
significant portion is attributed to United States Navy (the "U.S. Navy")
procurements. The development and success of the Company's business in the
future will depend upon the continued willingness of the U.S. Government to
commit substantial resources to such U.S. Navy programs and, in particular,
upon continued purchases of the Company's products. See "Business --
Company Organization and Products."
The Company's business with the U.S. Government is subject to various
risks, including termination of contracts at the convenience of the U.S.
Government; termination, reduction or modification of contracts or
subcontracts in the event of changes in the U.S. Government's requirements
or budgetary constraints; shifts in spending priorities; and when the
Company is a subcontractor, the failure or inability of the prime
contractor to perform its prime contract. Certain contract costs and fees
are subject to adjustment as a result of audits by government agencies. In
addition, all defense businesses are subject to risks associated with the
frequent need to bid on programs in advance of design completion (which may
result in unforeseen technological difficulties and/or cost overruns).
Multi-year U.S. Government contracts and related orders are subject
to cancellation if funds for contract performance for any subsequent year
become unavailable. In addition, if certain technical or other program
requirements are not met in the developmental phases of the contract, then
the follow-on production phase may not be realized. Upon termination other
than for a contractor's default, the contractor normally is entitled to
reimbursement for allowable costs, but not necessarily all costs, and to an
allowance for the proportionate share of fees or earnings for the work
completed. Foreign defense contracts generally contain comparable
provisions relating to termination at the convenience of the foreign
government. See "Business -- Contracts."
REDUCED SPENDING IN DEFENSE INDUSTRY
Reductions in U.S. Government expenditures for defense products are
likely to continue during the 1990's. These reductions may or may not have
an effect on the Company's programs; however, in the event expenditures for
products of the type manufactured by the Company are reduced and not offset
by greater foreign sales or other new programs or products, there will be a
reduction in the volume of contracts or subcontracts awarded to the
Company. Unless offset, such reductions would adversely affect the
Company's earnings.
LIMITED TERM OF CONTRACTS
The Company's contracts with the U.S. Government are for varying
fixed terms, and there can be no assurance that a renewal or follow-on
contract will be awarded to the Company by the U.S. Government upon the
expiration of any such contract. Certain of the Company's U.S. Government
contracts account for a substantial portion of the Company's revenues
(i.e., the AN/UYQ-65 production contract). The loss of revenue resulting
from the failure to obtain a renewal or follow-on contract with respect to
any significant contract or a number of lesser contracts, in either case
without the substitution of revenues from the award of new contracts, would
have a material adverse effect upon the Company's results of operations and
financial position. In addition, from time to time the Company enters into
U.S. Government contracts with a full funded backlog but in which the price
per unit may not be determined at the time of award. If the price per unit
which is ultimately determined is significantly less than anticipated by
the Company, the net revenues of the Company would be adversely affected.
HOLDING COMPANY STRUCTURE; SUBORDINATION
The Debentures are a direct obligation of DRS, which derives a
majority of its revenues from the operations of its subsidiaries. The
ability of DRS to make interest payments on or redeem the Debentures and to
pay dividends, if any, on the Common Stock will be primarily dependent upon
the receipt of dividends or other distributions from such subsidiaries. The
payment of dividends from the subsidiaries to the Company and the payment
of any interest on or the repayment of any principal of any loans or
advances made by the Company to any of its subsidiaries may be subject to
statutory or contractual restrictions and are contingent upon the earnings
of such subsidiaries. Although the Company believes that distributions and
dividends from its subsidiaries will be sufficient to pay interest on the
Debentures as well as to meet the Company's other obligations, there can be
no assurance they will be sufficient.
The Debentures are subordinated in right of payment to all existing
and future Senior Indebtedness of the Company, including all indebtedness
under the Company's credit agreements. By reason of such subordination, in
the event of an insolvency, liquidation or other reorganization of the
Company, the Senior Indebtedness must be paid in full before the principal
of, premium if any, and interest on the Debentures may be paid. At
September 30, 1996, Senior Indebtedness (excluding current installments)
was approximately $2.5 million. Because a majority of the Company's
operations are conducted through subsidiaries, claims of the creditors of
such subsidiaries will have priority with respect to the assets and
earnings of such subsidiaries over the claims of the creditors of the
Company, including holders of the Debentures, even though such obligations
do not constitute Senior Indebtedness, except to the extent the Company is
itself recognized as a creditor of such subsidiary or such other creditors
have agreed to subordinate their claims to the payment of the Debentures.
The Company's subsidiaries had indebtedness (excluding liability for income
taxes) of approximately $19.3 million at September 30, 1996.
The Debentures are not secured by any of the assets of the Company or
its subsidiaries. In addition, certain obligations of the Company are
secured by pledges of certain assets of the Company or its subsidiaries.
SUBSTANTIAL INDEBTEDNESS
Following the issuance of the Debentures, the Company continues to
have indebtedness that is substantial in relation to its stockholders'
equity. The Indenture imposes significant operating and financial
restrictions on the Company. Such restrictions will affect, and in many
respects significantly limit or prohibit, among other things, the ability
of the Company to incur additional indebtedness and pay dividends. These
restrictions, in combination with the leveraged nature of the Company,
could limit the ability of the Company to effect future financings or
otherwise may restrict corporate activities. See "Description of the
Debentures." The Indenture permits the Company to incur additional
indebtedness under certain conditions, and the Company expects to obtain
additional indebtedness as so permitted.
The Company's high degree of leverage could have important
consequences to the holders of the Debentures, including the following: (i)
the Company's ability to obtain additional financing for working capital,
capital expenditures, acquisitions, general corporate purposes or other
purposes may be impaired in the future; (ii) a substantial portion of the
Company's cash flow from operations must be dedicated to the payment of
principal and interest on its indebtedness, thereby reducing the funds
available to the Company for other purposes; (iii) the Company's
substantial degree of leverage may hinder its ability to adjust rapidly to
changing market conditions; and (iv) could make it more vulnerable in the
event of a downturn in general economic conditions or its business. See
"Description of the Debentures."
COMPETITION
The military electronics industry is characterized by rapid
technological change. The Company's products are sold in markets containing
many competitors which are substantially larger than the Company, devote
substantially greater resources to research and development and generally
have greater resources. Certain of such competitors are also suppliers to
the Company. In the military sector, the Company competes with many first-
and second-tier defense contractors on the basis of product performance,
cost, overall value, delivery and reputation. The Company's future success
will depend in large part upon its ability to improve existing product
lines and to develop new products and technologies in the same or related
fields. The introduction by competitors of new products with greater
capabilities could adversely affect the Company's business.
RELIANCE ON SUPPLIERS
The Company's manufacturing process for its products, excluding
electro-optical products, consists primarily of the assembly of purchased
components and testing of the product at various stages in the assembly
process.
Although materials and purchased components generally are available
from a number of different suppliers, several suppliers are the Company's
sole source of certain components. If a supplier should cease to deliver
such components, other sources probably would be available; however, added
cost and manufacturing delays might result. The Company has not experienced
significant production delays attributable to supply shortages, but
occasionally experiences procurement problems with respect to certain
components, such as semiconductors and connectors. In addition, with
respect to the Company's electro-optical products, certain exotic
materials, such as germanium, zinc sulfide and cobalt, may not always be
readily available.
ATTRACTING AND RETAINING TECHNICAL PERSONNEL
There is a continuing demand for qualified technical personnel, and
the Company believes that its future growth and success will depend upon
its ability to attract, train and retain such personnel. An inability to
maintain a sufficient number of trained personnel could have a material
adverse effect on the Company's contract performance or on its ability to
capitalize on market opportunities.
FUNDING OF REPURCHASE OBLIGATIONS; ABSENCE OF SINKING FUND
There is no sinking fund with respect to the Debentures, and at
maturity the entire outstanding principal amount thereof will become due
and payable by the Company. Also, upon the occurrence of certain events the
Company will be required to offer to repurchase all or a portion of the
outstanding Debentures. The source of funds for any such payment at
maturity or earlier repurchase will be the Company's available cash or cash
generated from operating or other sources, including, without limitation,
borrowings or sales of assets or equity securities of the Company. There
can be no assurance that sufficient funds will be available at the time of
any such event to pay such principal or to make any required repurchase.
See "Description of the Debentures."
SHARES ELIGIBLE FOR FUTURE SALE
The sale, or availability for sale, of substantial amounts of Common
Stock in the public market could adversely affect the prevailing market
price of the Debentures and the Common Stock into which the Debentures are
convertible and could impair the Company's ability to raise additional
capital through the sale of its securities. The Debentures offered hereby
are convertible at any time prior to maturity, unless previously redeemed
or repurchased, into shares of Common Stock, at a conversion price of $8.85
per share, subject to adjustment under certain circumstances. As of
February 4, 1997, there was an aggregate of 5,584,093 shares of Common
Stock outstanding (excluding 420,893 shares held in treasury). Of such
shares, 1,038,403 are "restricted" under the Securities Act and are
resalable pursuant to the limitations of Rule 144 under the Securities Act.
After giving effect to the application of $5.0 million in net proceeds
acquired by the Company pursuant to the Debenture Offering to repurchase
approximately $5.0 million in principal amount of the Company's 8-1/2%
Convertible Subordinated Debentures due August 1, 1998 (the "1998
Debentures"), the remaining outstanding 1998 Debentures will be convertible
into an additional 332,800 shares of Common Stock at $15 per share.
LACK OF PUBLIC MARKET; RESTRICTIONS ON RESALE
At present, the Debentures are owned by a small number of
institutional investors, and prior to this offering there has not been any
public market for the Debentures. The Debentures and the shares of Common
Stock which are issuable upon conversion of the Debentures are listed on
the AMEX. The Debentures are eligible for trading in the PORTAL Market of
the National Association of Securities Dealers, Inc. There can be no
assurance regarding the future development of a market for the Debentures
or the ability of holders of the Debentures to sell their Debentures or the
price at which such holders may be able to sell their Debentures. If such a
market were to develop, the Debentures could trade at prices that may be
higher or lower than the initial offering price depending on many factors,
including prevailing interest rates, the Company's operating results and
the market for similar securities. The Initial Purchaser has advised the
Company that it currently intends to make a market in the Debentures. The
Initial Purchaser is not obligated to do so, however, and any market-making
with respect to the Debentures may be discontinued at any time without
notice. Therefore, there can be no assurance as to the liquidity of any
trading market for the Debentures or that an active public market for the
Debentures will develop.
The Common Stock of the Company is listed on the AMEX. The market for
the Common Stock has historically been characterized by limited trading
volume and a limited number of holders. There can be no assurance that a
more active trading market for the Common Stock will develop.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the
Debentures or shares of Common Stock offered pursuant to this Prospectus.
The Selling Security Holders will receive all of the net proceeds from any
sale of the Debentures or shares of Common Stock offered hereby.
BUSINESS
GENERAL
The Company was incorporated in Delaware in June 1968. The Company's
executive offices are located at 5 Sylvan Way, Parsippany, New Jersey,
07054, and its telephone number is (201) 898-1500.
The Company is organized into three operating groups: Electronic
Systems Group ("ESG," 47.2% of fiscal 1996 revenues), Electro-Optical
Systems Group ("EOSG," 21.8% of fiscal 1996 revenues) and Media Technology
Group ("MTG,"31.0% of fiscal 1996 revenues). See "Business -- Company
Organization and Products."
The Company designs, manufactures and markets high-technology
computer workstations for the U.S. Department of Defense, electro-optical
targeting systems for military customers and image and data storage
products for both military and commercial customers. In response to a 1992
mandate by the Joint Chiefs of Staff, the Company focuses on
"commercial-off-the-shelf" ("COTS") product designs, whereby commercial
electronic components are adapted, upgraded and "ruggedized" for
application in harsh military environments. The Company believes that the
nature of modern warfare has changed, dictating increasing reliance on
real-time, accurate battlefield information derived from increasingly
sophisticated defense systems and electronics. Additionally, the nature of
military procurement programs has changed, requiring suppliers to become
more efficient and adaptable to current and future market needs.
Using COTS designs, the Company develops and delivers its products
with significantly less development time and expense compared to
traditional military product cycles, generally resulting in shorter lead
times, lower costs and the employment of the latest information and
computing technologies. The COTS process entails the purchasing, refitting,
upgrading (of both hardware and software) and "ruggedization" (repackaging,
remounting and stress testing to withstand harsh military environments) of
readily available commercial components. The design and manufacture of
COTS-based products is a complex process requiring specific engineering
capabilities, extensive knowledge of military platforms to which the
equipment will be applied and in-depth understanding of military operating
environments and requirements.
Strategy
In recent years, the Company has restructured its management team and
implemented strategies to exploit the changing nature of military
procurement programs brought on by the end of the cold war, military budget
constraints and the COTS mandate. The Company's strategies include:
o designing new products and adapting existing products for
use by all branches of the military;
o transferring technologies developed in the defense sector
to commercial and industrial markets; and
o acquiring businesses that will further strengthen and
complement the technology, product and market reach in the
electronic systems, data storage systems and electro-optical
systems segments of the marketplaces targeted by the Company.
To effect these strategies, the Company has (i) acquired several
businesses with complementary military and commercial products and
technologies over the last three years; (ii) forged strategic relationships
with other defense suppliers such as Lockheed-Martin Tactical Defense
Systems (formerly, Loral Corporation) and Northrop-Grumman (formerly,
Westinghouse Electric Corporation), among others; (iii) emphasized the
development of COTS-based products as well as products and systems that are
easily adapted to similar weapons platforms for use by all branches of the
military; and (iv) implemented cost reduction programs to reduce its
fixed-cost base, allow for growth and maintain the flexibility of its
operations.
The implementation of these strategies has resulted in increasing
revenues and profits over the last three fiscal years. Although the Company
experienced operating losses in fiscal 1990 through 1992, primarily due to
cost overruns on a single fixed-price development contract, a shift over
the last several years in the nature of military development contracting
from fixed-price to cost-type contracts has reduced the Company's exposure
in this area. For the fiscal year ended March 31, 1996, the Company had
revenues of $101.5 million, net earnings of $4.1 million and fully diluted
earnings per share of $.69, representing increases of 45.2, 57.6% and
38.0%, respectively, compared with the year ended March 31, 1995. For the
six months ended September 30, 1996, the Company had revenues of $60.9
million, net earnings of $2.5 million and fully diluted earnings per share
of $.38, representing increases of 51.9%, 60.2% and 35.7%, respectively,
compared with the same six-month period ended September 30, 1995.
Acquisitions. In October 1993 the Company acquired Technology
Applications & Service Company ("TAS"), a designer and supplier of advanced
command and control software and hardware. TAS' business, which focuses
primarily on radar displays, augments the Company's core expertise in sonar
signal processing, allowing the Company to offer complete command and
control system solutions to its naval customers. In December 1993, the
Company purchased its 80% interest in Laurel Technologies ("Laurel"), then
primarily an assembler of wire harness products for aerospace customers.
The addition of Laurel has provided the Company with the opportunity to
consolidate manufacturing operations at ESG and enables the Company to
solicit and bid effectively for long-term system development and
manufacturing contracts.
The Company acquired CMC Technology ("CMC") in December 1993 and
Ahead Technology Corporation ("Ahead") in November 1994. These acquisitions
provide the Company with an established computer and recorder products
commercial base, provide advanced manufacturing capabilities in the area of
magnetic recorder heads and allow the Company to apply its expertise in
high technology recorder products to select commercial markets. In July
1995, the Company acquired substantially all of the assets of Opto
Mechanik, Inc., which now constitute OMI Corp. ("OMI"). This acquisition
enables EOSG to expand its electro-optical targeting products and
manufacturing activities in a lower cost manufacturing facility while
adding backlog in complementary product areas.
In February 1996, the Company acquired substantially all of the
assets of Mag-Head Engineering Company, Inc. ("MEC"), a manufacturer of
audio and flight recorder heads. This acquisition provides the Company with
an established manufacturing capability in the area of magnetic recorder
heads and, when coupled with CMC and Ahead, allows the Company to apply its
expertise in high-technology recorder head products in select commercial
markets.
In June 1996, the Company acquired substantially all of the assets of
Vikron, Inc. ("Vikron") through a subsidiary of the Company. Located in St.
Croix Falls, Wisconsin, Vikron is a leading manufacturer of magnetic data
and recording heads that write and retrieve data from various magnetic
media, such as magnetic cards, tapes and ink. It also produces audio heads
for cassette tape duplication, heads for airline ticketing card readers,
automated teller machines and security access monitors, broadcast heads for
radio stations, digital data tape heads for computer hard disk back-up and
other archival applications. Vikron complements the Company's existing
capabilities in the defense and commercial magnetic recording systems
market.
In October 1996, the Company acquired certain assets of Nortronics
Company, Inc. ("Nortronics") through a subsidiary of DRS. Located near
Minneapolis, Minnesota, Nortronics is a manufacturer of magnetic data
recording heads that write and retrieve data from various data storage
media, such as cards with magnetic strips and magnetic tapes and ink. Its
products include specialty heads for magnetic strip card readers used in
airline ticketing, automated teller machines, security access systems, fare
and toll collection, credit cards, airplane phones, vending machines and
currency validation devices. Nortronics also produces tape heads utilized
in cockpit flight data recorders, broadcast audio heads, cassette
duplication equipment, medical monitors used in cardiology and in computer
hard disk back-up applications. Nortronics is a strategic component in the
growth the Company seeks in the specialty magnetic tape head business area.
Pacific Technologies, Inc. ("PTI") was also acquired in October 1996,
through a merger with and into a subsidiary of the Company. Located in San
Diego, California, PTI provides software, engineering and systems support
to the U.S. Navy for the testing of shipboard combat systems. For over 10
years, PTI has developed a wide range of simulation software for the
acceptance and validation testing of planned upgrades for combat systems on
board the Navy's surface ships.
In furtherance of its strategic plan, in February 1996, the Company
acquired a 90% interest in DRS Medical Systems, a partnership formed to
develop, manufacture and market medical ultrasound and sonographic imaging
equipment. The DRS Medical Systems partnership provides a means for the
Company to apply its expertise in sonar and image processing technology to
related commercial applications.
Strategic Relationships. The Company has established relationships
with other defense suppliers such as Lockheed-Martin Tactical Defense
Systems (formerly, Loral Corporation) and Northrop-Grumman (formerly,
Westinghouse Electric Corporation), among others. The Company acts as a
subcontractor to these major contractors and may also engage in other
development work with such contractors. This enables the Company to
diversify its program base and increase its opportunities to participate in
larger military procurement programs.
Adaptable Product Designs. The Company's recent focus has been on the
design and development of products that can be used by all branches of the
military. This enables the Company to increase revenues, reduce product
costs and decrease reliance on U.S. Navy procurement programs. The
Company's display systems, originally designed under a U.S. Navy
development contract, are open architecture information processing
workstations that can be applied for use in other branches of the military.
Similarly, the Company's boresight products, originally designed for use
with the U.S. Army's Apache attack helicopter, were specifically designed
to be adaptable to other air, sea or land-based weapons platforms. The
boresight system has been successfully applied to the U.S. Marine Corps'
Cobra helicopter and to the U.S. Air Force's AC-130 Spectre gunship
platforms; recently, proposals have been submitted for its use on F-15
fixed-wing platforms.
Cost Reduction Programs. The Company continues to focus on
streamlining its operations and, during fiscal 1996, the Company
consolidated several of its manufacturing facilities.
COMMERCIAL-OFF-THE-SHELF (COTS) PRODUCT DESIGNS
The concept of designing and manufacturing military products and
systems through the integration and adaptation of existing commercial and
military products was developed in response to both decreasing military
budgets and the increasing pace of technology. The use of COTS designs
entails the purchasing, refitting, upgrading and "ruggedization"
(repackaging, remounting and stress testing to withstand harsh military
environments) of available commercial components. The Company strives to
apply COTS designs to most of its new products. Management believes that
the adaptation of available commercial components to existing as well as to
new military systems and applications offers two primary advantages over
traditional military systems development and procurement cycles: (i) it has
the potential to save significant amounts of time and expenditures in the
area of research and development and (ii) as commercial product development
and production cycles become shorter than their military equivalents, the
adaptation of commercial technology to battlefield systems has the
potential to shorten military product cycles. As a result of some of these
advantages, the use of COTS computer hardware and software that can be
integrated in common (open architecture) applications and systems was
mandated by the Joint Chiefs of Staff in 1992.
MARKET OVERVIEW
The Company believes that the market for military electronics and
related equipment will be influenced by two primary factors:
First, the nature of modern warfare dictates increasing reliance on
timely and accurate battlefield information to ensure that increasingly
costly assets are efficiently deployed and to minimize destruction of
non-military targets. In general, military engagements have evolved from
large-scale undertakings, where numerical superiority was the key to
dominance, to "surgical strikes" where the ability to observe and strike
accurately and at will from afar has become a major means of both
deterrence and loss minimization. Advanced technology has been a major
factor enabling the increasing precision strike capability of the U.S.
military and has increased the "per shot" cost of arms. These factors
combine to produce a military, economic and political environment requiring
increased weapons efficiency and accuracy. In addition, real time data is
needed for in-theatre evaluation, damage assessment and training, as well
as to reduce and minimize incidents of U.S. casualties due to friendly
fire.
Second, it is often more cost-effective to refit and upgrade existing
weapons platforms than to replace them. With the development and unit costs
of new platforms increasing rapidly amid a political and economic
environment demanding decreasing overall military expenditures, Congress
and the military have delayed or canceled the implementation of many
proposed weapons systems, opting instead to improve the performance, and
extend the life, of existing weapons through improved battlefield
intelligence and equipment enhancements. This increasing focus on cost
efficiencies has manifested itself in the military's COTS program.
INDUSTRY CONSOLIDATION
As the size of the overall defense industry has decreased in recent
years, there has been an increase in the number of consolidations and
mergers of defense suppliers and this trend is expected to continue. As the
industry consolidates, the large (first-tier) defense contractors are
narrowing their supplier base and awarding increasing portions of projects
to strategic second-and third-tier suppliers, and in the process becoming
oriented more toward system integration and assembly.
As an example of the changing nature of supplier relationships,
Photronics Corp. has been awarded increasing content in the infrared
detector assemblies of several missile systems by its prime contractors. In
1988, Photronics Corp. supplied only the primary mirror for these systems.
Photronics Corp. now supplies the primary, secondary, tertiary and fold
mirrors, as well as the housing and nose domes for the missiles, and is
working directly with these prime contractors on the electro-optical
assemblies for the next generation missiles.
COMPANY ORGANIZATION AND PRODUCTS
The Company is organized into three operating groups: Electronic
Systems Group ("ESG," 47.2% of fiscal 1996 revenues), Electro-Optical
Systems Group ("EOSG," 21.8% of fiscal 1996 revenues) and Media Technology
Group ("MTG," 31.0% of fiscal 1996 revenues).
ELECTRONIC SYSTEMS GROUP ("ESG")
ESG consists of DRS Military Systems ("Military Systems"), located in
Oakland, New Jersey, TAS, located in Gaithersburg, Maryland, Laurel,
located in Johnstown, Pennsylvania, DRS Medical Systems, located in Mahwah,
New Jersey, and PTI, located in San Diego, California. Also, under the
direction of TAS is Technical Services Division ("TSD"), located in
Norfolk, Virginia and San Diego, California.
Military Systems designs, manufactures and markets signal processors
and display workstations which are installed on naval ships for
antisubmarine warfare (ASW) purposes and in land-based surveillance systems
used for underwater surveillance of harbors and coastal locations. These
workstations receive signals from a variety of sonar-type sensors,
processing the information and arranging it in a display format enabling
operators to quickly interpret the data and inform command personnel of
potential threats. Major product lines and contracts include:
o AN/UYQ-65: The AN/UYQ-65 is the first COTS-based tactical
workstation to be qualified by the U.S. Navy and was designed
to comply with the stringent requirements of the Aegis (DDG-51)
shipbuilding program. Replacing the sensor displays in the
SQQ-89 ASW Combat Suite, it employs dual processors enabling
simultaneous I/O and graphics processing. This new approach
allows for required high bandwidth processing while maintaining
response times for operator/machine interfaces. The system
architecture can be adapted to meet various interface, cooling,
memory, storage and processing requirements. See "Risk Factors
-- Limited Term of Contracts."
o AN/SQR-17A(V)3: These Mobile In-Shore Undersea Warfare (MIUW)
systems are deployed in land-based vans, utilizing sonobuoys
and anchored passive detectors for harbor defense, coastal
defense and amphibious operations surveillance, as well as to
enhance drug interdiction efforts. This system is currently
being procured for utilization in 22 field installations.
Military Systems is under contract to provide various upgrades
to these field installations.
o AN/SQQ-TIA: These are portable training systems used onboard
MIUW vans to simulate actual sonar signal processing sets
currently used by the U.S. Navy and are employed primarily for
Navy Reserve training.
o Airborne Separation Video Systems ("ASVS"): In fiscal 1996,
Military Systems was selected as the prime contractor on the
tri-service (Army, Navy and Air Force) program to develop ASVS
for the test and evaluation of weapons separation events on
board various fixed-and rotary-wing military aircraft. The
systems include an electronically-shuttered, fast-frame,
high-resolution, digital imaging camera and a high-density,
digital data storage device. Military Systems is also
incorporating a color readiness capability and is miniaturizing
the system's high-speed, electronic camera to assure
compatibility with air platforms, such as the Air Force's F-16.
TAS produces tactical (e.g., combat/attack) information systems and
training systems. Major product lines and contracts include:
o AN/UYQ-70: The AN/UYQ-70 is an advanced, open architecture
display system designed for widespread application through
software modification, and is to be deployed on Aegis and other
surface ships, submarines and airborne platforms. This system
was developed for the U.S. Navy under subcontract with the
Government Systems Group of Loral (Unisys) Corporation
(currently, Lockheed-Martin Tactical Defense Systems). The
AN/UYQ-70 is a self-contained, microprocessor-based unit
complete with mainframe interface software offering advanced
computing and graphic capabilities. These units replace
previous generation units that are dependent upon a shipboard
mainframe computer at approximately 25% of the cost of the
older units. This project is currently in the production phase.
Based upon the size of the naval surface fleet and the average
number of workstations to be deployed on each ship, the Company
believes that the potential market for this workstation product
may be in excess of 5,000 units over the next decade.
o Military Display Emulators: These are workstations that are
functionally identical to existing U.S. Navy shipboard display
consoles built to military specifications, but are manufactured
using low cost COTS components suitable for land-based
laboratory environments. These Military Display Emulators are
used in U.S. Navy development, test and training sites as plug
compatible replacements for the more expensive shipboard
qualified units. The Company is currently delivering these
Military Display Emulators for use in the Aegis and other U.S.
Navy programs.
Laurel, which is 80% owned by DRS through a partnership with Laurel
Technologies, Inc., and was purchased in December 1993, functions as a cost
efficient manufacturing facility and focuses on two areas. First, Laurel
provides manufacturing and product integration services for Military
Systems, TAS and Photronics Corp., a New York corporation and wholly owned
subsidiary of DRS ("Photronics Corp."). ESG's workstation and simulator
systems, among other products, are manufactured in this facility. In
addition, in fiscal 1996, Laurel was awarded a subcontract to manufacture
AN/UYQ-70 workstations for Lockheed-Martin Tactical Defense Systems.
Second, Laurel manufactures complex cable and wire harness assemblies for
large industrial customers that are involved in the military and commercial
aerospace industry. These products are then installed by the customers in a
wide variety of rotary blade and fixed-wing aerial platforms.
DRS Medical Systems is 90% owned by the Company through a partnership
with Universal Sonics Corporation and was formed to develop, manufacture
and market high-quality, low-cost medical ultrasound equipment. DRS Medical
Systems currently manufactures ultrasound and sonographic systems
principally for original equipment manufacturers.
TSD performs field service and depot level repairs for ESG products,
as well as other manufacturers' systems. Principal locations are in close
proximity to U.S. Naval yards in Norfolk, Virginia and San Diego,
California. Services including equipment and field change installation,
configuration audit, repair, testing and maintenance, are performed for the
U.S. Navy and, to a lesser extent, commercial customers. TSD has also
performed work for foreign navies including those of Australia, the
Republic of China, Egypt, Turkey and Greece.
PTI provides software, engineering and systems support to the U.S.
Navy for the testing of shipboard combat systems. PTI has also developed a
wide range of simulation software used in acceptance and validation testing
of planned upgrades for combat systems on board the Navy's surface ships.
MEDIA TECHNOLOGY GROUP ("MTG")
MTG consists of Precision Echo, Inc. ("PE") located in Santa Clara,
California, Ahead and CMC located in San Jose, California, MEC, located in
Golden Valley, Minnesota, Vikron, located in St. Croix Falls, Wisconsin,
and Nortronics, located in Dassel, Minnesota. PE manufactures a variety of
digital and analog recording systems utilized for military applications
including reconnaissance, ASW and other information warfare data storage
requirements, and is a predominant U.S. manufacturer of 8 millimeter
military recorders supplied to the U.S. armed forces. PE's products
include:
o AN/USH-42: This system was originally developed for deployment
in the U.S. Navy's A-6E attack aircraft. PE is currently under
contract to modify the USH-42 for use on the Navy's S-3B ASW
aircraft to record radar, infrared, bus, navigation and voice
data. These recorders provide a high-resolution video record of
mission data, operators' displays and external imagery.
o WRR-818: This ruggedized video recorder has been selected for
use in U.S. F/A-18 aircraft and several foreign military
aircraft. It has also been selected by the U.S. Army for use in
its Kiowa warrior reconnaissance helicopters. A similar
recorder, the WRR-812, has been adapted for use in the Canadian
Army's light armored reconnaissance vehicles.
o AN/AQH-9 and AN/AQH-12: These products are high quality
helicopter mission recording systems utilized to record sonar
and mine hunting information and other intelligence data.
Ahead manufactures burnish, glide and test heads used in the
production of computer disk drives. These consumable products are used by
many U.S. disk drive manufacturers to hone the surface and ensure the
quality of magnetic disks used in computer hard drives. Customers include
most major computer disk drive manufacturers.
CMC manufactures and refurbishes commercial video recording products
for broadcasters operating worldwide. CMC can refurbish pre-1993 head
assemblies located on these machines at a significant cost savings compared
to replacement. CMC is developing, in conjunction with Ahead, the ability
to refurbish post-1993 recorders used by its customer base. Ahead also has
the capability to manufacture recording heads for CMC. In order to foster
operational synergies and to allow space for growth, Ahead and CMC moved
into a new joint facility in fiscal 1996.
MEC designs, manufactures and refurbishes magnetic broadcast audio
heads, magnetic flight recorder heads and magnetic strip card readers for
the U.S. Government, defense and commercial markets.
Vikron manufacturers magnetic data and recording heads that write and
retrieve data from various magnetic media, such as magnetic cards, tapes
and ink. It also produces audio heads for cassette duplication, heads for
airline ticketing card readers, automated teller machines and security
access monitors, broadcast heads for radio stations, digital tape heads for
computer hard disk back-up and other archival applications. Products are
sold in the defense and commercial magnetic recording systems market.
Nortronics is a manufacturer of magnetic data recording heads that
write and retrieve data from various data storage media, such as cards with
magnetic strips and magnetic tapes and ink. Its products include specialty
heads for magnetic strip card readers used in airline ticketing, automated
teller machines, security access systems, fare and toll collection, credit
cards, airplane phones, vending machines and currency validation devices.
Nortronics also produces tape heads utilized in cockpit flight data
recorders, broadcast audio heads, cassette tape duplication equipment,
medical monitors used in cardiology and in computer hard disk back-up
applications.
ELECTRO-OPTICAL SYSTEMS GROUP ("EOSG")
EOSG consists of Photronics Corp. located in Hauppauge, New York and
OMI located in Palm Bay, Florida.
Photronics Corp. produces boresighting equipment used to align and
harmonize the navigation, targeting and weapons systems on rotary-and
fixed-wing aircraft and armored vehicles. Multiple Platform Boresighting
Equipment ("MPBE") is Photronics Corp.'s main product line. These products
can be used on both rotary-and fixed-wing aircraft, as well as on armored
vehicles. MPBE currently is used on the Army's Apache helicopters and
Apache Longbow helicopters, the Marine Corps' Cobra helicopters and on the
Air Force's AC-130 Spectre gunship, the Company's first award for this
equipment involving fixed-wing aircraft. Proposals have been submitted to
employ the system on the F-15 fighter. This technology is proprietary to
the Company.
Until the latter part of fiscal 1996, Photronics Corp. also produced
electro-optical components used in Sidewinder, Stinger and new generation
air-to-air and surface-to-air missiles in its Hauppauge facility. In order
to reduce its production costs, Photronics Corp. consolidated its missile
component manufacturing operations to OMI's new facility in Palm Bay,
Florida. In addition, the move created space for the expansion of
Photronics Corp.'s MPBE programs in Hauppauge.
OMI designs and manufactures electro-optical targeting and sighting
systems and missile components. Major product programs at OMI include:
o Night Vision Binoculars: OMI is currently under contract to
develop and manufacture 1,182 units for the Israeli military.
The Night Vision Binocular is a hand-held viewing binocular
that incorporates an image intensifier tube, laser rangefinder
and digital compass in a compact lightweight system suited for
infantry units, special forces and night operations involving
forward observers and reconnaissance patrols. The Night Vision
Binocular displays range and asimuth data in soldier's
eyepieces, allowing identification of targets and providing
essential fire support data for nighttime engagement. These
units have a range of 20 to 2,000 meters.
o Gunners Auxiliary Sight: This is an electro-optical device used
as a primary or backup sight on M1 Abrams battle tanks and
contains a very sophisticated electro-optical train and a laser
protective filter. OMI has produced over 2,000 of these
instruments and continues to operate as a repair and retrofit
facility for the M1A2 upgrade program, which will continue
through 1997, with options through 1999.
o TOW Optical Sight: OMI is currently the only U.S. qualified
producer of this device. This complex electro-optical system is
the main component of the U.S.'s premier antitank weapon
system.
o TOW Traversing Unit: This unit provides target tracking
accuracy for the TOW antitank weapon, acting as the mount for
the TOW Optical Sight and the missile launch tube. OMI is
currently the only qualified manufacturer of this tightly
toleranced assembly, and is currently working on modification
and retrofit programs. OMI has also been contracted to modify a
version for use by an overseas customer.
o Improved TOW Acquisition System: Working with the primary
contractor for the TOW sighting system, this antitank system
was developed for the U.S. Army's HMVE vehicle.
o Day/Night Tank Sighting System: This system was developed in
concert with a major primary contractor. OMI is a major
subcontractor, currently supplying three of the major
assemblies.
o Eyesafe Laser Rangefinder: OMI competed against the U.S. Army's
historical primary laser supplier for this contract and was
awarded an initial contract for preproduction units.
o Missile Components: The components originally consisted of
primary mirrors used in the nose mounted infrared seeker of
Sidewinder and Stinger missiles. Development efforts have
resulted in the ability to provide increased content to include
the secondary, tertiary and fold mirrors, housing and nose
dome. The Company is currently under contract to produce
infrared components and subassemblies on many of the
next-generation infrared missile systems.
CUSTOMERS
A significant portion of the Company's products are sold to agencies
of the U.S. Government, primarily the Department of Defense, to foreign
government agencies or to prime contractors or subcontractors thereof.
Approximately 78%, 84% and 94% of total consolidated revenues for fiscal
1996, 1995 and 1994, respectively, were derived directly or indirectly from
defense contracts for end use by the U.S. Government and its agencies. See
"Export Sales" below for information concerning sales to foreign
governments.
BACKLOG
The following table sets forth the Company's backlog by major product
group (including enhancements, modifications and related logistics support)
at the dates indicated:
March 31, March 31, March 31,
1996 1995 1994
------------ ------------- ------------
Government Products:
U.S. Government..... $120,000,000 $115,200,000 $123,700,000
Foreign Government.. 21,200,000 8,600,000 5,800,000
-------------- ------------- -------------
141,200,000 123,800,000 129,500,000
Commercial Products..... 4,400,000 2,200,000 5,100,000
-------------- ------------ ------------
$145,600,000 $126,000,000 $134,600,000
============ ============ ============
Approximately 60% of the backlog at March 31, 1996 is expected to
result in revenues during the fiscal year ending March 31, 1997.
At March 31, 1996, the Company's backlog of orders was approximately
$145.6 million compared to $126.0 million at March 31, 1995. The increase
in backlog for the fiscal year was due to the net effect of bookings,
partially offset by revenues, and the addition of approximately $17 million
of backlog from the OMI asset acquisition. New contract awards of
approximately $104.3 million were booked during the fiscal year ended March
31, 1996.
"Backlog" refers to the aggregate revenues remaining to be earned at
the specified date under contracts held by the Company, including, for U.S.
Government contracts, the extent of the funded amounts thereunder which
have been appropriated by Congress and allotted to the contract by the
procuring Government agency. Fluctuations in backlog amounts relate
principally to the timing and amount of Government contract awards.
RESEARCH AND DEVELOPMENT
The military electronics industry is subject to rapid technological
changes and the Company's future success will depend in large part upon its
ability to improve existing product lines and to develop new products and
technologies in the same or related fields. Thus, the Company's
technological expertise has been an important factor in its growth. A
portion of its research and development activities has taken place in
connection with customer-sponsored research and development contracts. All
such customer-sponsored activities are the result of contracts directly or
indirectly with the U.S. Government. The Company also invests in
Company-sponsored research and development. Such expenditures were
$600,000, $800,000 and $500,000 for fiscal 1996, 1995 and 1994,
respectively. Revenues recorded by the Company for customer-sponsored
research and development were $12,100,000, $18,800,000 and $27,500,000 for
fiscal 1996, 1995 and 1994, respectively.
CONTRACTS
The Company's contracts are normally for production, service or
development. Production and service contracts are typically of the
fixed-price variety with development contracts currently of the cost-type
variety. Because of their inherent uncertainties and consequent cost
overruns, development contracts historically have been less profitable than
production contracts.
Fixed-price contracts may provide for a firm-fixed price or they may
be fixed-price-incentive contracts. Under the firm-fixed-price contracts,
the Company agrees to perform for an agreed-upon price and, accordingly,
derives benefits from cost savings, but bears the entire risk of cost
overruns. Under the fixed-price-incentive contracts, if actual costs
incurred in the performance of the contracts are less than estimated costs
for the contracts, the savings are apportioned between the customer and the
Company. However, if actual costs under such a contract exceed estimated
costs, excess costs are apportioned between the customer and the Company up
to a ceiling. The Company bears all costs that exceed the ceiling.
Cost-type contracts typically provide for reimbursement of allowable
costs incurred plus a fee (profit). Unlike fixed-price contracts in which
the Company is committed to deliver without regard to performance cost,
cost-type contracts normally obligate the Company to use its best efforts
to accomplish the scope of work within a specified time and a stated
contract dollar limitation. In addition, U.S. Government procurement
regulations mandate lower profits for cost-type contracts because of the
Company's reduced risk. Under cost-plus-incentive-fee contracts, the
incentive may be based on cost or performance. When the incentive is based
on cost, the contract specifies that the Company is reimbursed for
allowable incurred costs plus a fee adjusted by a formula based on the
ratio of total allowable costs to target cost. Target cost, target fee,
minimum and maximum fee and adjustment formula are agreed upon when the
contract is negotiated. In the case of performance-based incentives, the
Company is reimbursed for allowable incurred costs plus an incentive,
contingent upon meeting or surpassing stated performance targets. The
contract provides for increases in the fee to the extent that such targets
are surpassed and for decreases to the extent that such targets are not
met. In some instances, incentive contracts also may include a combination
of both cost and performance incentives. Under cost-plus-fixed-fee
contracts, the Company is reimbursed for costs and receives a fixed fee,
which is negotiated and specified in the contract. Such fees have statutory
limits.
The percentages of revenues during fiscal 1996, 1995 and 1994
attributable to the Company's contracts by contract type were as follows:
Year Ended March 31,
1996 1995 1994
---- ---- ----
Firm-fixed-price......... 87% 74% 65%
Fixed-price-incentive.... - - 1%
Cost-plus-incentive-fee.. - 6% 17%
Cost-plus-fixed-fee...... 13% 20% 17%
The increased percentage and continued predominance of fixed-price
contracts reflects the fact that production contracts comprise a
significant portion of the Company's U.S. Government contract portfolio.
The Company negotiates for and, generally, receives progress payments
from its customers of between 80-100% of allowable costs incurred on the
previously described contracts. Included in its reported revenues are
certain amounts which the Company has not billed to customers. These
amounts, approximately $8.7 million, $7.9 million and $5.9 million as of
March 31, 1996, 1995 and 1994, respectively, consist of costs and related
profits, if any, in excess of progress payments for contracts on which
sales are recognized on a percentage-of-completion basis.
Under generally accepted accounting principles, all U.S. Government
contract costs, including applicable general and administrative expenses,
are charged to work-in-progress inventory and are written off to costs and
expenses as revenues are recognized. The Federal Acquisition Regulations
("FAR"), incorporated by reference in U.S. Government contracts, provide
that Company-sponsored research and development costs are allowable general
and administrative expenses. To the extent that general and administrative
expenses are included in inventory, research and development costs also are
included. Unallowable costs, pursuant to the FAR, have been excluded from
costs accumulated on U.S. Government contracts. Work-in-process inventory
included general and administrative costs (which include Company-sponsored
research and development costs) of $9.9 million and $6.6 million at March
31, 1996 and 1995, respectively.
All domestic defense contracts and subcontracts to which the Company
is a party are subject to audit, various profit and cost controls, and
standard provisions for termination at the convenience of the customer.
Multi-year U.S. Government contracts and related orders are subject to
cancellation if funds for contract performance for any subsequent year
become unavailable. In addition, if certain technical or other program
requirements are not met in the developmental phases of the contract, then
the follow-on production phase may not be realized. Upon termination other
than for a contractor's default, the contractor normally is entitled to
reimbursement for allowable costs, but not necessarily all costs, and to an
allowance for the proportionate share of fees or earnings for the work
completed. Foreign defense contracts generally contain comparable
provisions relating to termination at the convenience of the foreign
government.
MARKETING
The Company's marketing activities are conducted by its staff of
marketing personnel and engineers. The Company's domestic marketing
approach begins with the development of information concerning the present
and future requirements of its current and potential customers for defense
electronics, as well as those in the security and commercial communities
serviced by the Company's products. Such information is gathered in the
course of contract performance, research into the enhancement of existing
systems and inquiries into advances being made in hardware and software
development, and is then evaluated and exchanged among marketing, research
and engineering groups within the Company to devise proposals responsive to
the needs of customers. The Company markets its products abroad through
independent marketing representatives.
COMPETITION
The military electronics defense industry is characterized by rapid
technological change. The Company's products are sold in markets containing
a number of competitors which are substantially larger than the Company,
devote substantially greater resources to research and development and
generally have greater financial resources. Certain of such competitors are
also suppliers to the Company. The extent of competition for any single
project generally varies according to the complexity of the product and the
dollar volume of the anticipated award. The Company believes that it
competes on the basis of the performance of its products, its reputation
for prompt and responsive contract performance, and its accumulated
technical knowledge and expertise. The Company's future success will depend
in large part upon its ability to improve existing product lines and to
develop new products and technologies in the same or related fields.
In the military sector, the Company competes with many first-and
second-tier defense contractors on the basis of product performance, cost,
overall value, delivery and reputation. As the size of the overall defense
industry has decreased in recent years, there has been an increase in the
number of consolidations and mergers of defense suppliers, and this trend
is expected to continue. As the industry consolidates, the large
(first-tier) defense contractors are narrowing their supplier base and
awarding increasing portions of projects to strategic second-and
third-tier suppliers, and in the process are becoming oriented more toward
system integration and assembly.
PATENTS
The Company has patents on many of its recording products and certain
commercial products. The Company does not believe patent protection to be
significant to its current operations; however, future programs may
generate the need for patent protection. Similarly, the Company and its
subsidiaries have certain registered trademarks, none of which are
considered significant to current operations.
MANUFACTURING AND SUPPLIERS
The Company's manufacturing process for its products, excluding
optical products, consists primarily of the assembly of purchased
components and testing of the product at various stages in the assembly
process. Purchased components include integrated circuits, circuit boards,
sheet metal fabricated into cabinets, resistors, capacitors, semiconductors
and insulated wire and cables. In addition, many of the Company's products
use machined castings and housings, motors and recording and reproducing
heads. Many of the purchased components have been fabricated to Company
designs and specifications. The manufacturing process for the Company's
optics products includes the grinding, polishing and coating of various
optical materials and machining of metal components.
Although materials and purchased components generally are available
from a number of different suppliers, several suppliers are the Company's
sole source of certain components. If a supplier should cease to deliver
such components, other sources probably would be available; however, added
cost and manufacturing delays might result. The Company has not experienced
significant production delays attributable to supply shortages, but
occasionally experiences procurement problems with respect to certain
components, such as semiconductors and connectors. In addition, with
respect to the Company's optical products, certain exotic materials, such
as germanium, zinc sulfide and cobalt, may not always be readily available.
EXPORT SALES
The Company currently sells several of its products and services in
the international marketplace to countries such as Canada, Germany,
Australia and the Republic of China. Foreign sales are derived under export
licenses granted on a case-by-case basis by the United States Department of
State. The Company's foreign contracts are generally payable in United
States' dollars.
EMPLOYEES
As of December 31, 1996, the Company employed 1,153 employees. None
of the Company's employees are represented by labor unions, and the Company
has experienced no work stoppages.
There is a continuing demand for qualified technical personnel, and the
Company believes that its future growth and success will depend upon its
ability to attract, train and retain such personnel.
PROPERTIES
The Company leases approximately 6,000 square feet of office space
for its corporate headquarters in an office building at 5 Sylvan Way,
Parsippany, New Jersey under a lease that expires in fiscal 2001. The
Company leases approximately 25,000 square feet of space for administrative
and engineering facilities at 138 Bauer Drive, Oakland, New Jersey. The
Company leases the Oakland building from LDR Realty Co., a partnership
wholly-owned by Leonard Newman and David E. Gross, co-founders and former
executive officers of the Company, under a lease which expires in fiscal
1999. The Company believes that this lease was consummated on terms no less
favorable than those that could have been obtained by the Company from an
unrelated third party in a transaction negotiated on an arms-length basis.
Precision Echo's engineering and principal operations are located in
a 55,000 square foot building at 3105 Patrick Henry Drive, Santa Clara,
California, under a lease which expires in fiscal 2001. The operations of
CMC and Ahead have recently been consolidated and relocated to a new
facility in San Jose, California, comprising 32,000 square feet pursuant to
a five year lease expiring in fiscal 2001. MEC operates from a 7,000 square
foot leased facility in Golden Valley, Minnesota.
Vikron's principal offices and manufacturing facilities are located
in a 18,500 square foot leased facility in St. Croix Falls, Wisconsin.
Nortronics operates principally from a 20,000 square foot leased facility
in Dassel, Minnesota. Vikron's and Nortronics' leases expire in fiscal 2000
and 2002, respectively.
Photronics Corp.'s principal facilities are located in a 45,000
square foot building at 270 Motor Parkway, Hauppauge, New York. The
building, which is owned by the Company, was built in 1983. OMI leases
approximately 54,000 square feet in a building at 2330 Commerce Park Drive,
Palm Bay, Florida, for its operations and administration offices. These
leases expire in fiscal 2006.
TAS leases 40,000 square feet in a building at 200 Professional
Drive, Gaithersburg, Maryland that houses its executive offices and
principal engineering and manufacturing facilities under a lease which
expires in fiscal 2000. TAS's Technical Services Division, together with
PTI, conducts field service operations from locations in Virginia Beach,
Virginia and San Diego, California. These leased facilities, comprising
15,000 square feet and 5000 square feet, respectively, are covered by
leases, which, with respect to the Virginia location, expires in fiscal
1997, and for the California location, expires in fiscal 2001.
Laurel's primary manufacturing facilities and administrative offices
are located in a 38,000 square-foot building at 423 Walters Avenue in
Johnstown, Pennsylvania. The lease for this facility expires in fiscal
1999. DRS Medical Systems operates from an 8,400 square foot facility in
Mahwah, New Jersey, under a month-to-month lease expiring in April 1997.
The Company also leases approximately 2,000 square feet of office space in
Arlington, Virginia under a lease which expires in fiscal 1998.
ENVIRONMENTAL PROTECTION
The Company believes that its manufacturing operations and properties
are in material compliance with existing federal, state and local
provisions enacted or adopted to regulate the discharge of materials into
the environment, or otherwise protect the environment. Such compliance has
been achieved without material effect on the Company's earnings or
competitive position.
LEGAL PROCEEDINGS
The Company is a party to various legal actions and claims arising in
the ordinary course of its business. In the Company's opinion, the Company
has adequate legal defenses for each of the actions and claims and believes
that their ultimate disposition will not have a material adverse effect on
the Company's consolidated financial position or results of operations.
DESCRIPTION OF THE DEBENTURES
The Debentures were issued under an indenture (the "Indenture") dated
as of September 22, 1995, and as supplemented as of April 1, 1996, between
the Company and The Trust Company of New Jersey, as trustee (the
"Trustee"), a copy of which is available upon request from the Company. The
statements under this caption address the material terms of the Debentures
but are summaries and do not purport to be complete. The summaries make use
of terms defined in the Indenture and are qualified in their entirety by
reference to the Indenture, including the definitions therein of certain
terms. Whenever reference is made to defined terms of the Indenture and not
otherwise defined herein, such defined terms are incorporated herein by
reference.
GENERAL
The Debentures are general unsecured senior subordinated obligations
of the Company, are limited to $25,000,000 aggregate principal amount and
will mature on October 1, 2003. As of February 4, 1997, $25 million
aggregate principal amount of the Debentures were outstanding. The
Debentures bear interest at the rate per annum shown on the cover page
hereof from the date of original issue, or from the most recent Interest
Payment Date (as defined below) to which interest has been paid or duly
provided for, and accrued but unpaid interest will be payable semi-annually
on April 1 and October 1 of each year commencing April 1, 1996 (each, an
"Interest Payment Date"). Interest will be paid to Debentureholders of
record ("Holders") at the close of business on the March 15 or September
15, respectively, immediately preceding the relevant Interest Payment Date
(each, a "Regular Record Date"). Interest will be computed on the basis of
a 360-day year of twelve 30-day months.
Principal of and premium, if any, and interest on the Debentures will
be payable, the transfer of the Debentures will be registrable and the
Debentures will be exchangeable at the office or agency of the Company
maintained for that purpose in Jersey City, New Jersey (which initially
will be the corporate trust office of the Trustee), except that, at the
option of the Company, payment of interest may be made by check mailed to
the address of the Holder entitled thereto as it appears in the Debenture
Register on the related record date.
The Debentures were issued in fully registered form, without coupons,
in denominations of $1,000 and any integral multiple thereof. No service
charge will be made for any transfer or exchange of Debentures, but the
Company may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith.
All monies paid by the Company to the Trustee or any Paying Agent for
the payment of principal of and premium, if any, and interest on any
Debenture which remain unclaimed for two years after such principal,
premium or interest became due and payable may be repaid to the Company.
Thereafter the Holder of such Debenture may, as an unsecured general
creditor, look only to the Company for payment thereof.
The Trustee has been appointed to act as paying agent and registrar
of the Debentures. The Company may change any paying agent and registrar
without notice.
CONVERSION RIGHTS
Holders are entitled, at any time and from time to time prior to
maturity (subject to earlier redemption or repurchase, as described below),
to convert their Debentures (or any portion thereof that is an integral
multiple of $1,000), at 100% of the principal amount thereof, into Common
Stock of the Company at the conversion price set forth on the cover page
hereof, subject to adjustment under certain circumstances as described
below. After a call for redemption of Debentures, through optional
redemption or otherwise, the Debentures or portion thereof called for
redemption will be convertible if duly surrendered on or before, but not
after, the business day preceding the date fixed for redemption in respect
thereof.
The conversion price is subject to adjustment upon certain events,
including: (i) the issuance of Common Stock (including a distribution of
Common Stock held in the Company's treasury) as a dividend or distribution
on any class of Capital Stock of the Company or any Subsidiary which is not
wholly owned by the Company; (ii) a subdivision, combination or
reclassification of outstanding shares of Common Stock; (iii) the issuance
or distribution of Capital Stock of the Company or of rights or warrants to
acquire Capital Stock of the Company at less than the Current Market Price
(as defined below) on the date of issuance or distribution (provided that
the issuance of Capital Stock upon the exercise of warrants or options will
not cause an adjustment in the conversion price if no such adjustment would
have been required at the time such warrant or option was issued); and (iv)
the distribution to the holders of any class of Capital Stock of the
Company generally and to holders of Capital Stock of any Subsidiary which
is not wholly owned by the Company of evidences of indebtedness or assets
(including cash and securities, but excluding dividends or distributions
payable in shares of Common Stock and warrants and options for which
adjustment is made as described above and further excluding cash dividends
paid out of cumulative retained earnings of the Company arising after the
date of the Indenture).
Notwithstanding the foregoing, (a) if the rights or warrants
described in clause (iii) of the preceding paragraph are exercisable only
upon the occurrence of certain triggering events, then the conversion price
will not be adjusted until such triggering events occur and (b) if rights
or warrants expire unexercised, the conversion price shall be readjusted to
take into account only the actual number of such rights or warrants which
were exercised. In addition, the provisions of the preceding paragraph will
not apply to the issuance of Common Stock upon the exercise of the
Company's outstanding stock options under the 1981 Incentive Stock Option
Plan, 1981 Non-Qualified Stock Option Plan and 1991 Stock Option Plan,
unless the exercise price thereof is changed after the date of the
Indenture (other than solely by operation of the anti-dilution provisions
thereof), or the issuance of Common Stock upon the conversion of currently
outstanding 1998 Debentures, unless the conversion price thereof is changed
after the date of the Indenture (other than solely by operation of the
anti-dilution provisions thereof).
No adjustment will be made to the conversion price until cumulative
adjustments to the conversion price amount to at least 1% of the conversion
price, as last adjusted. Except as stated above, the conversion price will
not be adjusted for the issuance of Common Stock, or any securities
convertible into or exchangeable for Common Stock or carrying the right to
purchase any of the foregoing, or the payment of dividends on the Common
Stock.
Fractional shares of Common Stock will not be issued upon conversion.
A person otherwise entitled to a fractional share of Common Stock upon
conversion shall receive cash equal to the equivalent fraction of the
Current Market Price of a share of Common Stock on the business day prior
to conversion. The Company from time to time may, to the extent permitted
by law, reduce the conversion price by any amount for any period of at
least 20 days, in which case the Company shall give at least 15 days'
notice of such reduction to each Holder, if the Board of Directors of the
Company has made a determination that such reduction would be in the best
interests of the Company, which determination shall be conclusive. The
Company is entitled to make such reductions in the conversion price as it
may in its discretion determine to be advisable in order that any stock
dividend, subdivision of shares, distribution of rights to purchase stock
or securities, or distribution of securities convertible into or
exchangeable for stock shall not be taxable to its stockholders. If at any
time the Company makes a distribution of property to its stockholders which
would be taxable to such stockholders as a dividend for federal income tax
purposes (e.g., distribution of evidence of indebtedness or assets of the
Company, but generally not stock dividends or rights to subscribe for
Common Stock) and, pursuant to the anti-dilution provisions of the
Indenture, the conversion price of the Debentures is reduced or the
conversion price of the Debentures is reduced other than in connection with
certain anti-dilution adjustments, such a reduction may be considered as
resulting in the distribution of a dividend to Holders for federal income
tax purposes.
A Holder who surrenders a Debenture (or portion thereof) for
conversion between the close of business on a Regular Record Date and the
next Interest Payment Date will receive interest on such Interest Payment
Date with respect to such Debenture (or portion thereof) so converted
through such Interest Payment Date. Subject to such payments in the event
of conversion after the close of business on a Regular Record Date, no
payment or adjustment shall be made upon any conversion on account of any
interest accrued but unpaid on the Debentures surrendered for conversion.
Subject to any applicable right of the Holders to cause the Company
to purchase Debentures upon a Change of Control (as described below), in
case of any consolidation or merger to which the Company is a party, other
than a transaction in which the Company is the continuing corporation, or
in case of any sale or conveyance to another corporation of the property of
the Company as an entirety or substantially as an entirety, or in the case
of any statutory exchange of securities with another corporation or other
entity, there will be no adjustment of the conversion price, but each
Holder will have the right thereafter to convert such Holder's Debentures
into the kind and amount of securities, cash or other property which the
Holder would have owned or have been entitled to receive immediately after
such consolidation, merger, statutory exchange, sale or conveyance had such
Debenture been converted immediately prior to the effective date of such
consolidation, merger, statutory exchange, sale or conveyance. In the case
of a cash merger of the Company with another corporation or other entity or
any other cash transaction of the type mentioned above, the effect of these
provisions would be that the conversion features of the Debentures would
thereafter be limited to converting the Debentures at the conversion price
then in effect into the same amount of cash that such Holder would have
received had such Holder converted the Debentures into Common Stock
immediately prior to the effective date of such cash merger or transaction.
Depending upon the terms of such cash merger or transaction, the aggregate
amount of cash so received on conversion could be more or less than the
principal amount of the Debentures.
The Company has covenanted under the Indenture to reserve and keep
available at all times out of its authorized but unissued Common Stock, for
the purpose of effecting conversions of Debentures, the full number of
shares of Common Stock deliverable upon the conversion of all outstanding
Debentures.
REDEMPTION
Optional Redemption by the Company. The Debentures are not redeemable
at the option of the Company prior to October 1, 1998. Thereafter, the
Debentures will be redeemable at any time prior to maturity, at the option
of the Company, in whole or from time to time in part, upon not less than
30 days' nor more than 60 days' prior notice of the redemption date, mailed
by first class mail to each Holder's last address as it appears in the
Debenture Register, at the Redemption Prices established for the
Debentures, together with accrued but unpaid interest, if any, to the date
fixed for redemption. The Redemption Prices for the Debentures (expressed
as a percentage of the principal amount) shall be as follows:
AFTER OCTOBER 1, PERCENTAGE
1998 105 %
1999 103.75
2000 102.50
2001 101.25
Selection of Debentures Redeemed. If less than all the Debentures are
to be redeemed, selection of the Debentures for redemption will be made by
the Trustee in compliance with the requirements of the principal national
securities exchange, if any, on which the Debentures are listed, or, if the
Debentures are not listed, on a pro rata basis by lot or by such method
that complies with applicable legal requirements and that the Trustee
considers fair and appropriate. The Trustee may select for redemption
portions of the principal of Debentures that have a denomination larger
than $1,000. Debentures and portions thereof will be redeemed in the amount
of $1,000 or integral amounts of $1,000. The Trustee will make the
selection from Debentures outstanding and not previously called for
redemption.
CHANGE OF CONTROL
If a Change of Control occurs, the Company shall offer to repurchase
each Holder's Debentures pursuant to an offer as described below (the
"Change of Control Offer") at a purchase price equal to 100% of the
principal amount of such Holder's Debentures, plus accrued but unpaid
interest, if any, to the date of purchase. The Change of Control purchase
feature of the Debentures may in certain circumstances make more difficult
or discourage a takeover of the Company.
Under the Indenture, a "Change of Control" means the occurrence of
any of the following events: (i) any person (as the term "person" is used
in Section 13(d) or Section 14(d) of the Exchange Act) is or becomes the
direct or indirect beneficial owner of shares of the Company's Capital
Stock representing greater than 50% of the total voting power of all shares
of Capital Stock of the Company entitled to vote in the election of
directors under ordinary circumstances; (ii) the Company sells, transfers
or otherwise disposes of all or substantially all of the assets of the
Company; or (iii) during any period of two consecutive years (or, in the
case this event occurs within the first two years after the date of issue
of the Debentures, such shorter period as shall have commenced on the date
of original issue), Continuing Directors cease for any reason to constitute
a majority of the Board of Directors of the Company then in office.
Within 30 days after any Change of Control, unless the Company has
previously mailed a notice of optional redemption by the Company of all of
the Debentures, the Company shall mail a notice of the Change of Control
Offer to each Holder by first class mail at such Holder's last address as
it appears on the Debenture Register stating: (i) that a Change of Control
has occurred and that the Company is offering to repurchase all of such
Holder's Debentures; (ii) the circumstances and relevant facts regarding
such Change of Control (including, but not limited to, information with
respect to pro forma income, cash flow and capitalization of the Company
after giving effect to such Change of Control); (iii) the repurchase price;
(iv) the expiration date of the Change of Control Offer, which shall be no
earlier than 30 days nor later than 60 days from the date such notice is
mailed; (v) the date such purchase shall be effected, which shall be no
later than 30 days after expiration date of the Change of Control Offer;
(vi) that any Debentures not accepted for payment pursuant to the Change of
Control Offer shall continue to accrue interest; (vii) that, unless the
Company defaults in the payment of the Change of Control Payment, all
Debentures accepted for payment pursuant to the Change of Control Offer
shall cease to accrue interest after the Change of Control Payment Date;
(viii) the name and address of the paying agent; (ix) that Debentures must
be surrendered to the paying agent to collect the repurchase price; (x) any
other information required by applicable law to be included therein; and
(xi) the procedures determined by the Company, consistent with the
Indenture, that a Holder must follow in order to have such Debentures
repurchased.
In the event that the Company is required to make a Change of Control
Offer, the Company will comply with any applicable securities laws and
regulations, including, to the extent applicable, Section 14(e), Rule 14e-1
and any other tender offer rules under the Exchange Act which may then be
applicable in connection with any offer by the Company to purchase
Debentures at the option of the Holders thereof.
The Company, could, in the future, enter into certain transactions,
including certain recapitalizations of the Company, that would not
constitute a Change in Control under the Debentures, but that would
increase the amount of Senior Indebtedness (or any other indebtedness)
outstanding at such time. The Company's ability to create any additional
Senior Indebtedness or additional Subordinated Indebtedness is limited as
described in the Debentures and the Indenture although, under certain
circumstances, the incurrence of significant amounts of additional
indebtedness could have an adverse effect on the Company's ability to
service its indebtedness, including the Debentures. If a Change in Control
were to occur, there can be no assurance that the Company would have
sufficient funds at the time of such event to pay the Change in Control
purchase price for all Debentures tendered by the Holders. A default by the
Company on its obligation to pay the Change in Control purchase price
could, pursuant to cross-default provisions, result in acceleration of the
payment of other indebtedness of the Company outstanding at that time.
Certain of the Company's existing and future agreements relating to
its indebtedness could prohibit the purchase by the Company of the
Debentures pursuant to the exercise by a Holder of the foregoing option,
depending on the financial circumstances of the Company at the time any
such purchase may occur, because such purchase could cause a breach of
certain covenants contained in such agreements. Such a breach may
constitute an event of default under such indebtedness and thereby restrict
the Company's ability to purchase the Debentures. See "--Ranking."
MAINTENANCE OF CONSOLIDATED NET WORTH
The Company is required to maintain a Consolidated Net Worth of at
least $18 million. The Indenture provides that if the Company's
Consolidated Net Worth is less than $18 million at the end of any fiscal
quarter, the Company is required to furnish to the Trustee an Officer's
Certificate within 45 days after the end of such fiscal quarter (90 days
after the end of any fiscal year) notifying the Trustee that the Company's
Consolidated Net Worth has declined below $18 million. If, at any time or
from time to time, the Company's Consolidated Net Worth at the end of each
of any such two consecutive fiscal quarters (the last day of the second
fiscal quarter being referred to as a "Deficiency Date") is less than $18
million, then the Company shall, in each such event, no later than 50 days
after each Deficiency Date (100 days if a Deficiency Date is also the end
of the Company's fiscal year), mail to the Trustee and each Holder at such
Holder's last address as it appears on the Debenture Register a notice (the
"Deficiency Notice") of the occurrence of such deficiency, which shall
include an offer by the Company (the"Deficiency Offer") to repurchase
Debentures as described below. The Deficiency Notice shall state: (i) that
a deficiency has occurred; (ii) that the Company is offering to repurchase
10% of the aggregate principal amount of Debentures originally issued (or
such lesser amount as may be outstanding at the time of the Deficiency
Notice) (the "Deficiency Repurchase Amount"); (iii) that the repurchase
price shall be 100% of the principal amount of the Debentures repurchased
plus accrued but unpaid interest, if any, to the date of purchase; (iv) the
expiration date of the Deficiency Offer, which shall be no earlier than 30
days nor later than 45 days after the date such notice is mailed; (v) the
date such purchase shall be effected, which shall be no later than 20 days
after expiration date of the Deficiency Offer; (vi) that Debentures not
accepted for payment pursuant to the Deficiency Offer shall continue to
accrue interest; (vii) that, unless the Company defaults in payment of the
Deficiency Repurchase Amount, all Debentures accepted for payment pursuant
to the Deficiency Offer shall cease to accrue interest after the Deficiency
Payment Date; (viii) that if any Debenture is repurchased in part, a new
Debenture or Debentures in principal amount equal to the unrepurchased
portion will be issued; (ix) the name and address of the paying agent; (x)
that Debentures to be repurchased must be surrendered to the paying agent
to collect the repurchase price; (xi) any other information required by
applicable law to be included therein; and (xii) the procedures determined
by the Company, consistent with the Indenture, that a Holder must follow in
order to have such Debentures repurchased.
The Company shall purchase the Deficiency Repurchase Amount of
Debentures or, if less than the Deficiency Repurchase Amount has been
delivered for repurchase, all Debentures delivered for repurchase in
response to the Deficiency Offer. If the aggregate principal amount of
Debentures delivered for repurchase exceeds the Deficiency Repurchase
Amount, the Company will purchase the Debentures delivered to it pro rata
(in $1,000 increments only) among the Debentures delivered based on
principal amount. The Company will comply with all applicable securities
laws and regulations in connection with each Deficiency Offer. In no event
shall the failure to meet the minimum Consolidated Net Worth requirement
set forth above at the end of any fiscal quarter be counted toward the
making of more than one Deficiency Offer.
The Company may credit against the principal amount of Debentures to
be repurchased in any Deficiency Offer 100% of the principal amount
(excluding premium) of Debentures acquired by the Company subsequent to the
Deficiency Date through purchase (otherwise than pursuant to this provision
or a Change of Control Offer), optional redemption, conversion or exchange
and surrendered for cancellation.
If a Consolidated Net Worth deficiency were to occur, there can be no
assurance that the Company would have sufficient funds at the time of such
event to purchase the Deficiency Repurchase Amount of Debentures. A default
by the Company to so purchase the Deficiency Repurchase Amount of
Debentures could, pursuant to cross-default provisions, result in
acceleration of the payment of other indebtedness of the Company
outstanding at that time.
Certain of the Company's existing and future agreements relating to
its indebtedness could prohibit the purchase by the Company of the
Debentures pursuant to the exercise by a Holder of the foregoing option,
depending on the financial circumstances of the Company at the time any
such purchase may occur, because such purchase could cause a breach of
certain covenants contained in such agreements. Such a breach may
constitute an event of default under such indebtedness and thereby restrict
the Company's ability to purchase the Debentures. See "--Ranking."
RANKING
The payment of principal of and premium, if any, and interest on the
Debentures will, to the extent set forth in the Indenture, be subordinated
in right of payment to the prior payment in full of all Senior Indebtedness
(as defined below). Upon any payment or distribution of assets to creditors
upon any liquidation, dissolution, winding up, reorganization, assignment
for the benefit of creditors or marshalling of assets, whether voluntary,
involuntary or in receivership, bankruptcy, insolvency or similar
proceedings, the holders of all Senior Indebtedness will be first entitled
to receive payment in full of all amounts due or to become due thereon
before any payment is made on account of principal of and premium, if any,
and interest on the Debentures or on account of any other monetary claims
under or in respect of the Debentures, and before any distribution is made
to acquire any of the Debentures for any cash, property or securities. No
payments on account of principal of and premium, if any, and interest on
the Debentures shall be made if at the time thereof: (i) there is a default
in the payment of all or any portion of the obligations under any Senior
Indebtedness or (ii) there shall exist a default in any covenant with
respect to the Senior Indebtedness (other than as specified in clause (i)
of this sentence), and, in such event, such default shall not have been
cured or waived or shall not have ceased to exist, the Trustee and the
Company shall have received written notice from any holder of such Senior
Indebtedness stating that no payment shall be made with respect to the
Debentures and such default would permit the maturity of such Senior
Indebtedness to be accelerated, provided that no such default will prevent
any payment on, or in respect of, the Debentures for more than 120 days
unless the maturity of such Senior Indebtedness has been accelerated.
The Holders will be subrogated to the rights of the holders of the
Senior Indebtedness to the extent of payments made on Senior Indebtedness
upon any distribution of assets in any such proceedings out of the
distributive share of the Debentures.
"Senior Indebtedness" is defined to mean the principal of and
premium, if any, and interest on (a) the Debt of the Company or any of its
Subsidiaries which is outstanding on the date of the Indenture and has been
provided by a bank that is not an Affiliate of the Company or by any State
or local government or agency thereof, (b) any Debt incurred after the date
of the Indenture by the Company or any of its Subsidiaries which expressly
states that it is senior in right of payment to the Debentures and is
provided by a bank that is not an Affiliate of the Company, (c) any Debt,
whether outstanding on the date of the Indenture or thereafter incurred,
which evidences the Company's obligation to refund any progress payments or
deposits to the United States or any foreign government or any
instrumentality thereof or any prime contractor for any such government or
instrumentality and (d) amendments, renewals, extensions, modifications and
refundings of any such Debt, whether any such Debt described in (a), (b) or
(c) is outstanding on the date of the Indenture or thereafter created,
incurred or assumed, unless in any case, the instrument creating or
evidencing any such Debt pursuant to which the same is outstanding provides
that such Debt is not superior in right of payment to the Debentures. The
Company's ability to incur Senior Indebtedness after the date of the
Indenture is limited. See "-- Certain Covenants of the Company - Limitation
of Debt and Senior Indebtedness." Only indebtedness of the Company that is
Senior Indebtedness will rank senior to the Debentures in accordance with
the provisions of the Indenture. The Company has agreed that it will not
issue or incur any Debt (other than Senior Indebtedness or Capitalized
Lease Obligations) unless such Debt (other than Senior Indebtedness or
Capitalized Lease Obligations) will be subordinate in right of payment to
the Debentures at least to the same extent that the Debentures are
subordinate to Senior Indebtedness. The Company has also agreed that it
will not permit any of its Subsidiaries to issue or incur any Debt (other
than Senior Indebtedness or Capitalized Lease Obligations) unless such Debt
(other than Senior Indebtedness or Capitalized Lease Obligations) shall
provide that such Debt (other than Senior Indebtedness or Capitalized Lease
Obligations) will be subordinate in right of payment to distributions and
dividends from such Subsidiary to the Company in an amount sufficient to
satisfy the Company's obligations under the Debentures at least to the same
extent the Debentures are subordinate to Senior Indebtedness. The
Debentures are senior in right of payment to the Company's 1998 Debentures.
The Debentures are unsecured obligations of the Company, and,
accordingly, will rank pari passu with all trade debt and obligations of
the Company and its Subsidiaries that arise by operation of law or are
imposed by any judicial or governmental authority, except that any such
trade debt or other obligation may be senior in right of payment to the
Debentures to the extent the same is entitled to any security interest
arising by operation of law.
The Debentures are obligations exclusively of the Company, and the
Debentures, as a practical matter, will be effectively subordinated to all
indebtedness and other liabilities and commitments (including trade
payables and lease obligations) of the Subsidiaries. The right of the
Company, and, therefore, the right of creditors of the Company (including
Holders) to receive assets of any such Subsidiary upon the liquidation or
reorganization of such Subsidiary or otherwise, as a practical matter, will
be effectively subordinated to the claims of such Subsidiary's creditors,
except to the extent the Company is itself recognized as a creditor of such
Subsidiary or such other creditors have agreed to subordinate their claims
to the payment of the Debentures, in which case the claims of the Company
would still be subordinate to any secured claim on the assets of such
Subsidiary and any indebtedness of such Subsidiary senior to that held by
the Company.
At September 30, 1996, Senior Indebtedness (excluding current
installments) was approximately $2.5 million and the indebtedness
(excluding liability for income taxes) of the Company's subsidiaries was
approximately $19.3 million. The Company expects that it will from time to
time incur additional indebtedness constituting Senior Indebtedness.
CERTAIN COVENANTS OF THE COMPANY
The Indenture contains, among others, the covenants summarized below,
which are applicable (unless waived or amended) so long as any of the
Debentures are outstanding.
Limitation on Debt and Senior Indebtedness. The Company will not, and
will not permit any of its Subsidiaries to, create, incur, assume or
directly or indirectly guarantee or in any other manner become directly or
indirectly liable for ("incur") any Debt (including Acquired Debt) or
Senior Indebtedness other than Permitted Debt (as defined); provided,
however, that the Company and, subject to the other limitations set forth
herein, its Subsidiaries may incur Debt or Senior Indebtedness if the Debt
to Operating Cash Flow Ratio of the Company and its Subsidiaries at the
time of incurrence of such Debt, after giving pro forma effect thereto, is
6.5:1 or less; provided that any such Debt incurred by the Company that is
not Senior Indebtedness shall have a Weighted Average Life to Maturity
longer than the Weighted Average Life to Maturity of the Debentures.
Notwithstanding the foregoing, at any time the Debt to Operating Cash Flow
Ratio of the Company exceeds 6.5:1, the Company will be permitted to incur
additional Senior Indebtedness pursuant to lines of credit for working
capital of up to $5 million.
For purposes of the foregoing limitations "Permitted Debt" means (i)
Debt evidenced by the Debentures in an aggregate principal amount not to
exceed $25.0 million, (ii) Debt owed by the Company to any wholly owned
Subsidiary of the Company, (iii) Debt owed by any wholly owned Subsidiary
of the Company to the Company or any other wholly owned Subsidiary of the
Company, (iv) Debt owed to Leonard Newman pursuant to the Newman Agreement,
(v) Capitalized Lease Obligations not in excess of an aggregate of $2
million at any one time outstanding, plus any Capitalized Lease Obligations
from an acquisition outstanding on the date of such acquisition, (vi)
performance bonds or letters of credit incurred in the ordinary course of
business or in connection with government contracts, (vii) deferred income
taxes as defined in accordance with GAAP, (viii) Debt constituting
inter-company payables or receivables between or among the Company and its
Subsidiaries incurred in the ordinary course of business or (ix)
Refinancing Debt.
A calculation of the Debt to Operating Cash Flow Ratio as required by
this covenant shall be made, in each case, for the period of four full
consecutive fiscal quarters next preceding the date on which Debt is
proposed to be incurred ("Reference Period"). In addition, for purposes of
the pro forma calculations required to be made above, (i) (x) the amount of
Debt to be incurred (plus all other Debt previously incurred during such
Reference Period), and the amount (valued at its liquidation value and
including any accrued but unpaid dividends) of Disqualified Stock to be
issued (plus all other Disqualified Stock previously issued during such
Reference Period) will be presumed to have been incurred or issued on the
first day of such Reference Period and (y) the amount of any Debt redeemed,
refinanced or repurchased with the proceeds of the Debt referred to in
clause (x) will be presumed to have been redeemed, refinanced or
repurchased on the first day of such Reference Period, (ii) if any Asset
Disposition occurred during such Reference Period, the calculations
included in the computation of the Debt to Operating Cash Flow Ratio shall
be adjusted to give effect to such Asset Disposition on a pro forma basis
as if such Asset Disposition had occurred on the first day of such
Reference Period, (iii) if an acquisition of a business or entity occurred
during such Reference Period, the calculations included in the computation
of the Debt to Operating Cash Flow Ratio will be adjusted to give effect to
such acquisition on a pro forma basis as if such acquisition had occurred
on the first day of such Reference Period and (iv) if such new Debt is
being incurred in connection with an acquisition, no pro forma effect will
be given to negative operating cash flow or losses attributable to the
assets or business so acquired.
Limitation on Additional Debt After Default. The Company will not,
and will not permit any of its Subsidiaries to, incur any additional Debt
(other than Permitted Debt) or Senior Indebtedness following the occurrence
of an Event of Default (as defined below) unless such Event of Default (and
all other Events of Default then pending) is cured or waived.
Limitation on Preferred Stock. The Company will not, and will not
permit any of its Subsidiaries to, issue any shares of Disqualified Stock.
Limitation on Dividend Restrictions Affecting Subsidiaries. The
Company may not, and may not permit any of its Subsidiaries to, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction of any kind on the ability of any Subsidiary of the Company to
(a) pay to the Company dividends or make to the Company any other
distribution on its Capital Stock, (b) pay any Debt owed to the Company or
any of its Subsidiaries, (c) make loans or advances to the Company or any
of the Company's Subsidiaries or (d) transfer any of its property or assets
to the Company or any of its Subsidiaries, other than such encumbrances or
restrictions existing or created under or by reason of (i) applicable law,
(ii) the Indenture, (iii) covenants or restrictions contained in any
instrument governing Debt of the Company or any of its Subsidiaries
existing on the date of the Indenture, (iv) customary provisions
restricting subletting, assignment and transfer of any lease governing a
leasehold interest of the Company or any of its Subsidiaries or in any
license or other agreement entered into in the ordinary course of business,
(v) any agreement governing Debt of a person acquired by the Company or any
of its Subsidiaries in existence at the time of such acquisition (but not
created in contemplation thereof), which encumbrances or restrictions are
not applicable to any person, or the property or assets of any person,
other than the person, or the property or assets of the person so acquired,
(vi) any restriction with respect to a Subsidiary imposed pursuant to an
agreement entered into in accordance with the terms of the Indenture for
the sale or disposition of Capital Stock or property or assets of such
Subsidiary, pending the closing of such sale or disposition, (vii) with
respect to any Subsidiary, the terms of any contract with the United States
or any foreign government or any instrumentality thereof or any prime
contractor for any such contract pertaining to retention of funds by such
Subsidiary equivalent to any progress payments or deposits made pursuant to
such contract or (viii) any Refinancing Debt; provided, however, that the
encumbrances or restrictions contained in the agreements governing any such
Refinancing Debt shall be no more restrictive than the encumbrances or
restrictions set forth in the agreements governing the Debt being
refinanced as in effect on the date of the Indenture.
Limitation on Liens. The Company will not, and will not permit any of
its Subsidiaries, directly or indirectly, to create, incur, assume or
permit to exist any Lien (other than Permitted Liens) upon or with respect
to any of the Property of the Company or any such Subsidiary, whether owned
on the date of the Indenture or thereafter acquired, or on any income or
profits therefrom, to secure any Debt which is pari passu with or
subordinate in right of payment to the Debentures.
Limitation on Restricted Payments and Investments. The Company will
not, and will not permit any of its Subsidiaries to, directly or
indirectly, (i) declare or pay any distribution or dividend on or in
respect of any class of its Capital Stock (except dividends or
distributions payable by wholly owned Subsidiaries of the Company and
dividends or distributions payable in Qualified Stock of the Company or in
options, warrants or other rights to purchase Qualified Stock of the
Company); (ii) purchase, repurchase, prepay, redeem, defease or otherwise
acquire or retire for value (other than in Qualified Stock of the Company
or in options, warrants or other rights to purchase Qualified Stock of the
Company) any Capital Stock in the Company or any of its Subsidiaries (other
than a wholly owned Subsidiary of the Company); (iii) make or permit any
Subsidiary to make an Investment (other than Permitted Investments) in any
of its or their Affiliates or any Related Person, or any payment on a
guaranty of any obligation of any of its or their Affiliates or any Related
Person (other than (a) of any wholly owned Subsidiary or (b) of any other
Subsidiary in an amount equal to the amount of the obligation with respect
to which such guaranty relates multiplied by the fraction whose numerator
is the ownership percentage of such Subsidiary by the Company and its
wholly owned Subsidiaries and whose denominator is 100%); or (iv) repay,
prepay, redeem, defease, retire or refinance, prior to scheduled maturity
or scheduled sinking fund payment, any other Debt which is pari passu with,
or subordinate to, the Debentures (other than (x) by the payment of
Qualified Stock of the Company or of options, warrants or other rights to
purchase Qualified Stock of the Company or (y) up to $10.0 million
aggregate principal amount of the 1998 Debentures) except, in the case of
this clause (iv), if the proceeds used for such repayment, prepayment,
redemption, defeasance, retirement or refinancing are generated from the
issuance of Refinancing Debt (any such declaration, payment, distribution,
purchase, repurchase, prepayment, redemption, defeasance or other
acquisition or retirement or Investment referred to in clauses (i) through
(iv) above being hereinafter referred to as a "Restricted Payment"); unless
at the time of and after giving effect to a proposed Restricted Payment
(the value of any such payment, if other than cash, as determined by the
Board of Directors, including the affirmative vote of the Independent
Directors, whose determination shall be conclusive and evidenced by a board
resolution) (a) no Event of Default (and no event that, after notice or
lapse of time, or both, would become an Event of Default) shall have
occurred and be continuing and, (b) the Company could incur an additional
$1.00 of Debt pursuant to the first sentence under "Limitation on Debt and
Senior Indebtedness" above.
Limitation on Stock Splits, Consolidations and Reclassifications. The
Company will not effect a stock split, consolidation or reclassification of
any class of its Capital Stock unless (a) an equivalent stock split,
consolidation or reclassification is simultaneously made with respect to
each other class of Capital Stock of the Company and all securities
exchangeable or exercisable for or convertible into any Capital Stock of
the Company, and (b) after such stock split, consolidation or
reclassification all of the relative voting, dividend and other rights and
preferences of each class of Capital Stock of the Company are identical to
those in effect immediately preceding such stock split, consolidation or
reclassification. Notwithstanding the foregoing, the Company may combine
its Class A Common Stock and Class B Common Stock into a single class of
Common Stock, such that the holder of each share of Class A Common Stock or
Class B Common Stock outstanding immediately prior to such combination
shall, from and after such combination, be entitled to the same voting,
dividend, liquidation and other rights and preferences with respect to such
share as every other holder of Class A Common Stock or Class B Common
Stock.
Limitation on Sales of Assets and Subsidiary Stock. The Company will
not, and will not permit any of its Subsidiaries to, make any Asset
Disposition having a fair market value or resulting in gross proceeds to
the Company or any such Subsidiary in excess of $1.0 million in any single
transaction or series of related transactions or $5.0 million in the
aggregate over the life of the Debentures, unless the Company or any such
Subsidiary receives consideration at the time of such Asset Disposition at
least equal to the fair market value (as determined by the Board of
Directors of the Company and evidenced by a board resolution) of the
interests and assets subject to such Asset Disposition.
Transactions with Related Persons. The Company will not, and will not
permit any of its Subsidiaries to, directly or indirectly, enter into any
transaction or series of related transactions (including, without
limitation, the sale, purchase, exchange or lease of assets, property or
services) with (a) any beneficial owner of 20% or more of the outstanding
voting securities of the Company (as determined in accordance with Section
13(d) of the Exchange Act) at the time of such transaction, (b) any
officer, director or employee of the Company, of any of its Subsidiaries or
of any such beneficial owner of 20% or more of the outstanding voting
securities of the Company as described in clause (a) above or (c) any
Related Person unless such transaction or series of transactions (i)
involves an amount of $250,000 or less or (ii)(A) is on terms that are no
less favorable to the Company or any such Subsidiary, as the case may be,
than would be available in a comparable transaction with an unrelated third
party and (B)(x) if such transaction or series of related transactions
involve aggregate payments in excess of $400,000, the Company delivers an
officers' certificate to the Trustee certifying that such transaction
complies with clause (ii)(A) above and such transaction or series of
transactions is approved by a majority of the Board of Directors of the
Company including the approval of each of the Independent Directors or (y)
if such transaction or series of related transactions involve aggregate
payments in excess of $1.5 million, the Company obtains an opinion as to
the fairness to the Company or such Subsidiary from a financial point of
view issued by an investment banking firm, appraisal firm or accounting
firm, in each case of national standing. Notwithstanding the foregoing,
this provision will not apply to (i) any transaction entered into between
the Company and Subsidiaries of the Company (but excluding transactions
with any Subsidiary of which more than 20% of the outstanding voting
securities (as determined in accordance with Section 13(d) under the
Exchange Act) are beneficially owned by Persons who are (a) officers,
directors or employees of the Company, of any of its Subsidiaries or of any
beneficial owner of 20% or more of the outstanding voting securities of the
Company (as determined in accordance with Section 13(d) under the Exchange
Act) at the time of such transaction, (b) a beneficial owner of 20% or more
of the outstanding voting securities of the Company (as determined in
accordance with Section 13(d) under the Exchange Act) or (c) Related
Persons), (ii) the payment of compensation and provision of benefits to
officers and employees of the Company and loans and advances to such
officers and employees in the ordinary course of business, or any issuance
of securities, or other payments, awards or grants in cash, securities or
otherwise (including the grant of stock options or similar rights to
officers, employees and directors of the Company or any Subsidiary)
pursuant to, or the funding of, employment arrangements, stock options and
stock ownership plans or other benefit plans approved by the Independent
Directors, (iii) the Newman Agreement and the Gross Agreement and (iv)
transactions with any Person who is a director of the Company or of any of
its Subsidiaries and, who is not (a) the beneficial owner of 20% or more of
the outstanding voting securities of the Company (as determined in
accordance with Section 13(d) under the Exchange Act) or (b) an officer or
employee of the Company, of any of its Subsidiaries or of any such
beneficial owner of 20% or more of the outstanding voting securities of the
Company at the time of such transaction.
Limitation of Payments to Affiliates after Default. The Company shall
not enter into any transaction with any Person who is an officer or
director of the Company, or of any of its Subsidiaries, or of any
beneficial owner of 20% or more of the outstanding voting securities of the
Company (as determined in accordance with Section 13(d) under the Exchange
Act) at the time of such transaction (but excluding the Persons identified
below) unless it is provided that the Company's monetary obligations with
respect thereto are subordinate in right of payment to the Debentures at
least to the same extent as the Debentures are subordinate to Senior
Indebtedness. The Company shall not permit any of its Subsidiaries to enter
into any transaction with any Person who is an officer or director of the
Company, or of any of its Subsidiaries or of any beneficial owner of 20% or
more of the outstanding voting securities of the Company (as determined in
accordance with Section 13(d) under the Exchange Act) at the time of such
transaction (but excluding the Persons identified below) unless it is
provided that such Subsidiary's monetary obligations with respect thereto
are subordinate in right of payment to distributions and dividends from
such Subsidiary to the Company in an amount sufficient to satisfy the
Company's obligations under the Debentures at least to the same extent that
the Debentures are subordinate to Senior Indebtedness. Notwithstanding the
foregoing, such limitation shall not apply to (i) the regular compensation
payable to any person who is an employee of the Company, (ii) payments made
pursuant to any pension or other plan made available to employees
(including officers) of the Company and either existing on the date of the
Indenture or thereafter approved by the Independent Directors, (iii)
payments pursuant to the Newman Agreement or the Gross Agreement or (iv)
any payment made to a director of the Company or of any of its Subsidiaries
who is not (a) the beneficial owner of 20% or more of the outstanding
voting securities of the Company (as determined in accordance with section
13(d) under the Exchange Act) or (b) an officer or employee of the Company,
of any of its Subsidiaries or of any such beneficial owner of 20% or more
of the outstanding voting securities of the Company at the time of such
transaction.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company, without the consent of the Holders of any of the
Debentures, may consolidate with or merge into any other entity or convey,
transfer, sell or lease its assets substantially as an entirety to any
person or entity, provided that: (i) either (a) the Company is the
continuing corporation or (b) the corporation or other entity formed by
such consolidation or into which the Company is merged or the person or
entity to which such assets are conveyed, transferred, sold or leased is
organized under the laws of the United States or any state thereof or the
District of Columbia and expressly assumes all obligations of the Company
under the Debentures and the Indenture, (ii) immediately after and giving
effect to such merger, consolidation, conveyance, transfer, sale or lease
no Event of Default, and no event which, after notice or lapse of time,
would become an Event of Default, under the Indenture shall have occurred
and be continuing, (iii) upon consummation of such consolidation, merger,
conveyance, transfer, sale or lease, the Debentures and the Indenture will
be a valid and enforceable obligation of the Company or such successor and
(iv) the Company has delivered to the Trustee an officer's certificate and
an opinion of counsel, each stating that such consolidation, merger,
conveyance, transfer, sale or lease complies with the provisions of the
Indenture.
EVENTS OF DEFAULT
The following will be Events of Default under the Indenture: (a)
failure to pay principal of or premium, if any, on any Debenture when due
and payable at maturity, upon redemption, upon a Change of Control Offer,
Deficiency Offer or otherwise, whether or not such payment is prohibited by
the subordination provisions of the Indenture; (b) failure to pay any
interest on any Debenture when due and payable, which failure continues for
30 days, whether or not such payment is prohibited by the subordination
provisions of the Indenture; (c) failure to perform the other covenants of
the Company in the Indenture, which failure continues for 60 days after
written notice as provided in the Indenture; (d) a default occurs (after
giving effect to any applicable grace periods or any extension of any
maturity date) in the payment when due of principal of and or acceleration
of, any indebtedness for money borrowed by the Company or any of its
Subsidiaries in excess of $1.0 million, individually or in the aggregate,
if such indebtedness is not discharged, or such acceleration is not
annulled, within 10 days after written notice as provided in the Indenture;
and (e) certain events of bankruptcy, insolvency or reorganization of the
Company or any Subsidiary. Subject to the provisions of the Indenture
relating to the duties of the Trustee in case an Event of Default shall
occur and be continuing, the Trustee will be under no obligation to
exercise any of its rights or powers under the Indenture at the request or
direction of any of the Holders, unless such Holders shall have offered to
the Trustee reasonable indemnity. Subject to such provisions for the
indemnification of the Trustee, the Holders of a majority in aggregate
principal amount of the outstanding Debentures will have the right to
direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred
on the Trustee.
If an Event of Default shall occur and be continuing, either the
Trustee or the Holders of at least 25% in aggregate principal amount of the
then outstanding Debentures may accelerate the maturity of all Debentures;
provided, however, that after such acceleration, but before a judgment or
decree based on acceleration, the Holders of a majority in aggregate
principal amount of the then outstanding Debentures may, under certain
circumstances, rescind and annul such acceleration if all Events of
Default, other than the non-payment of accelerated principal, have been
cured or waived as provided in the Indenture. For information as to waiver
of defaults, see "Modification and Waivers."
No Holder of any Debenture will have any right to institute any
proceeding with respect to the Indenture or for the appointment of a
receiver or trustee or for any other remedy thereunder unless (i) such
Holder shall have previously given to the Trustee written notice of a
continuing Event of Default, (ii) the Holders of at least 25% in aggregate
principal amount of the then outstanding Debentures shall have made written
request, and offered indemnity satisfactory to the Trustee to institute
such proceeding as trustee, (iii) the Trustee shall have failed to
institute such proceeding within 60 days after the receipt of such notice
and (iv) no direction inconsistent with such request shall have been given
to the Trustee during such 60-day period by the Holders of a majority in
aggregate principal amount of the then outstanding Debentures.
The Company will be required to furnish annually to the Trustee a
statement as to the performance by the Company of certain of its
obligations under the Indenture and as to any default in such performance.
MODIFICATIONS AND WAIVERS
Modifications and amendments of the Indenture may be made by the
Company and the Trustee with the consent of the Holders of not less than a
majority in aggregate principal amount of the then outstanding Debentures
held by persons other than Affiliates of the Company; provided, however,
that no such modification or amendment may, without the consent of the
Holder of each outstanding Debenture affected thereby, (i) change the
stated maturity of, or any installment of interest on, any Debenture, (ii)
reduce the principal amount of any Debenture or reduce the rate or extend
the time of payment of interest on any Debenture, (iii) increase the
conversion price (other than in connection with a reverse stock split as
provided in the Indenture), (iv) change the place or currency of payment of
principal of, or premium or repurchase price, if any, or interest on, any
Debenture, (v) impair the right to institute suit for the enforcement of
any payment on or with respect to any Debenture, (vi) adversely affect the
right to exchange or convert Debentures, (vii) reduce the percentage of the
aggregate principal amount of outstanding Debentures, the consent of the
Holders of which is necessary to modify or amend the Indenture, (viii)
reduce the percentage of the aggregate principal amount of outstanding
Debentures, the consent of the Holders of which is necessary for waiver of
compliance with certain provisions of the Indenture or for waiver of
certain defaults, (ix) modify the provisions of the Indenture with respect
to the subordination of the Debentures in a manner adverse to the Holders,
(x) modify the provisions of the Indenture with respect to the right to
require the Company to repurchase Debentures in a manner adverse to the
Holders or (xi) modify the provisions of the Indenture with respect to the
vote necessary to amend this provision.
The Holders of a majority in aggregate principal amount of the
outstanding Debentures held by persons other than Affiliates of the Company
may, on behalf of all Holders, waive any past default under the Indenture
or Event of Default, except a default in the payment of principal, premium,
if any, or interest on any of the Debentures or in respect of a provision
which under the Indenture cannot be modified without the consent of the
Holder of each outstanding Debenture.
DISCHARGE OF INDENTURE
The Indenture provides that the Company may defease and be discharged
from its obligations in respect of the Debentures while the Debentures
remain outstanding (except for certain obligations to convert the
Debentures into Common Stock, register the transfer, substitution or
exchange of Debentures, to replace stolen, lost or mutilated Debentures and
to maintain an office or agency and the rights, obligations and immunities
of the Trustee), if all outstanding Debentures will become due and payable
at their scheduled maturity within one year and the Company has irrevocably
deposited, or caused to be deposited, with the Trustee (or another trustee
satisfying the requirements of the Indenture), in trust for such purpose,
(a) money in an amount, (b) U.S. Government Obligations (as defined below)
which through the payment of principal, premium, if any, and interest in
accordance with their terms will provide money in an amount, or (c) a
combination thereof, sufficient in the opinion of a nationally recognized
firm of independent public accountants expressed in a written certification
thereof delivered to the Trustee, to pay the principal of, premium, if any,
and interest on the outstanding Debentures at maturity or upon redemption,
together with all other amounts payable by the Company under the Indenture.
Such defeasance will become effective 91 days after such deposit only if,
among other things, (x) no Default or Event of Default with respect to the
Debentures has occurred and is continuing on the date of such deposit or
occurs as a result of such deposit or at any time during the period ending
on the 91st day after the date of such deposit, (y) such defeasance does
not result in a breach or violation of, or constitute a default under, any
other agreement or instrument to which the Company is a party or by which
it is bound, and (z) the Company has delivered to the Trustee (A) either a
private Internal Revenue Service ruling or an opinion of counsel that
Holders will not recognize income, gain or loss for federal income tax
purposes as a result of such deposit, defeasance and discharge and will be
subject to federal income tax on the same amount, in the same manner, and
at the same times, as would have been the case if such deposit, defeasance
and discharge had not occurred, (B) an opinion of counsel to the effect
that the deposit shall not result in the Company, the Trustee or the trust
being deemed to be an "investment company" under the Investment Company Act
of 1940, as amended, and (C) an officers' certificate and an opinion of
counsel, each stating that all conditions precedent relating to a
defeasance have been complied with. Notwithstanding the foregoing, the
Company's obligations to pay principal, premium, if any, and interest on
the Debentures shall continue until the Internal Revenue Service ruling or
opinion of counsel referred to in clause (z) (B) above is provided.
REPORTS TO HOLDERS
So long as the Company is subject to the periodic reporting
requirements of the Exchange Act it will continue to furnish the
information required thereby to the Commission. The Indenture provides that
even if the Company is entitled under the Exchange Act not to furnish such
information to the Commission or to the Holders, it will nonetheless
continue to furnish information under Section 13 of the Exchange Act to the
Commission and the Trustee as if it were subject to such periodic reporting
requirements.
GOVERNING LAW
The Indenture and the Debentures are governed by, and construed in
accordance with, the laws of the State of New York, without giving effect
to such State's conflicts of law principles.
INFORMATION CONCERNING THE TRUSTEE
The Company and its Subsidiaries may maintain deposit accounts and
conduct other banking transactions with the Trustee or its affiliates in
the ordinary course of business, and the Trustee and its affiliates may
from time to time in the future provide the Company and its Subsidiaries
with banking and financial services in the ordinary course of their
businesses.
CERTAIN DEFINITIONS
Set forth below is a summary of certain defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of
all such terms and for the definitions of other defined terms used in the
Prospectus and not defined below.
"Acquired Debt" of any specified person means Debt of any other
person existing at the time such other person merged with or into or became
a Subsidiary of such specified person, including Debt incurred in
connection with, or in contemplation of, such other person becoming a
Subsidiary of such specified person.
"Affiliate" of any specified Person means (i) any other Person who,
directly or indirectly, is in control of, is controlled by or is under
common control with such specified Person or (ii) any Person who is a
director or officer (a) of such specified Person, (b) of any Subsidiary of
such specified Person or (c) of any Person described in clause (i) above.
For purpose of this definition, control of a person means the power,
directly or indirectly, to direct or cause the direction of the management
and policies of such person whether by contract or otherwise; and the terms
"controlling" or "controlled" have meanings correlative to the foregoing.
"Asset Disposition" means any sale, lease, transfer or other
disposition (or series of related sales, leases, transfers or dispositions)
of Capital Stock of a Subsidiary, property or other asset (each referred to
for the purposes of this definition as a "disposition") by the Company or
any of its Subsidiaries other than (i) any disposition by any Subsidiary of
the Company to the Company or by the Company or any Subsidiary of the
Company to a wholly owned Subsidiary of the Company, (ii) a disposition of
property or assets in the ordinary course of business and (iii) any
issuance or sale by the Company of its Capital Stock, including any
disposition by means of a merger, consolidation or similar transaction.
"Capital Stock" of any person means any and all shares, interests,
rights to purchase, warrants, options, participations or other equivalents
of or interests in the common or preferred equity (however designated) of
such person, including, without limitation, partnership interests.
"Capitalized Lease Obligation" means, with respect to any person for
any period, an obligation of such person to pay rent or other amounts under
a lease that is required to be capitalized for financial reporting purposes
in accordance with GAAP; and the amount of such obligation shall be the
capitalized amount shown on the balance sheet of such person as determined
in accordance with GAAP.
"Common Stock" as applied to the Capital Stock of any corporation,
means the common equity (however designated) of such Person; and with
respect to the Company, means the Common Stock, par value $.01 per share,
or any successor class of common equity into which such common stock may
thereafter be converted.
"Consolidated Net Income" means, for any fiscal period, the Net
Income or loss of the Company and its Subsidiaries as the same would appear
on a consolidated statement of earnings of the Company for such fiscal
period prepared in accordance with GAAP, provided that (i) any
extraordinary gain (but not loss) and any gain (but not loss) on sales of
assets outside the ordinary course of business, in each case together with
any related provisions for taxes, realized during such period shall be
excluded, (ii) the results of operations of any person acquired in a
pooling of interests transaction for any period prior to the date of such
acquisition shall be excluded, (iii) Net Income attributable to any person
other than a Subsidiary that is at least 50% owned by the Company shall be
included only to the extent of the amount of cash dividends or
distributions actually paid to the Company or a Subsidiary of the Company
during such period, (iv) any extraordinary charge resulting from the
repurchase of the Debentures shall be excluded and (v) the cumulative
effect of a change in accounting principles based upon the implementation
of a change required by the Financial Accounting Standards Board shall be
excluded.
"Consolidated Net Worth" means, for any fiscal period, the net
stockholders' equity of the Company and its Subsidiaries as the same would
appear on the consolidated balance sheet of the Company as at the end of
such fiscal period prepared in accordance with GAAP.
"Continuing Directors" means any member of the Board of Directors of
the Company who (i) is a member of that Board of Directors on the date of
the Indenture or (ii) was nominated for election or elected to the Board of
Directors with the affirmative vote of a majority of the Continuing
Directors who were members of the Board at the time of such nomination or
election.
"Current Market Price" means, when used with respect to any security
as of any date, the last sale price, regular way, or, in case no such sale
takes place on such date, the average of the closing bid and asked prices,
regular way, in either case as reported for consolidated transactions on
the New York Stock Exchange or, if the security is not listed or admitted
to trading on the New York Stock Exchange, as reported for consolidated
transactions with respect to securities listed on the principal national
securities exchange on which such security is listed or admitted to trading
or, if the security is not listed or admitted to trading on any national
securities exchange, the last quoted price or, if not so quoted, the
average of the high bid and low asked prices in the over-the-counter
market, as reported by the National Association of Securities Dealers, Inc.
Automated Quotations System or such other system then in use or, if the
security is not quoted by any such organization, the average of the closing
bid and asked prices furnished by a New York Stock Exchange member firm
selected by the Company. "Current Market Price" means, when used with
respect to any Property other than a security as of any date, the market
value of such Property on such date as determined by the Board of Directors
of the Company in good faith, which shall be entitled to rely for such
purposes on the advice of any firm of investment bankers or appraisers
having familiarity with such Property.
"Debt" of any person as of any date means and includes, without
duplication, (i) the principal of and premium, if any, in respect of
indebtedness of such person, contingent or otherwise, for borrowed money,
including, without limitation, all interest, fees and expenses owed with
respect thereto (whether or not the recourse of the lender is to the whole
of the assets of such person or only to a portion thereof), or evidenced by
bonds, notes, debentures or similar instruments, or representing the
deferred and unpaid balance of the purchase price of any property or
interest therein or services, if and to the extent such indebtedness would
appear as a liability (other than a liability for accounts payable and
accrued expenses incurred in the ordinary course of business) upon a
balance sheet of such person prepared on a consolidated basis in accordance
with GAAP, (ii) all obligations issued or contracted for as payment in
consideration of the purchase by such person of the Capital Stock or
substantially all of the assets of another person or as a result of a
merger or a consolidation (other than any earn-outs or installment
payments), (iii) all Capitalized Lease Obligations of such person, (iv) all
obligations of such person in respect of letters of credit or similar
instruments or reimbursement of letters of credit or similar instruments
(whether or not such items would appear on the balance sheet of such
person), (v) all net obligations of such person in respect of interest rate
protection and foreign currency hedging arrangements, (vi) all guarantees
by such person of items that would constitute Debt under this definition
(whether or not such items would appear on such balance sheet), and (vii)
the amount of all obligations of such person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock, but
only to the extent such obligations arise on or prior to January 1, 2004;
provided, however, that Debt issued at a discount from par shall be treated
as if issued at par. The amount of Debt of any person at any date shall be
the outstanding balance on such date of all unconditional obligations as
described above and the maximum determinable liability, upon the occurrence
of the liability giving rise to the obligation, of any contingent
obligations referred to in clauses (i), (iv), (vi) and (vii) above at such
date.
"Debt to Operating Cash Flow Ratio" means, as of any date of
determination, the ratio of (i) (a) the aggregate principal amount of all
outstanding Debt of the Company and its Subsidiaries as of such date on a
consolidated basis plus (b) the aggregate par or stated value of all
outstanding Preferred Stock of the Company and its Subsidiaries as
reflected on the Company's most recent consolidated balance sheet prepared
in accordance with GAAP (excluding any such Preferred Stock held by the
Company or a wholly owned Subsidiary of the Company) or, if greater with
respect to any class of Capital Stock which is Disqualified Stock, the
aggregate redemption amount thereof as reflected on the Company's most
recent consolidated balance sheet (excluding any such Disqualified Stock
held by the Company or a wholly owned Subsidiary of the Company) to (ii)
Operating Cash Flow of the Company and its Subsidiaries on a consolidated
basis for the four most recent full fiscal quarters ending immediately
prior to such date, determined on a pro forma basis as set forth in the
covenant "Limitation on Debt and Senior Indebtedness."
"Disqualified Stock" means any Capital Stock which, by its terms or
by the terms of any security into which it is convertible or for which it
is exchangeable at the option of the holder thereof or mandatorily (except
to the extent that such exchange or conversion right cannot be exercised or
such mandatory conversion cannot occur prior to January 1, 2004), is, or
upon the happening of an event or the passage of time would be, (a)
required to be redeemed or repurchased by the Company or any of its
Subsidiaries, including at the option of the holder, in whole or in part,
or has, or upon the happening of an event or passage of time would have, a
redemption or similar payment due prior to January 1, 2004 or (b)
exchangeable or convertible into debt securities of the Company or any of
its Subsidiaries at the option of the holder thereof or mandatorily, except
to the extent that such exchange or conversion right cannot be exercised or
such mandatory conversion cannot occur on or prior to January 1, 2004.
"GAAP" means, as of any date, generally accepted accounting
principles in the United States and does not include any interpretations or
regulations that have been proposed but that have not become effective.
"Independent Directors" means directors that (i) are not 20% or
greater stockholders of the Company or the designee of any such
stockholder, (ii) are not officers or employees of the Company, any of its
Subsidiaries or of a stockholder referred to above in clause (i), (iii) are
not Related Persons and (iv) do not have relationships that, in the opinion
of the Board of Directors, would interfere with their exercise of
independent judgment in carrying out the responsibilities of the directors.
"Investment" means any loan or advance to any person, any acquisition
of any interest in any other person (including (i) with respect to a
corporation, any and all shares, interests, rights to purchase, warrants,
options, participations or other equivalents of or interests in (however
designated) corporate stock, including any Preferred Stock and any
securities convertible or exchangeable for any of the foregoing, bonds,
notes, debentures, loans or other securities or Debt of such other person
and (ii) with respect to a partnership or similar person, any and all
units, interests, rights to purchase, warrants, options, participations or
other equivalents of or other partnership interests in (however designated)
such person and any securities convertible or exchangeable for any of the
foregoing), any capital contribution to any other person, or any other
investment in any other person, other than (a) advances to officers and
employees in the ordinary course of business, (b) creation of receivables
in the ordinary course of business and (c) negotiable instruments endorsed
for collection in the ordinary course of business.
"Lien" means any mortgage, lien, pledge, charge, security interest or
other encumbrance of any nature whatsoever (including any conditional sale
or other title retention agreement, any lease in the nature thereof and any
agreement to give any security interest).
"Net Income" of any person means the net income (or loss) of such
person, determined in accordance with GAAP, excluding, however, from the
determination of Net Income any extraordinary gain (but not loss) and any
gain (but not loss) realized upon the sale or other disposition (including,
without limitation, dispositions pursuant to sale-leaseback transactions)
of any real property or equipment of such person, which is not sold or
otherwise disposed of in the ordinary course of business, or of any Capital
Stock of a Subsidiary of such person.
"Operating Cash Flow" means, with respect to the Company and its
Subsidiaries for any period, the Consolidated Net Income of the Company and
its Subsidiaries for such period, plus (i) extraordinary net losses and net
losses on sales of assets other than in the ordinary course of business
during such period, to the extent such losses were deducted in computing
Consolidated Net Income, plus (ii) provision for taxes based on income or
profits, to the extent such provision for taxes was included in computing
such Consolidated Net Income, and any provision for taxes utilized in
computing the net losses under clause (i) hereof, plus (iii) to the extent
deducted in calculating Consolidated Net Income, Total Interest Expense of
the Company and its Subsidiaries for such period, plus (iv) depreciation,
amortization and all other non-cash charges, to the extent such
depreciation, amortization and other non-cash charges (excluding any such
non-cash charges to the extent that they require an accrual of or reserve
for cash charges for any future periods) were deducted in calculating such
Consolidated Net Income (including amortization of goodwill and other
intangibles).
"Permitted Investments" means (i) Investments in the Company or in a
Subsidiary of the Company; (ii) Investments by the Company or any
Subsidiary of the Company in a person, if as a result of such Investment
(a) such person becomes or is a wholly owned Subsidiary of the Company or
the Subsidiary making such Investment or (b) such person is merged,
consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company, the
Subsidiary making such Investment or a wholly owned Subsidiary of either
the Company or such Subsidiary making such Investment (provided that any
subsequent issuance or transfer of any interests or other transaction which
results in any such wholly owned Subsidiary ceasing to be a wholly owned
Subsidiary of the Company, the Subsidiary making such Investment or another
wholly owned Subsidiary of either the Company or such Subsidiary making
such Investment, or any subsequent transfer of such Permitted Investment
(other than to the Company, the Subsidiary making such Investment or
another wholly owned Subsidiary of either the Company or such Subsidiary
making such Investment) shall be deemed for the purposes hereof to
constitute the making of a new Investment by the maker thereof and
therefore subject to a new determination of whether such Investment
qualifies as a Permitted Investment); (iii) U.S. Government Obligations
maturing within one year of the date of acquisition thereof; (iv)
certificates of deposit maturing within one year of the date of acquisition
thereof issued by a bank or trust company that is organized under the laws
of the United States or any state thereof having capital, surplus and
undivided profits aggregating in excess of $100,000,000; (v) repurchase
agreements with respect to U.S. Government Obligations; and (vi)
Investments in commercial paper rated at least A1 or the equivalent thereof
by Standard & Poor's Corporation or P1 or the equivalent thereof by Moody's
Investor Services, Inc. and maturing not more than 90 days from the date of
the acquisition thereof.
"Permitted Liens" means (i) Liens for taxes, assessments or
governmental charges or claims that either (a) are not yet delinquent or
(b) are being contested in good faith by appropriate proceedings and as to
which appropriate reserves have been established or other provisions have
been made in accordance with GAAP; (ii) statutory Liens of landlords and
carriers', warehousemen's, mechanics', suppliers', materialmen's,
repairmen's or other Liens imposed by law and arising in the ordinary
course of business and with respect to amounts that, to the extent
applicable, either (a) are not yet delinquent by more than 30 days or (b)
are being contested in good faith by appropriate proceedings and as to
which appropriate reserves have been established or other provisions have
been made in accordance with GAAP; (iii) Liens (other than any Lien imposed
by the Employee Retirement Income Security Act of 1974, as amended)
incurred or deposits made in the ordinary course of business in connection
with workers' compensation, unemployment insurance and other types of
social security; (iv) judgment or other similar Liens arising in connection
with court proceedings, provided that (a) the execution or enforcement of
each such Lien is effectively stayed within 30 days after entry of such
judgment (or such judgment has been discharged within such 30 day period),
the claims secured thereby are being contested in good faith by appropriate
proceedings timely commenced and diligently prosecuted and the aggregate
amount of the claims secured thereby does not exceed $1,000,000 at any time
or (b) the payment of which is covered in full by insurance and the
insurance company has not denied or contested coverage thereof; (v) Liens
existing on property or assets of any entity at the time it becomes a
Subsidiary or existing on property or assets at the time of the acquisition
thereof by the Company or any of its Subsidiaries, which Liens were not
created or assumed in contemplation of, or in connection with, such entity
becoming a Subsidiary or such acquisition, as the case may be, and which
attach only to such property or assets, provided that the Debt secured by
such Liens is not thereafter increased; (vi) Liens incurred in connection
with Capitalized Lease Obligations otherwise permitted under the Indenture;
(vii) Liens securing Refinancing Debt, provided that such Liens only extend
to the property or assets securing the Debt being refinanced, such
Refinanced Debt was previously secured by similar Liens on such property or
assets and the Debt or other obligations secured by such Liens is not
increased; (viii) Liens securing the advance of progress payments or
deposits made by the United States or any foreign government or any
instrumentality thereof or any prime contractor for any such government or
instrumentality and received by the Company in the ordinary course of its
business; (ix) the Lien created by the Master Security Agreement between
General Electric Capital Corporation and OMI Acquisition Corporation dated
as of August 28, 1995; and (x) any other Liens existing on the date of the
Indenture.
"Preferred Stock" means, with respect to any person, Capital Stock of
such person of any class or classes (however designated) which is preferred
as to the payments of dividends or distributions, or as to the distribution
of assets upon any voluntary or involuntary liquidation or dissolution of
such person, over any other class of the Capital Stock of such person.
"Property" of any person means all types of real, personal, tangible,
intangible or mixed property owned by such person whether or not included
on the most recent consolidated balance sheet of such person in accordance
with GAAP.
"Qualified Stock" means Capital Stock of the Company that is not
Disqualified Stock.
"Refinancing Debt" means Debt that refunds, refinances or extends any
Debentures, or other Debt existing on the date of the Indenture or
thereafter incurred by the Company or its Subsidiaries pursuant to the
terms of the Indenture, but only to the extent that (i) the Refinancing
Debt is subordinated to the Debentures to the same extent as the Debt being
refunded, refinanced or extended, if at all, (ii) the Refinancing Debt is
scheduled to mature either (a) no earlier than the Debt being refunded,
refinanced or extended, or (b) after the maturity date of the Debentures,
(iii) the portion, if any, of the Refinancing Debt that is scheduled to
mature on or prior to the maturity date of the Debentures has a Weighted
Average Life to Maturity at the time such Refinancing Debt is incurred that
is equal to or greater than the Weighted Average Life to Maturity of the
portion of the Debt being refunded, refinanced or extended that is
scheduled to mature on or prior to the maturity date of the Debentures,
(iv) such Refinancing Debt is in an aggregate principal amount that is
equal to or less than the aggregate principal amount then outstanding under
the Debt being refunded, refinanced or extended, plus customary fees and
expenses associated with refinancing and (v) such Refinancing Debt is
incurred by the same person that initially incurred the Debt being
refunded, refinanced or extended, except that (a) the Company may incur
Refinancing Debt to refund, refinance or extend Debt of any Subsidiary of
the Company, and (b) any Subsidiary of the Company may incur Refinancing
Debt to refund, refinance or extend Debt of any other wholly owned
Subsidiary of the Company.
"Related Person" means an individual related to an officer, director
or employee of the Company or any of its Affiliates which relation is by
blood, marriage or adoption and not more remote than first cousin.
"Subsidiary" of any person means a corporation or other entity a
majority of whose Capital Stock with voting power, under ordinary
circumstances, entitling holders of such Capital Stock to elect the board
of directors or other governing body, is at the time, directly or
indirectly, owned by such person and/or a Subsidiary or Subsidiaries of
such person.
"Total Interest Expense" means, for any period, the interest expense
of the Company and its Subsidiaries for such period, determined on a
consolidated basis in accordance with GAAP, whether paid or accrued
(including amortization of original issue discount, non-cash interest
payments and the interest component of capital leases, but excluding
amortization of debt and Preferred Stock issuance costs).
"U.S. Government Obligations" means non-callable (i) direct
obligations (or certificates representing an ownership interest in such
obligations) of the United States for which its full faith and credit are
pledged and (ii) obligations of a person controlled or supervised by, and
acting as an agency or instrumentality of, the United States, the payment
of which is unconditionally guaranteed as a full faith and credit
obligation of the United States.
"Weighted Average Life to Maturity" means, when applied to any Debt
or Preferred Stock or portions thereof (if applicable) at any date, the
number of years obtained by dividing (i) the then outstanding principal
amount or liquidation amount of such Debt or Preferred Stock or portions
thereof (if applicable) into (ii) the sum of the products obtained by
multiplying (a) the amount of each then remaining installment, sinking
fund, serial maturity or other required payment of principal, including
payment at final maturity, in respect thereof, by (b) the number of years
(calculated to the nearest one-twelfth) that will elapse between such date
and the making of such payment.
BOOK-ENTRY; DELIVERY AND FORM
Except as set forth below, the Debentures were initially issued in
the form of registered debentures in global form without coupons (each, a
"Global Debenture"). The Global Debentures were deposited on the date of
the closing of the sale of the Debentures (the "Closing Date") with, or on
behalf of, the Depository Trust Company (the "Depository") and registered
in the name of Cede & Co., as nominee of the Depository. Interests in the
Global Debentures were available for purchase pursuant to the Debenture
Offering only by "qualified institutional buyers," as defined in Rule 144A
under the Securities Act ("QIBs"). The Debentures to be resold as set forth
herein will be initially issued in global form (the "New Global
Debentures").
Debentures that were (i) originally issued to or transferred to
institutional "accredited investors," as defined in Rule 501(a)(1), (2),
(3) or (7) under the Securities Act (an "Institutional Accredited
Investor"), who are not QIBs or to any other persons who are not QIBs or
(ii) issued as described below under "-- Certificated Debentures," were
issued in registered form without coupons (the "Certificated Debentures").
The Depository has advised the Company that it is (i) a limited
purpose trust company organized under the laws of the State of New York,
(ii) a member of the Federal Reserve System, (iii) a "clearing corporation"
within the meaning of the Uniform Commercial Code, as amended, and (iv) a
"Clearing Agency" registered pursuant to Section 17A of the Exchange Act.
The Depository was created to hold securities for its participants
(collectively, the "Participants") and facilitates the clearance and
settlement of securities transactions between Participants through
electronic book-entry changes to the accounts of its Participants, thereby
eliminating the need for physical transfer and delivery of certificates.
The Depository's Participants include securities brokers and dealers
(including the Initial Purchaser), banks and trust companies, clearing
corporations and certain other organizations. Access to the Depository's
system is also available to other entities such as banks, brokers, dealers
and trust companies (collectively, the "Indirect Participants") that clear
through or maintain a custodial relationship with a Participant, either
directly or indirectly.
The Company expects that pursuant to procedures established by the
Depository (i) upon deposit of the Global Debentures or New Global
Debentures, the Depository will credit the accounts of Participants with an
interest in the Global Debenture or New Global Debentures, as applicable,
and (ii) ownership of the Debentures will be shown on, and the transfer of
ownership thereof will be effected only through, records maintained by the
Depository (with respect to the interest of Participants), the Participants
and the Indirect Participants. The laws of some states require that certain
persons take physical delivery in definitive form of securities that they
own and that security interest in negotiable instruments can only be
perfected by delivery of certificates representing the instruments.
Consequently, the ability to transfer Debentures or to pledge the
Debentures as collateral will be limited to such extent.
So long as the Depository or its nominee is the registered owner of
the Global Debentures or the New Global Debentures, as the case may be, the
Depository or such nominee, as the case may be, will be considered the sole
owner or Holder of the Debentures represented by the Global Debentures or
the New Global Debentures, as the case may be, for all purposes under the
Indenture. Except as provided below, owners of beneficial interests in the
Global Debentures or the New Global Debentures, as the case may be, will
not be entitled to have Debentures represented by such Global Debentures or
New Global Debentures, registered in their names, will not receive or be
entitled to receive physical delivery of Certificated Debentures, and will
not be considered the owners or Holders thereof under the Indenture for any
purpose, including with respect to giving of any directions, instruction or
approval to the Trustee thereunder. As a result, the ability of a person
having a beneficial interest in Debentures represented by a Global
Debenture or a New Global Debenture, as the case may be, to pledge such
interest to persons or entities that do not participate in the Depository's
system or to otherwise take action with respect to such interest, may be
affected by the lack of a physical certificate evidencing such interest.
Accordingly, each holder owning a beneficial interest in a Global
Debenture or a New Global Debenture, as the case may be, must rely on the
procedures of the Depository and, if such holder is not a Participant or an
Indirect Participant, on the procedures of the Participant through which
such holder owns its interest, to exercise any rights of a Holder under the
Indenture or such Global Debenture or New Global Debenture. The Company
understands that under existing industry practice, in the event the Company
requests any action of Holders that is an owner of a beneficial interest in
a Global Debenture or a New Global Debenture, as the case may be, desires
to take any action that the Depository, as the Holder of such Global
Debenture or New Global Debenture, is entitled to take, the Depository
would authorize the Participants to take such action and the Participant
would authorize holders owning through such Participants to take such
action or would otherwise act upon the instruction of such holders. Neither
the Company nor the Trustee will have any responsibility or liability for
any aspect of the records relating to or payments made on account of
Debentures by the Depository, or for maintaining, supervising or reviewing
any records of the Depository relating to such Debentures.
Payments with respect to the principal of, premium, if any, and
interest on any Debentures represented by a Global Debenture or a New
Global Debenture, as the case may be, registered in the name of the
Depository or its nominee on the applicable record date will be payable by
the Trustee to or at the direction of the Depository or its nominee in its
capacity as the registered Holder of the Global Debenture or a New Global
Debenture, as the case may be, representing such Debentures under the
Indenture. Under the terms of the Indenture, the Company and the Trustee
may treat the persons in whose names the Debentures, including the Global
Debentures or the New Global Debentures, as the case may be, are registered
as the owners thereof for the purpose of receiving such payment and for any
and all other purposes whatsoever. Consequently, neither the Company nor
the Trustee has or will have any responsibility or liability for the
payment of such amounts to beneficial owners of Debentures (including
principal, premium, if any, and interest), or to immediately credit the
accounts of the relevant Participants with such payment, in amounts
proportionate to their respective holdings in principal amount of
beneficial interest in the Global Debentures or the New Global Debentures,
as the case may be, as shown on the records of the Depository. Payments by
the Participants and the Indirect Participants to the beneficial owners of
Debentures will be governed by standing instructions and customary practice
and will be the responsibility of the Participants or the Indirect
Participants.
CERTIFICATED DEBENTURES
If (i) the Company notifies the Trustee in writing that the
Depository is no longer willing or able to act as a depository and the
Company is unable to locate a qualified successor within 90 days or (ii)
the Company, at its option, notifies the Trustee in writing that it elects
to cause the issuance of Debentures in definitive form under the Indenture,
then, upon surrender by the Depository of its Global Debentures or the New
Global Debentures, as the case may be, Certificated Debentures will be
issued to each person that the Depository identifies as the beneficial
owner of the Debentures represented by the Global Debentures or the New
Global Debentures, as the case may be. In addition, subject to certain
conditions, any person having a beneficial interest in a Global Debenture
or a New Global Debenture, as the case may be, may, upon request to the
Trustee, exchange such beneficial interest for Certificated Debentures.
Upon any such issuance, the Trustee is required to register such
Certificated Debentures in the name of such person or persons (or the
nominee of any thereof), and cause the same to be delivered thereto.
Neither the Company nor the Trustee shall be liable for any delay by
the Depository or any Participant or Indirect Participant in identifying
the beneficial owners of the related Debentures and each such person may
conclusively rely on, and shall be protected in relying on, instructions
from the Depository for all purposes (including with respect to the
registration and delivery, and the respective principal amounts, of the
Debentures to be issued).
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Company and the Initial Purchaser entered into the Registration
Rights Agreement dated as of September 22, 1995. Pursuant to the
Registration Rights Agreement, the Company has agreed to file with the
Securities and Exchange Commission (the "Commission") a registration
statement under the Securities Act (the "Shelf Registration Statement") to
cover public resales of the Debentures by Holders and of the Common Stock
issuable upon conversion of the Debentures by holders thereof, in each case
who satisfy certain conditions relating to the providing of information in
connection with the Shelf Registration Statement. The Company has agreed to
use its reasonable best efforts to (a) cause the Shelf Registration
Statement to be filed with the Commission within 90 days after September
29, 1995 (the "Closing Date"); (b) cause the Shelf Registration Statement
to be declared effective by the Commission within 150 days after the
Closing Date; and (c) keep the Shelf Registration Statement effective until
at least the third anniversary of the Closing Date or such shorter period
that will terminate when all the shares of the Common Stock and the
Debentures covered by the Shelf Registration Statement have been sold
pursuant to the Shelf Registration Statement. The Company has filed a
Registration Statement of which this Prospectus is a part in compliance
with its obligation under the Registration Rights Agreement to file a Shelf
Registration Statement. Notwithstanding the foregoing, the Company will be
permitted to suspend the use of the Shelf Registration Statement during
certain periods under certain conditions.
The Registration Rights Agreement provides that, if (i) the Shelf
Registration Statement is not filed with the Commission or is not declared
effective by the Commission within the time periods set forth above or (ii)
at any time during which the Shelf Registration Statement is required to be
kept effective, it shall cease to be effective (other than as a result of
the effectiveness of a successor registration statement) and such
effectiveness is not restored within 45 days thereafter (each such event
referred to in clause (i) or (ii), a "Registration Default"), the Company
will pay liquidated damages (the "Liquidated Damages") to each Holder of
Debentures or holder of Class A Common Stock which are "restricted"
securities under the Securities Act intended to be eligible for resale
under the Shelf Registration Statement and who has complied with its
obligations under the Registration Rights Agreement. During the first
90-day period immediately following the occurrence of a Registration
Default, such Liquidated Damages shall be in an amount equal to $.05 per
week per $1,000 principal amount of Debentures and $.01 per week per share
(subject to adjustment in the event of stock splits or consolidations,
stock dividends and the like) of Common Stock constituting restricted
securities held by such person. The amount of the Liquidated Damages will
increase by an additional $.05 per week per $1,000 principal amount and
$.01 per week per share (subject to adjustment as set forth above) of
Common Stock constituting restricted securities for each subsequent 90-day
period until the applicable Registration Default is cured, up to a maximum
amount of liquidated damages of $.20 per week per $1,000 principal amount
of Debentures and $.04 per week per share (subject to adjustment as set
forth above) of Common Stock constituting restricted securities. All
accrued Liquidated Damages shall be paid by wire transfer of immediately
available funds or by federal funds check by the Company on each Damages
Payment Date (as defined in the Registration Rights Agreement). Following
the cure of all Registration Defaults, the payment of Liquidated Damages
will cease.
In addition, for so long as the Debentures are outstanding and during
any period in which the Company is not subject to the Exchange Act, the
Company will provide to holders of Debentures and to prospective purchasers
of the Debentures the information required by Rule 144A(d)(4) under the
Securities Act. The Company will provide a copy of the Registration Rights
Agreement to prospective investors upon request.
DESCRIPTION OF 1998 DEBENTURES
The following summary describes certain provisions of the indenture
governing the 1998 Debentures (the "1998 Indenture") and the 1998
Debentures. The following summary does not purport to be complete and is
subject to and is qualified in its entirety by reference to the 1998
Indenture and the form of the 1998 Debentures.
The Company's 1998 Debentures were issued on August 1, 1983 in an
aggregate principal amount of $25,000,000. As of February 4, 1997,
$4,992,000 aggregate principal amount of the 1998 Debentures were
outstanding. The 1998 Debentures are unsecured obligations of the Company
which are subordinated in right of payment to all existing and future
Senior Indebtedness (as defined below) of the Company. The 1998 Indenture
does not contain any restrictions upon the incurrence of Senior
Indebtedness or any other indebtedness by the Company or by any of its
subsidiaries.
The 1998 Debentures bear interest at a rate of 8-1/2% per annum
payable semiannually on February 1 and August 1 of each year and mature on
August 1, 1998. Mandatory sinking fund payments sufficient to retire $2.5
million principal amount of the 1998 Debentures annually, which commenced
on August 1, 1990, are calculated to retire 80% of the issue prior to
maturity. See "Capitalization."
The 1998 Debentures are redeemable on not less than 30 days' notice
at the option of the Company, in whole or in part, at a redemption price of
100% of the principal amount, plus accrued interest to the date of
redemption. The 1998 Debentures are convertible at any time prior to
maturity, unless previously redeemed, into shares of Common Stock of the
Company at a conversion price of $15.00 per share, subject to adjustment
under certain conditions.
The 1998 Indenture contains certain limitations on the Company's
right to distribute dividends or purchase, redeem or otherwise acquire or
retire any of its capital stock and to merge or consolidate unless it meets
the criteria set forth therein.
Senior Indebtedness is defined in the 1998 Indenture to include the
principal of (and premium, if any) and interest on (a) all indebtedness of
the Company, whether outstanding on the date of the 1998 Indenture or
thereafter created, incurred, assumed or guaranteed, for borrowed money
(other than the 1998 Debentures), whether short-term or long-term and
whether secured or unsecured (including all indebtedness evidenced by
notes, bonds, debentures or other securities sold by the Company for
money), (b) indebtedness incurred by the Company in the acquisition
(whether by way of purchase, merger, consolidation or otherwise and whether
by the Company or another person) of any business, real property or other
assets (except assets acquired in the ordinary course of the conduct of the
acquirer's usual business), (c) guarantees by the Company of indebtedness
for borrowed money, whether short-term or long-term and whether secured or
unsecured, of any corporation in which the Company owns, directly or
indirectly, 50% or more of the stock having general voting power and (d)
renewals, extensions, refundings, deferrals, restructurings, amendments and
modifications of any such indebtedness, obligation or guarantee, unless in
each case by the terms of the instrument creating or evidencing such
indebtedness, obligation or guarantee or such renewal, extension,
refunding, deferral, restructuring, amendment or modification it is
provided that such indebtedness, obligation or guarantee is not superior in
right of payment of the 1998 Debentures.
DESCRIPTION OF CAPITAL STOCK
On February 7, 1996, the Board of Directors of the Company approved
and recommended for submission to the stockholders of the Company by a 6 to
1 vote, with Leonard Newman voting against such submission, the
consideration and approval of an Amended and Restated Certificate of
Incorporation (the "Restated Certificate"), which amended and restated the
Company's certificate of incorporation (i) to effect a reclassification of
each share of Class A Common Stock and each share of Class B Common Stock
into one share of Common Stock, (ii) to provide that action by the
stockholders may be taken only at a duly called annual or special meeting,
and not by written consent and (iii) to provide that the stockholders of
the Company would have the right to make, adopt, alter, amend, change or
repeal the By-Laws of the Company only upon the affirmative vote of not
less than 66 2/3% of the outstanding capital stock of the Company entitled
to vote thereon.
On March 26, 1996, the stockholders approved the Restated
Certificate. The Restated Certificate was filed with the Secretary of State
of the State of Delaware and became effective April 1, 1996. The authorized
capital stock of the Company currently consists of 2,000,000 shares of
Preferred Stock and 20,000,000 shares of Common Stock. As of February 4,
1997, there were 5,584,093 shares of Common Stock issued and outstanding
(exclusive of 420,893 shares held in treasury). No shares of Preferred
Stock have been issued. All outstanding shares of Common Stock are fully
paid and nonassessable.
PREFERRED STOCK
The Restated Certificate authorizes 2,000,000 shares of Preferred
Stock each having a par value of $10 per share. Subject to applicable law,
the Board may issue, in its sole discretion, shares of Preferred Stock
without further stockholder action by resolution at the time of issuance.
The Preferred Stock may be issued in one or more series and may vary as to
the designation and number of shares in such series, the voting power of
the holders thereof, the dividend rate, the redemptive terms and prices,
the voluntary and involuntary liquidation preferences, the conversion
rights and the sinking fund requirements, if any, of such series. The
Board, however, may not create any series of Preferred Stock with more than
one vote per share.
COMMON STOCK
Voting Rights. As a result of the Reclassification, all holders of
Common Stock have the same preferences, rights, powers and qualifications,
including one vote for each share of Common Stock held.
The Board was previously divided into two classes; Class A Directors
and Class B Directors. The Class A Directors were divided into three
classes serving staggered terms, the Class A-I Directors, the Class A-II
Directors and the Class A-III Directors. As a result of the
Reclassification, the Board is no longer divided into Class A Directors and
Class B Directors. The directors who, as of the effective date of the
Reclassification, were designated as Class A-I Directors, Class A-II
Directors and Class A-III Directors are now designated as Class I
Directors, Class II Directors and Class III Directors, respectively, and
will continue to serve out their respective terms. Each of the former Class
B Directors was appointed to serve as either a Class I Director, Class II
Director or Class III Director. Each class of directors will consist of as
nearly an equal number of directors as possible. At each annual meeting
beginning with the 1996 Annual Meeting, one class of directors will be
elected to succeed those whose terms expire by all record holders of the
Common Stock as of the date of determination, with each new director to
serve a three-year term.
In General. Holders of Common Stock have no redemption or preemptive
rights and are not liable for further calls or assessments. Holders of
Common Stock will be entitled, after satisfaction of the Company's
liabilities and payment of the liquidation preferences, if any, of any
outstanding shares of Preferred Stock, to share the remaining assets of the
Company, if any, equally in proportion to the number of shares held.
Subject to the rights of holders of Preferred Stock, if any, and
subject to other provisions of the Restated Certificate, holders of Common
Stock are entitled to receive such dividends and other distributions in
cash, property or shares of stock of the Company as may be declared from
time to time by the Board in its discretion from any assets of the Company
legally available therefor.
Transfer Agent and Registrar. Continental Stock Transfer & Trust
Company, 2 Broadway, New York, New York 10004, is the transfer agent and
the registrar of the Common Stock.
PLAN OF DISTRIBUTION
The Company will not receive any of the proceeds from this offering.
The Selling Security Holders may sell all or a portion of the Debentures
and shares of Common Stock offered hereby from time to time on terms to be
determined at the times of such sales. The Debentures and shares of Common
Stock may be sold from time to time to purchasers directly by any of the
Selling Security Holders. Alternatively, any of the Selling Security
Holders may from time to time offer the Debentures or shares of Common
Stock through underwriters, including the Initial Purchaser, dealers or
agents, who may receive compensation in the form of underwriting discounts,
commissions or concessions from the Selling Security Holders and the
purchasers of the Debentures or shares of Common Stock for whom they may
act as agent. To the extent required, the aggregate principal amount of
Debentures and number of shares of Common Stock to be sold, the names of
the Selling Security Holders, the purchase price, the name of any such
agent, dealer or underwriter and any applicable commissions with respect to
a particular offer will be set forth in an accompanying Prospectus
Supplement or, if appropriate, a post-effective amendment to the
Registration Statement of which this Prospectus is a part. There is no
assurance that the Selling Security Holders will sell any or all of the
Debentures or shares of Common Stock offered hereby. The Selling Security
Holders and any broker-dealers, agents or underwriters that participate
with the Selling Security Holders in the distribution of the Debentures or
shares of Common Stock may be deemed to be "underwriters" within the
meaning of the Securities Act, in which event any discounts, commissions or
concessions received by such broker-dealers, agents or underwriter and any
profit on the resale of the Debentures or shares of Common Stock purchased
by them may be deemed to be underwriting commissions or discounts under the
Securities Act.
The Debentures and the shares of Common Stock issued upon conversion
of the Debentures may be sold from time to time in one or more transactions
at fixed offering prices, which may be changed, or at varying prices
determined at the time of sale or at negotiated prices. Such prices will be
determined by the holders of such securities or by agreement between such
holders and underwriters or dealers who may receive fees or commissions in
connection therewith.
To comply with the securities laws of certain states, if applicable ,
the Debentures and shares of Common Stock will be sold in such
jurisdictions only through registered or licensed brokers or dealers. In
addition in certain states the Debentures and shares of Common Stock may
not be offered or sold unless they have been registered or qualified for
sale in the applicable state or an exemption from the registration or
qualification requirement is available and is complied with.
The Debentures were originally sold to the Initial Purchaser on
September 29, 1995 in a private placement (including the over-allotment
option for $5,000,000 aggregate principal amount of the Debentures which
was exercised on November 3, 1995) at a purchase price of 95% of their
principal amount. The Company agreed to indemnify the Initial Purchaser
against certain liabilities in connection with the offer and sale of the
Debentures, including liabilities under the Securities Act, and to
contribute to payments that the Initial Purchaser may be required to make
in respect thereof.
The Company will pay substantially all expenses incident to the
offering and sale of the Debentures and Common Stock to the public other
than underwriting discounts and selling commissions and fees. The Company
and the Selling Security Holders have agreed to indemnify each other
against certain liabilities arising under the Securities Act. In addition,
any underwriter utilized by the Selling Security Holders may be indemnified
against certain liabilities, including liabilities under the Securities
Act. See "Selling Security Holders."
Prior to this offering there has not been any public market for the
Debentures and there can be no assurance regarding the future development
of a market for the Debentures. The Debentures and the shares of Common
Stock which are issuable upon conversion of the Debentures are listed on
the AMEX. The Debentures are eligible for trading in the PORTAL Market;
however, no assurance can be given as to the liquidity of, or trading
market for, the Debentures. The Company has been advised by the Initial
Purchaser that it intends to make a market in the Debentures. However, it
is not obligated to do so and any market-making activities with respect to
the Debentures may be discontinued at any time without notice. See
"Description of the Debentures -- Registration Rights; Liquidated Damages."
Accordingly, no assurance can be given as to the liquidity of or the
trading market for the Debentures. See "Risk Factors -- Lack of Public
Market for the Debentures; Restrictions on Resale."
SELLING SECURITY HOLDERS
The following table sets forth information concerning the principal
amount of Debentures beneficially owned by each Selling Security Holder
which may be offered from time to time pursuant to this Prospectus. Other
than as a result of the ownership or placement of Debentures or Common
Stock, none of the Selling Security Holders has had any material
relationship with the Company within the past three years, except as noted
herein. The table has been prepared based upon information furnished to the
Company by or on behalf of the Selling Security Holders.
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF
DEBENTURES DEBENTURES PERCENT OF
BENEFICIALLY BEING OUTSTANDING
NAME OWNED REGISTERED DEBENTURES
- ------------------------------------------ ----------- ----------- -----------
<S> <C> <C> <C>
BT Holdings................................ $1,650,000 $1,650,000 6.9%
Botta Trading Inc.......................... 200,000 200,000 *
Calamos Asset Management Inc............... 2,692,000 2,692,000 11.3
Castle Convertible Fund Inc................ 500,000 500,000 2.1
Catholic Mutual Relief Society of America.. 250,000 250,000 1.0
CNA Income Shares, Inc..................... 250,000 250,000 1.0
Convertible Securities, Inc................ 1,000,000 1,000,000 4.2
First Delta................................ 200,000 200,000 *
First Pacific Advisers, Inc.(1)............ 4,500,000 4,500,000 18.9
Forest Fulcrum Ltd......................... 682,000 682,000 2.9
Forest Fulcrum Fund........................ 222,000 223,000 1.0
Forest Performance Domestic Fund........... 125,000 125,000 *
Forest Performance Ltd..................... 125,000 125,000 *
Franklin Investors Securities
Trust Convertible Securities Fund...... 750,000 750,000 3.1
Hull Capital Corp.......................... 200,000 200,000 *
ICI American Holdings...................... 250,000 250,000 1.0
Laterman Strategies 90's L.P............... 270,000 270,000 1.1
Laterman & Co.............................. 180,000 180,000 *
Nalco Chemical Retirement.................. 100,000 100,000 *
Nesbitt Burns.............................. 400,000 400,000 1.7
Noddings & Associates, Inc................. 320,000 320,000 1.3
Offshore Strategies Ltd.................... 750,000 750,000 3.1
The Putnam Advisory Company, Inc.
on behalf of Boston College
Endowment................................ 200,000 200,000 *
The Putnam Advisory Company, Inc.
on behalf of New Hampshire
Retirement System........................ 525,000 525,000 2.2
The Putnam Advisory Company, Inc.
on behalf of The Museum of
Fine Art, Boston......................... 90,000 90,000 *
Putnam Convertible Income-Growth
Trust.................................... 1,850,000 1,850,000 7.7
Putnam Convertible Opportunities and
Income Trust............................. 485,000 485,000 2.0
Putnam High Income Convertible
and Bond Fund............................ 600,000 600,000 2.5
Select Capital Management Inc.............. 197,000 197,000 *
Soundshore Partners........................ 1,321,000 1,321,000 5.5
State of Delaware.......................... 400,000 400,000 1.7
United National Insurance Company.......... 150,000 150,000 *
Winchester Convertible Plus Limited........ 1,000,000 1,000,000 4.2
Zazove Convertible Fund, L.P............... 1,200,000 1,200,000 5.0
Zeneca Holdings............................ 250,000 250,000 1.0
----------- ----------- -----------
Total................................. $23,884,000 $23,884,000 92.4%
</TABLE>
- ------------
* Less than 1%.
1 First Pacific Advisers, Inc. may be deemed to be the beneficial owner
(within the meaning of Rule 13d-3 under the Exchange Act) of more
than ten percent of the Common Stock of the Company. Such information
has been derived from statements on Schedule 13D and 13G filed with
the SEC by First Pacific Advisers, Inc.
Because the Selling Security Holders may sell all or some of the
Debentures which they hold and shares of Common Stock issued upon
conversion thereof pursuant to the offering contemplated by this
Prospectus, no estimate can be given as to the aggregate amount of
Debentures or shares of Common Stock that are to be offered hereby or that
will be owned by the Selling Security Holders upon completion of this
offering to which this Prospectus relates. Accordingly, the aggregate
principal amount of Debentures offered hereby may decrease. In addition,
the Selling Security Holders identified above may have sold, transferred or
otherwise disposed of all or a portion of their Debentures and shares of
Common Stock issued upon conversion thereof since the date on which they
provided the information regarding their Debentures and shares of Common
Stock, in transactions exempt from the registration requirements of the
Securities Act. As of the date of this Prospectus, the aggregate principal
amount of Debentures outstanding is $25,000,000. See "Plan of
Distribution."
LEGAL MATTERS
Certain legal matters in connection with this offering will be passed
upon for the Company by Skadden, Arps, Slate, Meagher & Flom LLP, 919 Third
Avenue, New York, New York 10022. Mark N. Kaplan, a director and owner of
1,000 shares of the Common Stock of the Company, is a partner in the firm
of Skadden, Arps, Slate, Meagher & Flom LLP.
EXPERTS
The consolidated financial statements and consolidated financial
statement schedule of the Company as of March 31, 1996 and 1995, and for
each of the years in the three-year period ended March 31, 1996, have been
incorporated by reference in the Registration Statement in reliance upon
the reports of KPMG Peat Marwick LLP, independent certified public
accountants, incorporated by reference herein, and upon the authority of
said firm as experts in accounting and auditing.
==================================== ====================================
NO PERSON IS AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED OR
INCORPORATED BY REFERENCE IN THIS
PROSPECTUS, AND ANY INFORMATION OR $25,000,000
REPRESENTATION NOT CONTAINED OR
INCORPORATED BY REFERENCE HEREIN
MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR
ANY UNDERWRITER. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER OF ANY DIAGNOSTIC/RETRIEVAL
SECURITY OTHER THAN THE REGISTERED SYSTEMS, INC.
SECURITIES TO WHICH IT RELATES OR
AN OFFER TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH OFFER WOULD
BE UNLAWFUL. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE 9% SENIOR SUBORDINATED
COMPANY SINCE THE DATE HEREOF. CONVERTIBLE DEBENTURES
DUE 2003
-------------
TABLE OF CONTENTS
Page
Available Information............2
Incorporation of Certain
Documents by Reference.........2
Prospectus Summary...............4 ---------------
Risk Factors.....................8
Use of Proceeds.................11 PROSPECTUS
Business........................11
Description of the --------------
Debentures....................25
Description of 1998
Debentures....................46
Description of Capital
Stock.........................47
Plan of Distribution............49
Selling Security Holders........51
Legal Matters...................53
Experts.........................53 February 24, 1997
================================== ======================================
