<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
SCHEDULE 13E-3
RULE 13E-3 TRANSACTION STATEMENT
(PURSUANT TO SECTION 13(E) OF THE
SECURITIES EXCHANGE ACT OF 1934)
AURORA ELECTRONICS, INC.
------------------------
(NAME OF THE ISSUER)
AURORA ELECTRONICS, INC.
------------------------
(NAME OF PERSON(S) FILING STATEMENT)
COMMON STOCK, PAR VALUE $.03 PER SHARE
--------------------------------------
(TITLE OF CLASS OF SECURITIES)
051629 10 3
-------------------------------------
(CUSIP NUMBER OF CLASS OF SECURITIES)
KENNETH G. HAWARI, ESQ.
HUGHES & LUCE, L.L.P.
1717 MAIN STREET, SUITE 2800
DALLAS, TEXAS 75201
(214) 939-5500
-----------------------
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON
AUTHORIZED TO RECEIVE NOTICES AND COMMUNICATIONS
ON BEHALF OF PERSON(S) FILING STATEMENT)
This statement is filed in connection with (check the appropriate box):
a. [ ] The filing of solicitation materials or an information
statement subject to Regulation 14A, Regulation 14C or Rule
13e-3(c) under the Securities Exchange Act of 1934.
b. [ ] The filing of a registration statement under the Securities
Act of 1933.
c. [x] A tender offer.
d. [ ] None of the above.
<PAGE> 2
Check the following box if the soliciting materials or information statement
referred to in checking box (a) are preliminary copies: [ ]
Calculation of Filing Fee
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Transaction Valuation* Amount of Filing Fee
- --------------------------------------------------------------------------------
$18,687,500 $3,738
(6,500,000 shares of common stock
at $2.875 per share)
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* The amount of the filing fee, calculated in accordance with Regulation
240.0-11 of the Securities Exchange Act of 1934, as amended, equals
one-50th of one percent of the value of the securities proposed to be
acquired.
[X] Check box if any part of the fee is offset as provided by Rule
0-11(a)(2) and identify the filing with which the offsetting fee was
previously paid. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
Amount Previously Paid: $3,738
Form or Registration No.: Schedule 13E-4 Tender Offer Statement
Filing Party: Aurora Electronics, Inc.
Date Filed: February 23, 1996
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<PAGE> 3
INTRODUCTION
This Rule 13E-3 Transaction Statement (the "Statement") is filed with the
Securities and Exchange Commission (the "Commission") by Aurora Electronics,
Inc., a Delaware corporation (the "Company"), and relates to a tender offer by
the Company to purchase up to 6,500,000 shares of its common stock, par value
$.03 per share (the "Shares"), at a price of $2.875 per share net to the seller
in cash upon the terms and subject to the conditions set forth in the Company's
Offer to Purchase, dated February 23, 1996 (the "Offer to Purchase"), and the
related Letter of Transmittal, copies of which are attached hereto as Exhibits
(a)(1) and (a)(2), respectively, to the Statement on Schedule 13E-4 of the
Company (the "Schedule 13E-4") being filed with the Commission concurrently
herewith.
The cross reference sheet below is being supplied pursuant to General
Instruction F to Schedule 13E-3 and shows the location in the Schedule 13E-4 of
the information required to be included in response to the items of this
Statement. The information in the Schedule 13E-4, including all exhibits
thereto, is hereby expressly incorporated herein by reference and the responses
to each item to this Statement are qualified in their entirety by the
provisions of the Schedule 13E-4. All cross references in this Statement,
other than cross references to the Schedule 13E-4, are to the Offer to
Purchase.
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<PAGE> 4
CROSS REFERENCE SHEET TO
SCHEDULE 13E-4
<TABLE>
<CAPTION>
Item and Caption
---------------- Item of
of Schedule 13E-3 Schedule 13E-4
----------------- --------------
<S> <C> <C>
1. Issuer and Class of Security Subject to the Transaction
(a) . . . . . . . . . . . . . . . . . . . . . . . . . . 1(a)
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . 1(b)
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . 1(c)
(d)-(f) . . . . . . . . . . . . . . . . . . . . . . . . *
2. Identity and Background
(a)-(g) . . . . . . . . . . . . . . . . . . . . . . . . *
3. Past Contacts, Transactions or Negotiations
(a)-(b) . . . . . . . . . . . . . . . . . . . . . . . . *
4. Terms of the Transaction
(a) . . . . . . . . . . . . . . . . . . . . . . . . . . 1(b)
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . *
5. Plans or Proposals of the Issuer or Affiliate
(a) . . . . . . . . . . . . . . . . . . . . . . . . . . *
(b)-(g) . . . . . . . . . . . . . . . . . . . . . . . . 3
6. Source and Amounts of Funds or Other Consideration
(a) . . . . . . . . . . . . . . . . . . . . . . . . . . 2(a)
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . 6
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . 2(b)
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . *
7. Purpose(s), Alternatives, Reasons and Effects
(a) . . . . . . . . . . . . . . . . . . . . . . . . . . 3
(b)-(d) . . . . . . . . . . . . . . . . . . . . . . . . *
8. Fairness of the Transaction
(a)-(f) . . . . . . . . . . . . . . . . . . . . . . . . *
9. Reports, Opinions, Appraisals and Certain Negotiations
(a)-(c) . . . . . . . . . . . . . . . . . . . . . . . . *
</TABLE>
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<PAGE> 5
<TABLE>
<S> <C> <C>
10. Interest in Securities of the Issuer
(a) . . . . . . . . . . . . . . . . . . . . . . . . . . *
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . 4
11. Contracts, Arrangements or Understandings With Respect
to the Issuer's Securities . . . . . . . . . . . . . . . 5
12. Present Intention and Recommendation of Certain Persons
With Regard to the Transaction
(a)-(b) . . . . . . . . . . . . . . . . . . . . . . . . *
(a)-(c) . . . . . . . . . . . . . . . . . . . . . . . . *
14. Financial Information
(a)-(b) . . . . . . . . . . . . . . . . . . . . . . . . 7
15. Persons and Assets Employed, Retained or Utilized
(a) . . . . . . . . . . . . . . . . . . . . . . . . . . *
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . 6
16. Additional Information . . . . . . . . . . . . . . . . .
17. Material to be Filed as Exhibits . . . . . . . . . . . . 9
</TABLE>
- -------------------
* Not Applicable
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<PAGE> 6
ITEM 1. ISSUER AND CLASS OF SECURITY SUBJECT TO THE TRANSACTION.
(a) See Item 1(a) of the Schedule 13E-4.
(b) See "Introduction" and "The Offer -- Number of Shares" of
the Offer to Purchase, which is incorporated herein by
reference.
(c) See "Certain Information About the Company -- Price Range
of Shares; Dividends" and "The Offer -- Listing on the
AMEX" of the Offer to Purchase, which is incorporated
herein by reference.
(d) See "Certain Information About the Company -- Price Range
of Shares; Dividends" of the Offer to Purchase, which is
incorporated herein by reference.
(e) Not applicable.
(f) Not applicable.
ITEM 2. IDENTITY AND BACKGROUND.
The person filing this statement is the issuer of the class of
equity securities which is the subject of this Rule 13E-3
transaction. See "Introduction" of the Offer to Purchase, which is
incorporated herein by reference and Annex C thereto.
ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS.
(a) Not applicable.
(b) Not Applicable.
ITEM 4. TERMS OF THE TRANSACTION.
(a) See "Introduction," "The Offer and Recapitalization --
Background" and "The Offer" of the Offer to Purchase, which
is incorporated herein by reference.
(b) Not applicable.
ITEM 5. PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE.
(a),(b) Not Applicable.
(c) See "Tender Offer Considerations for Stockholders" and "The
Offer and Recapitalization -- Purchase Agreement--Other
Terms" of the Offer to Purchase, which is incorporated
herein by reference.
(d) See "The Offer and Recapitalization" of the Offer to
Purchase, which is incorporated herein by reference.
(e) Not Applicable.
(f),(g) See "The Offer -- Listing on the AMEX" of the Offer to
Purchase, which is incorporated hereby by reference.
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<PAGE> 7
ITEM 6. SOURCE AND AMOUNTS OF FUNDS OR OTHER CONSIDERATION.
(a) See "The Offer and Recapitalization -- Source and Amount of
Funds" of the Offer to Purchase, which is incorporated
herein by reference.
(b) See "The Offer -- Estimated Fees and Expenses" of the Offer
to Purchase, which is incorporated herein by reference.
(c) See "The Offer and Recapitalization -- Senior Credit
Facilities" of the Offer to Purchase, which is incorporated
herein by reference.
(d) Not applicable.
ITEM 7. PURPOSE(S), ALTERNATIVES, REASONS AND EFFECTS.
(a)-(c) See "Introduction," "Special Factors -- Background of the
Offer and Recapitalization" and "Special Factors --
Determination of the Board; Fairness of the Offer and
Recapitalization" of the Offer to Purchase, which is
incorporated herein by reference.
(d) See "Tender Offer Considerations for Stockholders,"
"Certain Information About the Company -- Certain
Projections," "Special Factors -- Purchase and Certain
Potential Effects of the Offer and Recapitalization," "The
Offer -- Listing on the AMEX," and "The Offer -- Certain
Federal Income Tax Consequences" of the Offer to Purchase,
which is incorporated herein by reference.
ITEM 8. FAIRNESS OF THE TRANSACTION.
(a)-(f) See "Introduction," "Special Factors -- Background of the
Offer and Recapitalization" and "Special Factors --
Recommendation of the Board; Fairness of the Offer and
Recapitalization" of the Offer to Purchase, which is
incorporated herein by reference.
ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS.
(a)-(c) See "Special Factors -- Recommendation of the Board;
Fairness of the Offer," "Special Factors -- Opinion of
Alex. Brown & Sons Incorporated" and Annex A of the Offer
to Purchase, which is incorporated herein by reference.
ITEM 10. INTEREST IN SECURITIES OF THE ISSUER.
(a) See "Introduction" of the Offer to Purchase, which is
incorporated herein by reference.
(b) None.
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<PAGE> 8
ITEM 11. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH RESPECT TO THE
ISSUER'S SECURITIES.
See "Tender Offer Considerations for Stockholders," "Special Factors
-- Background of the Offer and Recapitalization" and "The Offer and
Recapitalization" of the Offer to Purchase, which is incorporated
herein by reference.
ITEM 12. PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS WITH REGARD
TO THE TRANSACTION.
(a) See "The Offer and Recapitalization -- Conflicts of
Interest" of the Offer to Purchase, which is incorporated
herein by reference.
(b) See "Introduction" of the Offer to Purchase, which is
incorporated herein by reference. Other than the approval
and recommendation of the transaction by the Board of
Directors, no one has made a recommendation in support of
or opposed to the proposed Offer and Recapitalization
described in the Offer to Purchase.
ITEM 13. OTHER PROVISIONS OF THE TRANSACTION.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
ITEM 14. FINANCIAL INFORMATION.
(a)-(b) See "Certain Information About the Company -- Summary
Financial Information," "Certain Information About the
Company -- Certain Projections," "Certain Information About
the Company -- Pro Forma Consolidated Financial
Information," "Certain Information About the Company --
Notes to Pro Forma Consolidated Financial Information," and
Annex B and Annex C of the Offer to Purchase, which is
incorporated herein by reference.
ITEM 15. PERSONS AND ASSETS EMPLOYED, RETAINED OR UTILIZED.
(a) Not applicable.
(b) See "Special Factors -- Opinion of Alex. Brown & Sons
Incorporated" and "The Offer -- Estimated Fees and
Expenses" of the Offer to Purchase, which is incorporated
herein by reference.
ITEM 16. ADDITIONAL INFORMATION.
None.
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<PAGE> 9
ITEM 17. MATERIAL TO BE FILED AS EXHIBITS.
Exhibit Number Description
-------------- -----------
99.(a)(1) Commitment Letter dated February 21, 1996 from Chemical
Bank Regarding Proposed Senior Credit Facilities.
99.(a)(2) Securities Purchase Agreement, dated February 21, 1996.
99.(b)(1) Alex. Brown Opinion.
99.(b)(2) Alex. Brown Board Presentation.
99.(c) Not applicable.
99.(d)(1) Offer to Purchase, dated February 23, 1996.
99.(d)(2) Letter of Transmittal (including Guidelines for
Certification of Taxpayer Identification Number on Form
W-9).
99.(d)(3) Notice of Guaranteed Delivery.
99.(d)(4) Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees.
99.(d)(5) Form of Letter to Clients for use by Brokers, Dealers,
Commercial Banks, Trust Companies and Other Nominees.
99.(d)(6) Form of Letter to Participants in the Company's
Employee Stock Purchase Plan for use by Plan Trustee.
99.(e) Not applicable.
99.(f) None, except those materials referred to in 99.(d)(1),
99.(d)(2), 99.(d)(3), 99.(d)(4), 99.(d)(5) and
99.(d)(6).
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<PAGE> 10
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
DATED: February 23, 1996
AURORA ELECTRONICS, INC.
By: /s/ JIM C. COWART
----------------------------------
Jim C. Cowart
Chairman of the Board and
Chief Executive Officer
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<PAGE> 11
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequentially
------- ------------
Number Description Numbered Page
------- ----------- -------------
<S> <C> <C>
99.(a)(1) Commitment Letter dated February 21, 1996 from Chemical Bank
Regarding Proposed Senior Credit Facilities.
99.(a)(2) Securities Purchase Agreement, dated February 21, 1996
99.(b)(1) Alex. Brown Opinion.*
99.(b)(2) Alex. Brown Board Presentation.
99.(c) Not applicable.
99.(d)(1) Offer to Purchase, dated February 23, 1996.*
99.(d)(2) Letter of Transmittal (including Guidelines for Certification of
Taxpayer Identification Number on Form W-9).*
99.(d)(3) Notice of Guaranteed Delivery.*
99.(d)(4) Letter to Brokers, Dealers, Commercial Banks, Trust Companies and
Other Nominees.*
99.(d)(5) Form of Letter to Clients for use by Brokers, Dealers, Commercial
Banks, Trust Companies and Other Nominees.*
99.(d)(6) Form of Letter to Participants in the Company's Employee Stock
Purchase Plan for use by Plan Trustee.*
99.(e) Not applicable.
99.(f) None, except those materials referred to in 99.(d)(1),
99.(d)(2), 99.(d)(3), 99.(d)(4), 99.(d)(5) and 99.(d)(6).
</TABLE>
- ----------------
* Furnished to stockholders.
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<PAGE> 1
[LOGO]
CHEMICAL BANK
633 Third Avenue
New York, New York 10017-6764
February 21, 1996
Aurora Electronics Group, Inc.
Aurora Electronics, Inc.
2030 Main Street
Suite 1120
Irvine, CA 92714-7241
Attn.: Mr. Jim C. Cowart
Chairman and Chief Executive Officer
Dear Jim:
Aurora Electronics, Inc. ("Holdings") and its wholly-owned subsidiary Aurora
Electronics Group, Inc. ("Aurora") have requested that Chemical Bank
("Chemical" or the "Bank") arrange for $35,000,000 in senior debt financing
(the "Credit Facilities") to be used to: (a) refinance a portion of Aurora's
existing senior debt, (b) finance approved acquisitions, (c) pay fees and
expenses associated with the Credit Facilities and (d) provide working capital
for Aurora.
Chemical is pleased to advise you of its commitment to provide the entire
amount of such Credit Facilities subject to your acceptance hereof and of the
other terms and conditions referred to and set forth herein (the "Commitment
Letter") and in the Outline of Terms and Conditions provided herewith (the
"Term Sheet") and in the definitive Credit Agreement governing the Credit
Facilities (the "Credit Agreement") and related loan documentation. Chemical's
commitment hereunder shall terminate in the event that the initial borrowing
under the Credit Facilities does not occur on or before April 30, 1996.
It is understood and agreed that Chemical will act as sole agent and arranger
for the Credit Facilities, that no additional agents or co-agents will be
appointed without the consent of Chemical, and that Chemical may elect to
syndicate part of the Credit Facilities prior to and/or after the execution of
definitive documentation. Accordingly, you agree to use your reasonable best
efforts to assist Chemical in achieving a syndication that is satisfactory to
Chemical.
You represent and warrant that (a) all information and data which has been
prepared by Aurora, Holdings or (to the best of your knowledge) Welsh, Carson,
Anderson & Stowe ("WCAS") (the "Credit Party(ies)") or is hereafter made
available to Chemical by any Credit Party, any affiliate thereof or their
advisors, agents or other representatives in connection with the Transactions
(as hereinafter defined), is and will be, taken as a whole, complete and
correct in all material respects and does not and will not, taken as a whole,
contain any untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements contained therein, in light of
the circumstances under which such statements were made, not misleading, and
(b) all financial
Middle Market Structured Finance Division
<PAGE> 2
February 21, 1996
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projections that have been or are hereafter prepared by any Credit Party and
made available to Chemical or any other participants in the Credit Facilities
have been or will be prepared in good faith based upon reasonable assumptions.
You agree to supplement, or cause to be supplemented, the information and
projections referred to in clauses (a) and (b) above from time to time until
completion of the loan documentation and syndication so that the representation
and warranty in the preceding sentence remains correct. In arranging and
syndicating the Credit Facilities, Chemical will be using and relying on such
information and projections without independent verification thereof.
We have reviewed certain historical and pro forma financial statements of
Aurora and Holdings, their assets and liabilities, their business and
operations and the proposed capital structure after the Transactions. If
Chemical's continuing review of materials regarding the Transactions or
Holdings and Aurora discloses, or Chemical otherwise discovers, information not
previously disclosed to it which Chemical reasonably believes has or could have
a material adverse impact on the Transactions or on Holdings or Aurora,
Chemical may, in its sole discretion, suggest alternative financing amounts or
structures or decline to participate in the proposed financing.
Chemical's willingness to provide the financing described herein is further
subject to:
(a) Holdings' receipt of not less than $35,000,000 as gross cash proceeds
from WCAS in consideration for the issuance of convertible preferred
stock (the "Convertible Preferred Stock"); Chemical's and its counsel's
satisfaction with all terms and conditions of the Convertible Preferred
Stock and all agreements and instruments executed and delivered in
connection therewith; such cash proceeds having first been applied by
Holdings to fund the purchase of shares pursuant to the Tender Offer (as
hereinafter defined) and the redemption of notes pursuant to the
Redemption (as hereinafter defined) and to pay fees and expenses
associated with the Tender Offer and the Redemption, and any such
proceeds remaining on the Closing Date (immediately after giving effect
to consummation of the issuance of the Convertible Preferred Stock (as
hereinafter defined) and the Subordinated Note (as hereinafter defined),
the Tender Offer and the Redemption (such transactions referred to herein
as the "Holdings Transactions" and together with the Refinancing (as
hereinafter defined) and the Credit Facilities, collectively referred to
herein as the "Transactions")) having been contributed by Holdings to
Aurora as a cash contribution to Aurora's equity;
(b) Holdings' acquisition of up to 6.5 million shares of Holding's common
stock pursuant to an effective self- tender offer (the "Tender Offer")
for a purchase price not in excess of $3.00 per share; Chemical's and
its counsel's satisfaction with the terms and conditions of the Tender
Offer and Chemical's and its counsel's receipt and satisfaction with
all documentation relating to the Tender Offer;
(c) Aurora's repayment in full of all indebtedness, liabilities and other
obligations arising under or in connection with Aurora's existing
senior debt (approximately $26,600,000) and release of all related
liens and security interests (the "Refinancing); Chemical's and its
counsel's satisfaction with all terms and conditions of the
Refinancing and all agreements and instruments executed and delivered
in connection therewith;
PAGE 2
Middle Market Structured Finance Division
<PAGE> 3
February 21, 1996
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(d) Holdings' receipt of not less than $10,000,000 as gross cash proceeds
from the issuance of an unsecured promissory note (the "Subordinated
Note") to WCAS; Chemical's and its counsel's satisfaction with all
terms and conditions of the Subordinated Note and related indebtedness
and all agreements and instruments executed and delivered in
connection therewith; such cash proceeds having first been applied by
Holdings to fund the purchase of shares pursuant to the Tender Offer
and the redemption of notes pursuant to the Redemption and to pay fees
and expenses associated with the Tender Offer and the Redemption, and
any such proceeds remaining on the Closing Date (immediately after
giving effect to consummation of the Holdings Transactions) having
been contributed by Holdings to Aurora as a cash contribution to
Aurora's equity;
(e) Holdings' having given thirty days' irrevocable notice to all holders
of its outstanding 9 1/4% Senior Subordinated Notes of Holdings'
intention to redeem 100% of such notes (the "Redemption Offer") for an
aggregate redemption price equal to $9,029,000 plus accrued and unpaid
interest to the date of redemption (the "Redemption Amount"); Holdings
having irrevocably defeased all its obligations under the indenture
relating to such notes by virtue of its depositing with the trustee
thereunder an amount equal to the Redemption Amount (the "Defeasance"
and together with the Redemption Offer, collectively referred to
herein as the "Redemption"); Chemical's and its counsel's satisfaction
with all terms and conditions of the Redemption and all agreements and
instruments executed and delivered in connection therewith;
(f) Chemical's and its counsel's satisfaction with the corporate
organizational structure and capital structure of Aurora, which will
include evidence that (i) Aurora shall have received aggregate cash
contributions to its equity from Holdings in an amount at least equal
to (A) the gross cash proceeds from the issuance of the Convertible
Preferred Stock and the Subordinated Note less (B) an amount equal to
the sum of (1) the aggregate purchase price (not to exceed
$19,500,000) paid for shares acquired pursuant to the Tender Offer on
or prior to the Closing Date, (2) the aggregate amount (not to exceed
the Redemption Amount) paid on or prior to the Closing Date pursuant
to the Defeasance, and (3) the aggregate amount of fees and expenses
incurred by Holdings in connection with the Tender Offer, the
Redemption and the issuance of the Subordinated Note, (ii) immediately
after giving effect to consummation of the Transactions, Aurora's
stockholders equity shall be at least $50,000,000 and (iii) upon
completion of the Tender Offer (x) WCAS owns not less than a majority
(on a fully diluted basis) of all classes of the issued and
outstanding capital stock of Holdings and by virtue thereof WCAS is
entitled to elect a majority of Holdings' Board of Directors and (y)
Holdings owns 100% of all classes of the issued and outstanding
capital stock of Aurora;
(g) Chemical's and its counsel's completion of and satisfaction with the
results of all legal due diligence;
(h) Chemical's and its counsel's receipt, review and satisfaction with the
environmental due diligence on Aurora's facilities including Phase I
studies and, if reasonably required by Chemical after its review of
such Phase I studies, Phase II studies;
PAGE 3
<PAGE> 4
February 21, 1996
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(i) Chemical's receipt of and satisfaction with financial models that
include calculations of the financial covenants to be included in the
Credit Agreement which calculations demonstrate compliance with such
financial covenants;
(j) Chemical's satisfaction with any material changes to the terms of any
of the Transactions after the date hereof;
(k) Chemical's satisfaction with Aurora's insurance coverage;
(l) The expiration or termination of all applicable waiting periods under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
with respect to filings made in connection with the Transactions; and
(m) There not occurring or becoming known to Chemical any material adverse
change with respect to the condition (financial or otherwise),
operations, assets or prospects of Aurora or Holdings since December
31, 1995.
Chemical's commitment hereunder is subject to the negotiation, execution and
delivery prior to April 30, 1996 of definitive documentation setting forth
agreed upon terms with respect to Credit Facilities satisfactory to Chemical
and its counsel. Such documentation shall contain the terms and conditions
outlined herein and in the Term Sheet and such other indemnities, conditions to
borrowing, representations and warranties, covenants, events of default,
conditions precedent, security arrangements and other terms and conditions as
Chemical may reasonably require or shall be typical for facilities of this
type. The terms and conditions of Chemical's commitment hereunder and of the
Credit Facilities are not limited to the terms and conditions set forth herein
and in the Term Sheet and therefore Chemical may require additional terms and
conditions not inconsistent with those contained in the Commitment Letter.
Matters that are not fully covered by or made clear under the provisions hereof
and of the Term Sheet are subject to the approval and agreement of Chemical.
As consideration for Chemical's commitment hereunder, Holdings and Aurora agree
to pay to Chemical such fees and expenses as they may agree upon mutually as
and when same are payable.
PAGE 4
Middle Market Structured Finance Division
<PAGE> 5
February 21, 1996
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By executing this Commitment Letter each of you agrees to:
(i) Reimburse Chemical from time to time upon demand, for all reasonable
fees and expenses incurred by Chemical (including, without limitation,
out-of-pocket expenses of Chemical's due diligence investigation, fees
and expenses associated with Chemical's field examination, syndication,
underwriting, title insurance, audit, search appraisal, recording,
filing and transportation expenses, and fees and disbursements of
Chemical's external counsel and of industry, environmental, tax,
accounting and other outside auditors or consultants) in connection
with the Transactions, including without limitation, the preparation of
this Commitment Letter, the Term Sheet, the Credit Agreement for the
Credit Facilities, the security arrangements in connection therewith
and the other transactions contemplated hereby, and review and
preparation of other documents relating to the foregoing. The
provisions contained in this paragraph shall remain in full force and
effect regardless of whether the Transactions are completed or
definitive financing documentation shall be executed and delivered
(except to the extent superseded by such documentation) and
notwithstanding the termination of this Commitment Letter or the
commitment hereunder.
(ii) Indemnify and hold harmless Chemical and its officers, directors,
employees, affiliates, agents, attorneys and advisors and controlling
persons from and against any and all losses, claims, damages and
liabilities to which any such person may become subject arising out of,
relating to, or in connection with this Commitment Letter, the
Transactions, the Credit Facilities, or the loans thereunder, the use
of any proceeds of such loans or any pending or threatened claim,
litigation, investigation or proceeding relating to any of the
foregoing, regardless of whether any of such indemnified parties is a
party thereto, and to reimburse each of such indemnified parties upon
demand for any legal or other fees and expenses incurred in connection
with any of the foregoing, including without limitation, in
investigating or defending any of the foregoing; provided that the
foregoing indemnity will not, as to any indemnified party, apply to
losses, claims, damages, liabilities or related expenses to the extent
they have resulted from the willful misconduct or gross negligence of
such indemnified party;
(iii) This letter may not be amended, supplemented or otherwise modified
except pursuant to a writing signed by each of the parties hereto. This
letter shall be governed by, and construed in accordance with, the laws
of the State of New York.
Holdings, Aurora and Chemical agree that this letter is delivered to you on the
understanding that neither this letter nor any of its terms or substance, shall
be disclosed, directly or indirectly, to any other person except: (i) to your
and our officers, directors and employees, (ii) to your or our attorneys and
advisors who are directly involved in the consideration of this matter, (iii)
as required by applicable law or compulsory legal process or as may be
necessary or advisable in connection with any action, suit, claim or
proceedings arising out of or in connection with this letter or the
transactions contemplated hereby, (iv) upon the request or demand of any
regulatory authority or agency having authority over Chemical or any of its
affiliates, (v) to the extent that such information has been publicly disclosed
other than as a result of a disclosure by you or Chemical or (vi) as part of
the syndication of the Credit Facilities, to any actual or potential assignee
or participant who are informed of the confidential nature hereof and who agree
in writing to maintain
PAGE 5
Middle Market Structured Finance Division
<PAGE> 6
February 21, 1996
- --------------------------------------------------------------------------------
such confidentiality substantially on the terms set forth in this paragraph.
In each case of permitted disclosure, by any person, Aurora and Holdings agree
to notify Chemical of the same.
This Commitment Letter and Chemical's commitment hereunder shall not be
assignable by you without Chemical's prior written consent, and may not be
amended or any provision hereof waived, supplemented or otherwise modified
except by an instrument in writing signed by Holdings, Aurora and Chemical.
This Commitment Letter is for your sole benefit and shall confer no rights or
benefits in any other person or entity.
Each of you and Chemical hereby waives to the fullest extent you may
effectively do so any right you or we may have to a trial by jury in respect of
any litigation directly or indirectly arising out of, under or in connection
with this Commitment Letter or any of the transactions contemplated thereunder.
You hereby agree that this paragraph is a specific and material aspect of this
letter and acknowledge that Chemical would not enter into this commitment
letter or consummate the transactions contemplated hereunder if this paragraph
were not part of this commitment letter.
This Commitment Letter may be executed in any number of counterparts, each of
which shall be an original and all of which, when taken together, shall
constitute one agreement. Delivery of an executed counterpart of a signature
page to this Commitment Letter by telecopier shall be effective as delivery of
a manually executed signature page hereto.
If the foregoing correctly sets forth our agreement, please indicate your
acceptance hereof and of the Term Sheet by signing in the appropriate space
provided below and returning to Chemical the enclosed duplicate originals of
this Commitment Letter and attached Term Sheet no later than 5:00 p.m. (New
York time) on February 23, 1996.
Chemical's commitment hereunder will expire at such time in the event Chemical
has not received such acceptance and fees in accordance with the immediately
preceding sentence.
PAGE 6
Middle Market Structured Finance Division
<PAGE> 7
February 21, 1996
- --------------------------------------------------------------------------------
Chemical is pleased to have been given the opportunity to assist with the
financing described herein.
Very truly yours,
CHEMICAL BANK
By:
Darsweil L. Rogers
Vice President
Accepted and agreed to as of
the date first written above:
Aurora Electronics Group, Inc.
Aurora Electronics, Inc.
By:_____________________
Name:
Title:
PAGE 7
Middle Market Structured Finance Division
<PAGE> 8
February 21, 1996
- --------------------------------------------------------------------------------
OUTLINE OF TERMS AND CONDITIONS
OF SENIOR CREDIT FACILITIES
FEBRUARY 21, 1996
As used herein capitalized terms defined in the Commitment Letter to which this
Outline of Terms and Conditions is attached shall have the respective meanings
therein specified.
BORROWER: Aurora Electronics Group, Inc. (the "Borrower").
GUARANTOR(S): Aurora Electronics, Inc. ("Holdings") which owns
100% of the stock of the Borrower. Also, any
existing or newly formed direct or indirect
domestic subsidiary ("Subsidiary") of Holdings
(including, without limitation, domestic
subsidiaries of the Borrower) (each a
"Subsidiary").
AGENT: Chemical Bank.
AMOUNT: $35,000,000.
FACILITIES: A.) $15,000,000 Senior Secured Tranche A
Revolving Credit. B.) $20,000,000 Senior
Secured Tranche B Revolving Credit.
PURPOSE: TRANCHE A REVOLVING CREDIT will be used for the
Borrower's ongoing working capital needs.
TRANCHE B REVOLVING CREDIT will be used to (i)
refinance existing debt, (ii) pay fees and
expenses associated with the Credit Facilities,
(iii) finance approved acquisitions (the criteria
for which shall be mutually agreed upon in the
Credit Agreement) and (iv) finance distributions
to Holdings to enable Holdings to (A) service
regularly scheduled payments of principal and
interest under the Subordinated Note and other
subordinated indebtedness of Holdings permitted
to exist under the Credit Agreement, (B) make
regularly scheduled lease payments with respect
to Holdings' existing lease of a building located
in Chicago, Illinois, (C) fund a settlement of
the class action lawsuit in which Holdings' is
currently named as a defendant, provided, that
the aggregate amount that may be distributed to
Holdings in connection therewith shall not exceed
$1,250,000, (D) pay expenses incurred in
connection with Holdings' early termination of
its existing lease of a building in Chicago,
Illinois, provided, that the aggregate amount
that may be distributed to Holdings in connection
therewith shall not exceed $2,500,000 and (E)
fund a settlement with the Internal Revenue
Service of existing tax liabilities provided,
that the aggregate amount that may be distributed
to Holdings in connection therewith shall not
exceed $75,000.
PAGE 8
Middle Market Structured Finance Division
<PAGE> 9
February 21, 1996
- --------------------------------------------------------------------------------
INITIAL DRAWDOWN: Nothing will be drawn down under the Tranche A
Revolving Credit on the Closing Date. No more
than $12,000,000 may be drawn down under the
Tranche B Revolving Credit on the Closing Date.
MATURITY: Fifth anniversary of the closing date of the
Facilities (the "Closing Date") or such earlier
date as the total Revolving Credit Commitment
shall terminate, expire or be cancelled in
accordance with the terms of the Credit
Agreement.
AMORTIZATION: The commitment under the Tranche B Revolving
Credit will reduce in 20 consecutive quarterly
instalments of $1,000,000 commencing June 30,
1996.
FEES AND
INTEREST RATES: As set forth in the attached Schedule I.
BORROWING BASE: Tranche A Revolving Credit Loans shall be limited
at any time to the lesser of (i) the Tranche A
Revolving Credit Commitment and (ii) a
percentage, to be determined after completion of
a field examination, of the Borrower's net
eligible accounts receivable and net eligible
inventory (in each case, to be defined in the
Credit Agreement).
COLLATERAL: First priority (subject only to certain permitted
liens), perfected security interest in favor of
the Agent, on behalf of the Lenders, in and liens
on all existing and hereafter acquired assets of
Holdings and its Subsidiaries (except in the case
of scheduled assets of foreign Subsidiaries)
including, but not limited to, accounts
receivable, inventory, real property, machinery,
equipment, license rights, insurance proceeds,
intellectual property and all other tangible and
intangible assets of Holdings and its
Subsidiaries (except in the case of scheduled
assets of foreign Subsidiaries) and the products
and proceeds thereof. First priority perfected
security interests in the stock of the Borrower
and of all other Subsidiaries of Holdings,
whether now existing or hereafter created
(limited to 65% in the case of foreign
Subsidiaries).
MANDATORY
PREPAYMENTS: 100% of the net cash proceeds (to be defined in
the Credit Agreement) of (i) any asset sale,
sale-lease back or other disposition (excluding
sales of inventory in the ordinary course of
business), (ii) any sale or issuance of equity
or incurrence of indebtedness after the Closing
Date and (iii) any extraordinary receipt received
outside the ordinary course of business
(including, without limitation, insurance
proceeds), in each case with such exceptions that
may be mutually agreed upon in definitive loan
documentation. All such incurrences and sales
shall require the consent of a requisite
percentage of the Lenders to be specified in the
Credit Agreement. Nothing herein is intended to
permit equity issuances that would result in a
change of control not permitted under the Credit
Agreement.
PAGE 9
Middle Market Structured Finance Division
<PAGE> 10
February 21, 1996
- --------------------------------------------------------------------------------
CONDITIONS
OF LENDING: Usual for facilities and transactions of this
type, those specified in the Commitment Letter,
and such others as may reasonably be required by
the Agent and the Lenders, including but not
limited to delivery of satisfactory legal
opinions, audited financial statements and other
financial information; first priority (subject to
certain permitted liens) perfected security
interests in the collateral; accuracy in all
respects of representations and warranties;
absence of defaults, prepayment events or
creation of liens under debt instruments or other
agreements as a result of the transactions
contemplated hereby; evidence of authority;
consents of all persons; compliance with
applicable laws and regulations (including ERISA,
margin regulations and environmental laws);
payment of fees and expenses; obtaining of
satisfactory insurance; Chemical's receipt of and
satisfaction with all documentation pertaining to
the Transaction; successful completion of
Chemical and its counsel's due diligence and
satisfaction with the results thereof;
satisfactory field examination audits and
environmental surveys; and execution of
definitive documentation for the Senior
Financing.
REPRESENTATIONS
AND WARRANTIES: Usual for facilities and transactions of this
type and such others as may reasonably be
required by the Agent and the Lenders. Holdings
and its Subsidiaries shall represent and warrant,
without limitation, as to: corporate existence,
good standing; authorization; governmental
approvals; compliance in all material respects
with laws including, without limitation, ERISA;
compliance in all material respects with
applicable governmental regulations; the accuracy
of and compliance with GAAP, of the historic and
interim financial statements, as well as the
material compliance with GAAP and accuracy of
representations of the management prepared
projections and pro forma financial statements
after giving effect to the Tender Offer; absence
of material adverse change; absence of defaults
or events of default; inapplicability of the
Investment Company Act of 1940 and the Public
Utility Holding Company Act of 1935; taxes;
perfection and priority of security interests;
ownership of properties; enforceability of loan
documentation; absence of liens; use of proceeds;
consents; compliance with contracts; accuracy of
information; solvency; and absence of litigation.
AFFIRMATIVE COVENANTS: Usual for facilities and transactions of this
type and such others as may reasonably be
required by the Agent and the Lenders. Holdings
and its Subsidiaries shall covenant and agree,
without limitation as to: delivery of monthly,
annual and other periodic reports, projections
and information, including financial statements;
maintenance of corporate existence and rights;
being duly licensed; compliance in all material
respects with laws and
PAGE 10
Middle Market Structured Finance Division
<PAGE> 11
February 21, 1996
- --------------------------------------------------------------------------------
applicable governmental regulations, including
without limitation, ERISA and environmental laws,
rules and regulations; performance of
obligations; maintenance of properties in good
repair; maintenance of insurance; inspection of
books and properties; payment of taxes and other
liabilities; notice of defaults, investigations,
litigation and other adverse actions; and
consummation of the redemption of Holdings'
9-1/4%% Senior Subordinated Notes within 30 days
following the Closing Date.
The Agent shall have the right (including by
hiring a satisfactory firm to do so) to conduct
field examinations at the expense of the Borrower
to audit the existence and condition of the
Borrower's accounts receivable, inventory,
accounts payable, books and records, and the
Borrower's compliance with the terms and
conditions of the loan documents.
NEGATIVE COVENANTS: Usual for facilities and transactions of this
type and such others as may reasonably be
required by the Agent and the Lenders. Holdings
and its Subsidiaries without limitation, shall
not: incur, create, assume or permit to exist any
indebtedness or its equivalent, except borrowings
under the Facilities and certain other
indebtedness to be agreed upon (including,
without limitation, the Subordinated Note);
incur, create, assume or permit to exist any
mortgage, lien or encumbrance on, or enter into
sale-leaseback arrangements affecting any of its
assets or revenues, whether now owned or
hereafter acquired, except liens in favor of the
Agent (for the benefit of the Lenders) and
certain other permitted liens (to be specified in
the Credit Agreement); guarantee, endorse or
otherwise in any way become contingently liable
for any indebtedness of any other party; make any
loans, advances, or investments except for those
in the normal course of business in amounts to be
agreed upon; merge or consolidate with any other
entity or acquire substantially all of the assets
of any other entity, other than approved
acquisitions (the criteria for which shall be
mutually agreed upon in the Credit Agreement);
sell, lease or otherwise transfer or dispose of
any of its assets, other than the sale of
inventory by the Borrower in the ordinary course
of business; materially change the nature of its
business or, in the case of Holdings, engage in
any business other than ownership of the capital
stock of the Borrower and matters incidental
thereto; change the fiscal year end or accounting
methods (unless required to remain in conformity
with GAAP); amend, alter or waive any documents
or agreements contemplated hereby; or acquire,
create or otherwise permit to exist any
subsidiaries other than those acquired or created
in connection with approved acquisitions.
FINANCIAL COVENANTS: Usual for transactions of this type which may
include, but not necessarily be limited to, a
fixed charge coverage test, interest coverage
test, leverage test and capital expenditure
limitation.
PAGE 11
Middle Market Structured Finance Division
<PAGE> 12
February 21, 1996
- --------------------------------------------------------------------------------
EVENTS OF DEFAULT: Usual Events of Default for facilities and
transactions of this type and such others as may
reasonably be required by the Agent and the
Lenders with respect to Holdings and its
Subsidiaries, including, without limitation:
nonpayment of principal, interest, fees and other
amounts when due; failure to observe or perform
any covenant or undertaking contained in the loan
documentation; any representation or warranty
shall prove to have been incorrect in any
material respect when made or deemed made; a
default or event of default shall occur with
respect to material contracts or third party
indebtedness, including without limitation
indebtedness under the Subordinated Note;
voluntary or involuntary bankruptcy; material
ERISA violation; or Agent (on behalf of the
Lenders) shall cease to have a first priority
perfected security interest in any collateral.
YIELD PROTECTION AND
INCREASED COSTS: The usual for facilities of this type and such
others as may be reasonably required by the Agent
and the Lenders, including but not limited to
compensation with respect to increased reserve
requirements and decreased profitability
resulting from changes in U.S. or foreign capital
adequacy requirements, guidelines or policies or
their interpretation or application by any
regulatory authority (including those outside the
U.S.) whether or not having the force of law
(including pursuant to guidelines adopted by the
Federal Reserve Board in response to the July
1988 report of the Basle Committee on Banking
Regulations and Supervisory Practices), and any
other customary yield and increased cost
protection deemed necessary by Agent or the
Lenders. Compensation will be payable by the
Borrower upon presentation by the affected Lender
of a certificate as to the amounts involved,
which certificate will be conclusive absent
manifest error.
EXPENSES AND
INDEMNIFICATION: Without limiting the terms of the Commitment
Letter, all reasonable out-of-pocket expenses and
charges of (i) Chemical incurred in connection
with the preparation, execution an delivery,
administration and enforcement, as well as
waivers and modifications, of the Credit
Agreement and the other loan documents (including
the reasonable fees and disbursements of
Chemical's external counsel and the expenses and
charges of field examinations) and (ii) the
Lenders for waivers, modifications, enforcement
costs and documentary taxes, are to be the
obligations of the Borrower. In addition, the
Borrower shall indemnify the Agent and the
Lenders and hold them harmless from and against
all costs, expenses (including reasonable fees
and disbursements of counsel) and liabilities
arising out of or relating to the Credit
Facilities, the Tender Offer or other proposed
transactions, provided that neither the Agent nor
any Lender will be indemnified for costs,
expenses and liabilities found by a court of
final decision to have resulted from its gross
negligence or willful misconduct.
PAGE 12
Middle Market Structured Finance Division
<PAGE> 13
February 21, 1996
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GOVERNING LAW: New York.
PAGE 13
Middle Market Structured Finance Division
<PAGE> 14
February 21, 1996
- --------------------------------------------------------------------------------
SCHEDULE I
FEES AND INTEREST RATES
COMMITMENT FEE: 0.375% per annum of the unused portion of the
total Revolving Credit (including Tranche A and
Tranche B), payable quarterly commencing from the
closing date. Fees shall be calculated on the
basis of the actual number of days elapsed over a
360-day year.
INTEREST RATES: At the Borrower's option, a margin over ABR or
Adjusted LIBOR.
"ABR" shall mean the higher of A) Chemical's
Prime Rate and B) the Federal Funds Effective
Rate plus 1/2 of 1%. Adjusted LIBOR is the
London Interbank Offered Rate for one, two, three
or six month interest periods (as selected by the
Borrower), adjusted at all times for statutory
reserves; provided, that all Adjusted LIBOR
borrowings shall be for a one month interest
period initially and until the earlier of (i) 120
days following the Closing Date and (ii)
Chemical's satisfactory completion of its
syndication of the Credit Facilities.
Interest on all borrowings will be payable
quarterly and, with respect to Adjusted LIBOR-
based borrowings, at the end of the relevant
interest period. Interest shall be calculated on
the basis of the actual number of days elapsed
over a 360-day year for all borrowings.
The interest rates available at the Closing Date
will be Adjusted LIBOR plus 2.75% per annum or
ABR plus 1.25% per annum. Following the Agent's
receipt of the financial statements of Holdings
included in Holdings' Form 10-Q or Form 10-K (as
the case may be), commencing with the financial
statements included in Holdings' Form 10-K for
its fiscal year ending September 30, 1996,
interest rate adjustments (either increasing or
decreasing the margin) will be made based on the
ratio of Total Funded Senior Debt to EBITD&A, as
outlined in the grid below. All such interest
rate adjustments will apply prospectively (and
not retroactively) from the date of the Agent's
receipt of the applicable Form 10-Q or Form
10-K.
PAGE 14
Middle Market Structured Finance Division
<PAGE> 15
February 21, 1996
- --------------------------------------------------------------------------------
Ratio of
Total Funded Senior Adjusted
Debt to EBITD&A LIBOR Margin ABR Margin
----------------- ------------ ----------
greater than 3.5 2.75% 1.25%
less than 3.5
but greater than 3.0 2.50% 1.00%
less than 3.0
but greater than 2.5 2.25% 0.75%
less than 2.5
but greater than 2.0 2.00% 0.50%
less than 2.0 1.75% 0.25%
PREPAYMENT PENALTY: None (other than customary yield protection as
referred to above)
PAGE 15
Middle Market Structured Finance Division
<PAGE> 16
[LOGO]
CHEMICAL BANK
633 Third Avenue
New York, New York 10017-6764
February 21, 1996
Aurora Electronics, Inc.
Aurora Electronics Group, Inc.
2030 Main Street
Suite 1120
Irvine, California 92714-7241
Attn.: Jim C. Cowart
Chairman & Chief Executive Officer
Fee Letter
Dear Jim:
Aurora Electronics, Inc. ("Holdings"), Aurora Electronics Group,
Inc. ("Aurora") and Chemical Bank ("Chemical" or the "Bank") have entered into
a letter agreement of even date herewith (the "Commitment Letter") regarding
the proposed financing described therein. Payment of the fees referenced
herein as and when same are payable is a condition to the effectiveness of the
Commitment Letter. Capitalized terms used herein and not otherwise defined have
the meanings assigned thereto in the Commitment Letter and related Term Sheet.
As consideration for Chemical's commitment under the Commitment
Letter and its agreement to manage, structure and arrange the Credit
Facilities, you agree to pay to Chemical a structuring fee (the "Structuring
Fee") equal to 1.75% of the aggregate principal amount of the Credit
Facilities. The Structuring Fee shall be earned as follows: (a) $50,000 of
the Structuring Fee shall be earned upon acceptance and execution of the
Commitment Letter and (b) the balance of the Structuring Fee shall be earned
upon the execution of a definitive credit agreement with respect to the Credit
Facilities; provided, that, if subsequent to acceptance and execution of the
Commitment Letter (x) Holdings or Aurora is for any reason unable or unwilling
to enter into a definitive agreement with respect to the Credit Facilities
notwithstanding Chemical's willingness to make available the Credit Facilities
on a basis consistent with the terms set forth in the Commitment Letter or (y)
Holdings or Aurora enters into a definitive financing agreement of any kind
with a lender other than Chemical, then Chemical shall be entitled to receive
50% (inclusive of the $50,000 earned pursuant to (a) above) of the Structuring
Fee payable in cash on demand. Except as set forth in the proviso to the
immediately preceding sentence, amounts payable in respect of the Structuring
Fee shall be paid as
<PAGE> 17
follows: (1) the $50,000 earned pursuant to (a) above shall be paid in cash
upon the earlier of (A) the execution of a definitive credit agreement with
respect to the Credit Facilities and (B) any expiration or termination of
Chemical's commitment under the Commitment Letter and (2) the balance of the
Structuring Fee shall be paid in cash upon the execution of a definitive credit
agreement with respect to the Credit Facilities.
Chemical shall also be paid an administration fee equal to
$35,000 per annum payable in full in cash on the Closing Date and in equal
quarterly installments in advance commencing one year after the Closing Date.
The administration fee (and all other fees referred to herein) shall be in
addition to reimbursement of Chemical's out-of- pocket fees and expenses, which
fees and expenses shall be earned and payable in accordance with the Commitment
Letter.
In addition, you agree to pay to the Lenders the fees set forth
in the Term Sheet (which is incorporated herein by reference) in the amounts
and at the times specified therein.
It is understood and agreed that this letter agreement shall not
constitute or give rise to any obligation of Chemical to provide or to commit
to provide any financing; such obligation, if any, will arise only under the
Commitment Letter if accepted in accordance with its terms.
Once paid or earned, none of the fees referred to in this letter
shall be refundable or cancelable.
This letter agreement shall be governed by, and construed in
accordance with, the laws of the State of New York. This letter may be
executed in any number of counterparts, each of which shall be an original and
all of which, when taken together, shall constitute one agreement. Delivery of
an executed counterpart of a signature page to this letter by telecopier shall
be effective as delivery of a manually executed signature page hereto.
2
<PAGE> 18
In the event the foregoing is in accordance with your
understanding, please countersign a copy of this letter in the space provided
below and return it to Chemical, whereupon this letter will become a binding
agreement between us.
Very truly yours,
By:_____________________________
Darsweil L. Rogers Vice President
Accepted and agreed to as of
the date first above written:
Aurora Electronics, Inc.
Aurora Electronics Group, Inc.
By:________________________
Name:
Title:
3
<PAGE> 1
================================================================
SECURITIES PURCHASE AGREEMENT
Among
AURORA ELECTRONICS, INC.
WELSH, CARSON, ANDERSON & STOWE VII, L.P.
WCAS CAPITAL PARTNERS II, L.P.
and
The Several Persons Named
In Schedule I Hereto
Dated as of February 21, 1996
================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
I. PURCHASE AND SALE OF SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 1.01. Issuance and Sale of the Convertible
Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 1.02. Issuance and Sale of the Note
and Common Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
SECTION 1.03. Calculation of Number of Convertible
Preferred Shares and Common Shares
to be Issued and Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
SECTION 1.04. Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
II. REPRESENTATIONS AND WARRANTIES OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
SECTION 2.01. Organization and Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
SECTION 2.02. Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
SECTION 2.03. Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
SECTION 2.04. Authorization of Agreements, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
SECTION 2.05. Validity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
SECTION 2.06. Governmental Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
SECTION 2.07. Financial Statements, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 2.08. SEC Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 2.09. Absence of Certain Changes or Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 2.10. Certain Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 2.11. Actions Pending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 2.12. Title to Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 2.13. Real Property Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 2.14. Intellectual Property Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 2.15. Labor Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 2.16. Severance Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 2.17. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 2.18. Compliance with Law; Permits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 2.19. Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 2.20. Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 2.21. Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 2.22. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 2.23. Offering of the Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 2.24. Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 2.25. Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
III. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 3.01. Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 3.02. Validity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 3.03. Investment Representations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
IV. COVENANTS OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 4.01. Conduct of the Company's Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 4.02. Access to Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
</TABLE>
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SECTION 4.03. Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 4.04. Inquiries and Negotiations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 4.05. Notification of Certain Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 4.06. Public Announcements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 4.07. Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 4.08. Financial Statements, Reports, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 4.09. Directors of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
V. COVENANTS RELATING TO THE RECAPITALIZATION
TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 5.01. The Tender Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 5.02. Transactions Relating to
the Company's Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 5.03. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 5.04. New Stock Option Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 5.05. Certificate of Designations;
Reservation of Conversion Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 5.05. Covenant of the Purchasers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
VI. CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 6.01. Conditions Precedent to the Obligations
of the Purchasers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 6.02. Conditions Precedent to the Obligations
of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
VII. SURVIVAL OF REPRESENTATIONS; INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 7.01. Survival of Representations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 7.02. General Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 7.03. Conditions of Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 7.04. Limitation on Certain Indemnities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
VIII. TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 8.01. Termination by the Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 8.02. Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
IX. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 9.01. Restrictive Legends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 9.02. Expenses, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 9.03. WCAS VII Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 9.04. Survival of Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 9.05. Parties in Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
</TABLE>
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SECTION 9.06. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 9.07. Entire Agreement; Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
SECTION 9.08. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
SECTION 9.09. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
</TABLE>
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<PAGE> 5
INDEX TO EXHIBITS, SCHEDULES AND ANNEX
<TABLE>
<CAPTION>
Exhibit Description
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<S> <C>
A Form of 10% Senior Subordinated
Note
B Form of Certificate of Designations
C Form of Registration Rights Agreement
Schedule Description
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I Purchasers and Securities
II Calculation of Actual Number of Convertible Preferred Shares and Common Shares
III Fundamental Terms of the New Stock Option Plan
</TABLE>
iv
<PAGE> 6
SECURITIES PURCHASE AGREEMENT dated as of February 21, 1996,
among AURORA ELECTRONICS, INC., a Delaware corporation (the "Company"), WELSH,
CARSON, ANDERSON & STOWE VII, L.P., a Delaware limited partnership ("WCAS
VII"), WCAS CAPITAL PARTNERS II, L.P., a Delaware limited partnership ("WCAS CP
II"), and the several persons named in Schedule I hereto (such persons together
with WCAS VII, being hereinafter collectively called the "Preferred Stock
Purchasers," and the Preferred Stock Purchasers together with WCAS CP II, being
hereinafter collectively called the "Purchasers").
WHEREAS, the Company desires to sell to the Preferred Stock
Purchasers, and the Preferred Stock Purchasers desire to purchase from the
Company, on the terms and subject to the conditions set forth herein, between
350,000 and 400,000 shares of Convertible Preferred Stock, $.01 par value
("Convertible Preferred Stock"), of the Company at a purchase price of $100 per
share; and
WHEREAS, the Company desires to sell to WCAS CP II, and WCAS
CP II desires to purchase from the Company, on the terms and subject to the
conditions set forth herein, (i) a 10% Senior Subordinated Note of the Company
due September 30, 2001, in the principal amount of $10,000,000, and (ii)
between 607,211 and 610,022 shares of Common Stock, $.03 par value ("Common
Stock"), of the Company for an aggregate purchase price of $10,000,000; and
WHEREAS, the Company has agreed, as a condition to the
obligation of the Purchasers to purchase said securities, to (i) commence and
consummate an issuer tender offer (the "Tender Offer") pursuant to Rules 13e-3
and 13e-4 promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), for the purchase for cash of up to 6,500,000 issued and
outstanding shares of Common Stock, (ii) enter into a new bank credit facility
with Chemical Bank N.A., as Agent, permitting total borrowings of not less than
$35,000,000 with initial availability of not less than $15,000,000, (iii)
terminate the existing Senior Secured Credit Agreement, dated as of May 12,
1994, among the Company, the Lenders named therein and Banque Paribas, as Agent
(the "Existing Credit Agreement") and pay all amounts required to discharge all
of its obligations thereunder, (iv) commence the redemption of the outstanding
9-1/4% Senior Subordinated Notes of the Company due 1996 (the "9-1/4% Notes")
and provide for the payment of all amounts required to discharge all of its
obligations thereunder, and (v) adopt and implement a new stock option plan
(the "New Stock Option Plan") for employees of the Company and enter into new
stock option agreements with certain members of management of the Company, all
on the terms and subject to the conditions set forth herein (the transactions
listed in clauses (i) through (v) hereof being hereinafter collectively called
the "Recapitalization Transactions"); and
<PAGE> 7
WHEREAS, in order to induce the Purchasers to consummate the
transactions contemplated by this Agreement, the Company has agreed to grant to
the Purchasers certain registration rights with respect to (i) the shares of
Common Stock purchased hereunder and (ii) the shares of Common Stock that will
be issuable upon the conversion of the Convertible Preferred Stock purchased
hereunder;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants herein contained, the parties hereto agree as follows:
I.
PURCHASE AND SALE OF SECURITIES
SECTION 1.01. Issuance and Sale of the Convertible Preferred
Shares.
(a) Subject to the terms and conditions set forth herein,
on the Closing Date (as hereinafter defined) the Company shall issue, sell and
deliver to the Preferred Stock Purchasers, and the Preferred Stock Purchasers
shall purchase from the Company, the number of shares of Convertible Preferred
Stock, up to an aggregate 400,000 shares, determined in accordance with Section
1.03 below (the number of shares so purchased are referred to herein as the
"Convertible Preferred Shares"), for a purchase price of $100 per share (the
aggregate purchase price for the Convertible Preferred Shares being herein
called "Preferred Stock Purchase Price"). On the Closing Date, the Company
shall issue a certificate or certificates in definitive form, registered in the
name of each Preferred Stock Purchaser, representing the number of Convertible
Preferred Shares obtained by multiplying (x) the percentage (the "Fractional
Interest") set forth opposite the name of such Preferred Stock Purchaser on
Schedule I hereto under the heading "Fractional Interest" by (y) the aggregate
number of Convertible Preferred Shares to be purchased as determined in
accordance with Section 1.03 below, rounded down to the nearest whole share for
any Purchaser other than WCAS VII, with any such fractional shares being added
to the number of Convertible Preferred Shares to be purchased by WCAS VII.
(b) As payment in full for the Convertible Preferred
Shares being purchased by it hereunder, and against delivery of the certificate
or certificates therefor as aforesaid, on the Closing Date each Preferred Stock
Purchaser shall transfer immediately available funds by wire transfer to the
account or accounts designated by the Company two business days prior to the
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<PAGE> 8
Closing Date an amount equal to $100 multiplied by the number of Convertible
Preferred Shares to be purchased by such Preferred Stock Purchaser in
accordance with paragraph (a) above.
SECTION 1.02. Issuance and Sale of the Note and Common
Shares.
(a) Subject to the terms and conditions set forth herein, on
the Closing Date (i) the Company shall execute, sell and deliver to WCAS CP II,
and WCAS CP II shall purchase from the Company, a 10% Senior Subordinated Note
due September 30, 2001 in substantially the form attached hereto as Exhibit A,
in the principal amount of $10,000,000 (such note, and any note or notes issued
in exchange or substitution therefor, being hereinafter called the "Note"), and
(ii) the Company shall issue, sell and deliver to WCAS CP II, and WCAS CP II
shall purchase from the Company, the number of shares of Common Stock, between
607,211 and 610,022 shares, determined in accordance with Section 1.03 below
(the shares so purchased are referred to herein as the "Common Shares," and
together with the Note and the Preferred Shares, being hereinafter collectively
called the "Securities"), for an aggregate purchase price of $10,000,000. On
the Closing Date, the Company shall issue in definitive form the Note and a
certificate representing the number of Common Shares being purchased by WCAS CP
II hereunder, in each case registered in the name of WCAS CP II.
(b) On the Closing Date, as payment in full for the Note
and the Common Shares being purchased by it hereunder, and against delivery of
the Note and a certificate for the Common Shares as aforesaid, WCAS CP II shall
transfer $10,000,000 by wire transfer of immediately available funds to the
account or accounts designated by the Company two business days prior to the
Closing Date.
SECTION 1.03. Calculation of Number of Convertible Preferred
Shares and Common Shares to be Issued and Sold. It is understood and agreed
that the actual aggregate number of Convertible Preferred Shares and Common
Shares to be issued and sold by the Company pursuant to Sections 1.01 and 1.02
hereof shall depend on the number of shares of Common Stock tendered and not
withdrawn in the Tender Offer and shall equal the number of Convertible
Preferred Shares and Common Shares, as the case may be, that are determined by
mutual agreement of the Company and the Purchasers in accordance with Schedule
II hereto. For illustrative purposes, Schedule II hereto sets forth the
minimum, midpoint and maximum number of Convertible Preferred Shares and Common
Shares that may be purchased by each Purchaser on the Closing Date and the
minimum, midpoint and maximum aggregate purchase price to be paid by each
Purchaser.
3
<PAGE> 9
SECTION 1.04. Closing Date. The transfer, sale and delivery
of the Securities contemplated by Sections 1.01 and 1.02 hereof (the "Closing")
shall take place at the offices of Reboul, MacMurray, Hewitt, Maynard &
Kristol, 45 Rockefeller Plaza, New York, New York, as soon as practicable after
the satisfaction or waiver of each of the conditions to the obligations of the
parties set forth in Article VI hereof, or at such date and time as may be
mutually agreed upon among the parties hereto (such date and time of the
Closing being herein called the "Closing Date").
II.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Purchasers as
follows:
SECTION 2.01. Organization and Qualification. The Company is
a corporation validly existing and in good standing under the laws of the State
of Delaware and has all requisite corporate power and authority to own or lease
and operate its properties and assets and to carry on its business as it is now
being conducted. The Company is duly qualified as a foreign corporation to do
business, and is in good standing, in each jurisdiction in which the character
of its properties owned or leased or the nature of its activities makes such
qualification necessary, except where the failure to be so qualified would not
have a material adverse effect on the properties, assets, financial condition,
prospects, operating results or business of the Company and its subsidiaries,
taken as a whole (a "Material Adverse Effect"). Schedule 2.01 includes a
complete and accurate list of each jurisdiction in which the Company is
qualified as a foreign corporation.
SECTION 2.02. Subsidiaries. (a) Except as set forth on
Schedule 2.02 hereto, neither the Company nor any of its subsidiaries owns of
record or beneficially, directly or indirectly, (i) any shares of outstanding
capital stock or securities convertible into capital stock of any other
corporation or (ii) any participating interest in any partnership, joint
venture or other non-corporate business enterprise. Each subsidiary of the
Company is a corporation validly existing and in good standing under the laws
of its jurisdiction of incorporation and has all requisite corporate power and
authority to own or lease and operate its properties and assets and to carry on
its business as it is now being conducted. Each subsidiary of the Company is
duly qualified as a foreign corporation to do business, and is in good
standing, in each jurisdiction in which the character of its
4
<PAGE> 10
properties owned or leased or the nature of its activities makes such
qualification necessary, except where the failure to be so qualified would not
have a Material Adverse Effect. All the outstanding shares of capital stock of
the Company's subsidiaries are duly authorized, validly issued, fully paid and
nonassessable and, except as set forth on Schedule 2.02, are owned by the
Company or by a wholly-owned subsidiary of the Company, free and clear of any
liens, claims, charges, restrictions, rights of others, security interests,
prior assignments or other encumbrances (collectively, "Claims"), and there are
no proxies, voting or transfer agreements or understandings outstanding with
respect to any such shares.
(b) Schedule 2.02 includes a complete and accurate list
of each subsidiary of the Company, indicating the jurisdiction of
incorporation, each jurisdiction in which such subsidiary is qualified as a
foreign corporation, its capital structure (including all authorized and
outstanding shares), and the nature and level of ownership in such subsidiary
by the Company, any subsidiary of the Company and any other person (for
purposes of this Agreement, "person" shall mean and include an individual, a
partnership, a joint venture, a corporation, a trust, or an unincorporated
organization). Complete and correct copies of the Certificate of Incorporation
and By-laws of the Company and of each subsidiary of the Company have
previously been delivered to the Purchasers.
(c) For purposes of this Agreement, the term
"subsidiary", when used with respect to the Company, shall mean any corporation
or other business entity, a majority of whose outstanding equity securities is
at the time owned, directly or indirectly, by the Company and/or one or more
other subsidiaries of the Company.
SECTION 2.03. Capitalization.
(a) The authorized capital stock of the Company consists of
25,000,000 shares of Common Stock and 1,000,000 shares of Preferred Stock, $.01
par value, of the Company. As of the date hereof, 8,298,293 shares of Common
Stock are issued and outstanding, all of which were duly authorized and validly
issued and are fully paid and nonassessable, and no shares of said Preferred
Stock are issued and outstanding.
(b) Upon the filing with the Secretary of State of the
State of Delaware of a Certificate of Designations of the Company in the form
attached hereto as Exhibit B (the "Certificate of Designations"), after the
date hereof but prior to the consummation of the transactions contemplated
hereby, the authorized capital stock of the Company shall be reclassified to
5
<PAGE> 11
include 400,000 shares of newly authorized Convertible Preferred Stock.
(c) As of the date hereof, except for (i) options granted
pursuant to the Aurora Electronics, Inc. 1993 Stock Option Plan (the "Existing
Stock Option Plan") to purchase an aggregate 759,340 shares of Common Stock, of
which as of the date hereof options to purchase an aggregate 343,053 shares are
vested and options to purchase an aggregate 416,287 shares are unvested, (ii)
other options to purchase an aggregate 250,000 shares of Common Stock, all of
which are vested as of the date hereof, (iii) outstanding warrants to purchase
an aggregate 974,473 shares of Common Stock, and (iv) as set forth on Schedule
2.03 hereof, no subscription, warrant, option, convertible security, stock
appreciation or other right (contingent or other) to purchase or acquire any
shares of any class of capital stock of the Company or any of its subsidiaries
is authorized or outstanding and (except as otherwise expressly contemplated by
this Agreement) there is not any commitment of the Company or any of its
subsidiaries to issue any shares, warrants, options or other such rights or to
distribute to holders of any class of its capital stock any evidences of
indebtedness or assets. Schedule 2.03 sets forth a complete and correct list
of the number of warrants or options, including a listing of the vesting
schedules thereof, held by each person with respect to the outstanding capital
stock of the Company.
(d) Except as set forth on Schedule 2.03, neither the Company
nor any of its subsidiaries has any obligation (contingent or other) to
purchase, redeem or otherwise acquire any shares of its capital stock or any
interest therein or to pay any dividend or make any other distribution in
respect thereof.
SECTION 2.04. Authorization of Agreements, Etc. (a) Each of
(i) the execution and delivery by the Company of this Agreement, the Note and
the Registration Rights Agreement in substantially the form attached hereto as
Exhibit C (the "Registration Rights Agreement"), (ii) the performance by the
Company of its respective obligations hereunder and thereunder, (iii) the
issuance, sale and delivery by the Company of the Convertible Preferred Shares
and the Common Shares, (iv) the issuance and delivery of the shares of Common
Stock issuable upon the conversion of the Convertible Preferred Shares
(collectively, the "Conversion Shares"), and (v) the performance by the Company
of the Recapitalization Transactions have been duly authorized by all requisite
corporate action and will not violate any provision of law, any order of any
court or other agency of government, the Certificate of Incorporation or
By-laws of the Company, or (subject to the receipt of required consents from
the Company's lenders pursuant to the Existing Credit Agreement) any provision
6
<PAGE> 12
of any indenture, agreement or other instrument to which the Company or any of
its properties or assets is bound, or conflict with, result in a breach of or
constitute (with due notice or lapse of time or both) a default under any such
indenture, agreement or other instrument, or result in the creation or
imposition of any Claim in favor of any third person upon any of the assets of
the Company or any of its subsidiaries.
(b) The Convertible Preferred Shares and the Common Shares
have been duly authorized by the Company and, when sold and paid for in
accordance with this Agreement, will be validly issued, fully paid and
nonassessable shares of Convertible Preferred Stock and Common Stock. The
Conversion Shares, when issued and delivered upon the conversion of the
Convertible Preferred Shares, will be duly authorized, validly issued, fully
paid and nonassessable shares of Common Stock. Neither the issuance, sale and
delivery of the Convertible Preferred Shares and the Common Shares to the
Purchasers hereunder, nor the issuance and delivery of the Conversion Shares
upon the conversion of the Convertible Preferred Shares, is subject to any
preemptive rights of stockholders of the Company or to any right of first
refusal or other similar right in favor of any person.
SECTION 2.05. Validity. This Agreement has been duly
executed and delivered by the Company and constitutes the legal, valid and
binding obligation of the Company, enforceable against the Company in
accordance with its terms. The Note and Registration Rights Agreement, when
executed and delivered by the Company as provided in this Agreement, will
constitute the legal, valid and binding obligations of the Company, enforceable
against the Company in accordance with their respective terms.
SECTION 2.06. Governmental Approvals. Subject to the
accuracy of the representations and warranties of the Purchasers set forth in
Article III hereof, no registration or filing with, or consent or approval of,
or other action by, any Federal, state or other governmental agency or
instrumentality is or will be necessary for the valid execution, delivery and
performance of this Agreement, the Registration Rights Agreement, the issuance,
sale and delivery of the Securities, the issuance and delivery of the
Conversion Shares upon the conversion of the Convertible Preferred Shares, or
the consummation of the Recapitalization Transactions, other than (i)
compliance with the requirements of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), (ii) the filing of the
Certificate of Designations and a Certificate of Amendment to the Certificate
of Incorporation of the Company with the Secretary of State of the State of
Delaware in accordance with the Delaware General Corporation Law (the "Delaware
GCL") with respect to the designation of the Convertible Preferred Stock and
the
7
<PAGE> 13
authorization of additional shares of Common Stock sufficient to permit the
issuance and delivery of the Conversion Shares, as the case may be, and (iii)
such filings with and approvals of the Securities and Exchange Commission
("SEC") or any state securities commission or similar regulatory body as may be
necessary in connection with the commencement or consummation of the Tender
Offer.
SECTION 2.07. Financial Statements, Etc. (a) The Company
has furnished to the Purchasers: (i) the audited consolidated balance sheets of
the Company and its subsidiaries as of September 30, 1995, 1994 and 1993 and
the related consolidated statements of operations, stockholders' equity and
cash flows for each of the fiscal years ended September 30, 1995, 1994 and
1993, each certified by Arthur Andersen LLP, the independent certified public
accountants retained by the Company, and (ii) the unaudited consolidated
balance sheet of the Company and its subsidiaries as of December 31, 1995, and
the related consolidated statements of operations and cash flows for the three
months then ended, certified by the principal financial officer of the Company.
All such financial statements (including any related schedules and/or notes)
have been prepared in accordance with generally accepted accounting principles
in the United States ("GAAP") consistently applied and consistent with prior
periods, (i) except that such interim statements are subject to year-end and
audit adjustments (which consist of normal recurring accruals) and do not
contain certain footnote disclosures, and (ii) except as otherwise disclosed in
such financial statements or in the Company SEC Filings (as defined below).
Such balance sheets fairly present in all material respects the financial
position of the Company and its subsidiaries as of their respective dates, and
such statements of operations, stockholders' equity and cash flows fairly
present in all material respects the results of operations of the Company and
its subsidiaries for the respective periods then ended, subject, in the case of
unaudited financial statements, to normal year-end and audit adjustments and
the absence of certain footnote disclosures.
(b) Except as and to the extent (i) reflected on the
consolidated balance sheet of the Company and its subsidiaries as of September
30, 1995 (the "September 30, 1995 Balance Sheet"), (ii) incurred since
September 30, 1995 in the ordinary course of business consistent with past
practice, or (iii) set forth on Schedule 2.07 hereto, neither the Company nor
any of its subsidiaries has any material liabilities or obligations of any kind
or nature, whether known or unknown, secured or unsecured, absolute, accrued,
contingent or otherwise, and whether due or to become due, that would be
required to be reflected on a balance sheet, or the notes thereto, prepared in
accordance with GAAP.
8
<PAGE> 14
Since September 30, 1995, neither the Company nor any of its subsidiaries has
suffered any Material Adverse Effect.
SECTION 2.08. SEC Filings. The Company has filed all forms,
reports and documents required to be filed with the SEC since September 30,
1992, and the Company has made available to the Purchasers, as filed with the
SEC, complete and accurate copies of (i) the Annual Report of the Company on
Form 10-K for the year ended September 30, 1995, and (ii) all other reports,
statements and registration statements (including Current Reports on Form 8-K)
filed by the Company with the SEC since September 30, 1992, in each case
including all amendments and supplements (collectively, the "Company SEC
Filings"). The Company SEC Filings (including, without limitation, any
financial statements or schedules included therein) (i) were prepared in
compliance with the requirements of the Securities Act of 1933, as amended (the
"Securities Act"), or the Exchange Act, and the rules and regulations
thereunder, as the case may be, and (ii) did not at the time of filing (or if
amended, supplemented or superseded by a filing prior to the date hereof, on
the date of that filing) contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.
SECTION 2.09. Absence of Certain Changes or Events. Except
as set forth on Schedule 2.09 hereto or as otherwise disclosed in the Company
SEC Filings or the financial statements of the Company and its subsidiaries as
of and for the three months ended December 31, 1995 referred to above, and
except as otherwise expressly contemplated by this Agreement, since September
30, 1995, neither the Company nor any of its subsidiaries has (i) issued any
stock, bonds or other corporate securities; (ii) borrowed or refinanced any
amount or incurred any material liabilities (absolute or contingent), other
than revolving credit facility borrowings and trade payables incurred in the
ordinary course of business consistent with past practice; (iii) discharged or
satisfied any material Claim or incurred or paid any obligation or liability
(absolute or contingent) other than current liabilities shown on the September
30, 1995 Balance Sheet and current liabilities incurred since the date of such
balance sheet in the ordinary course of business consistent with past practice;
(iv) declared or made any payment or distribution to stockholders, or purchased
or redeemed any shares of its capital stock or other securities; (v) mortgaged,
pledged or subjected to lien any of its assets, tangible or intangible, other
than liens for current real property taxes not yet due and payable; (vi) sold,
assigned or transferred any of its tangible assets, or cancelled any debts or
Claims, except in the ordinary course of business consistent with past
practice; (vii) sold, as-
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signed or transferred any Intellectual Property Rights (as hereinafter defined)
or other intangible assets; (viii) waived any rights of substantial value,
whether or not in the ordinary course of business; (ix) made any material
increase in the compensation (including, without limitation, the rate of
commissions) payable to, or any payment of a material cash bonus to any
director, officer, employee of, or consultant or agent to, the Company or any
of its subsidiaries or any other material change in the terms or conditions of
any employment relationship; (x) announced any plan or legally binding
commitment to create any employee benefit plan, program or arrangement or to
amend or modify in any material respect any existing employee benefit plan,
program or arrangement; (xi) eliminated the vesting conditions or otherwise
accelerated the payment of any compensation, including any stock options; or
(xii) except in connection with this Agreement and the transactions
contemplated hereby, entered into any agreement, letter of intent or similar
undertaking to take any of the actions listed in clauses (i) through (xi)
above.
SECTION 2.10. Certain Information. None of the information
supplied by the Company for inclusion in any document to be filed with the SEC
in connection with the Tender Offer (collectively, the "Tender Offer Filings")
will, at the respective time such Tender Offer Filing or any amendments or
supplements thereto are filed with the SEC, contain any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, except that no representation is made by the Company with
respect to information supplied by the Purchasers which relates to the
Purchasers or any affiliate or associate of the Purchasers for inclusion in the
Tender Offer Filings. None of the information relating to the Company and its
subsidiaries included in any Tender Offer Filing will, at the time such Tender
Offer Filing is distributed to the Company's stockholders, be false or
misleading with respect to any material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
SECTION 2.11. Actions Pending. Except (i) for any actions,
suits, investigations or proceedings which individually do not involve claims
against the Company or any of its subsidiaries for more than $25,000, (ii) as
set forth on Schedule 2.11 hereto, or (iii) as set forth in the Company SEC
Filings, there is no action, suit, investigation or proceeding pending or, to
the best knowledge of the Company, threatened against or affecting the Company,
or any of its properties or rights, before any court or by or before any
governmental body or arbitration
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board or tribunal. Except as set forth on Schedule 2.11 hereto, there is no
judgment, decree, injunction or order of any court, governmental department,
commission, agency, instrumentality or arbitrator outstanding against the
Company.
SECTION 2.12. Title to Properties. The Company and its
subsidiaries have good and marketable title to the properties and assets
reflected on the September 30, 1995 Balance Sheet (other than non-material
properties and assets disposed of in the ordinary course of business consistent
with past practice since the date of such balance sheet), and all such
properties and assets are owned free and clear of any Claims, except (i) as
described on Schedule 2.12 hereto, (ii) for liens under the Existing Credit
Agreement, and (iii) for the liens described in clauses (i) through (v) of
Section 2.13 below. Such properties and assets constitute all of the assets
material to the business of the Company and its subsidiaries (the "Business")
as the same is currently being conducted.
SECTION 2.13. Real Property Interests. Neither the Company
nor any of its subsidiaries owns any real property. Schedule 2.13 hereto sets
forth a complete and accurate list of the real properties leased by the Company
or any of its subsidiaries for annual rental payments in excess of $25,000 (the
"Leased Properties"). Complete and accurate copies of all leases or other
agreements relating to the Leased Properties have been delivered to the
Purchasers and there have been no changes or amendments to such leases or
agreements since such delivery. The Company or one of its subsidiaries is the
lawful owner of all fixtures located on the Leased Properties, free and clear
of all Claims, subject to (i) liens for current taxes not yet due, (ii) liens
pursuant to the Existing Credit Agreement, (iii) landlord's liens, (iv)
purchase money liens and (v) workman's, materialman's, warehouseman's and
similar liens arising by law or statute. Each lease or other agreement
relating to the Leased Properties is in full force and effect, without any
material default of the Company or any such subsidiary thereunder and, to the
best knowledge of the Company, without any material default thereunder of the
other party thereto, and such leases and agreements give the Company and its
subsidiaries the right to use or occupy, as the case may be, all real
properties as are sufficient and adequate to operate the Business as the same
is currently being conducted.
SECTION 2.14. Intellectual Property Rights.
(a) The patents, trademarks and trade names, trademark and
trade name registrations, servicemark, brandmark and brand name registrations
and copyrights, the applications therefor and the licenses with respect thereto
(collectively, "Intellectual
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<PAGE> 17
Property Rights") listed on Schedule 2.14 hereto constitute all such material
proprietary rights owned or held by the Company or any of its subsidiaries that
are reasonably necessary to the conduct of the Business as conducted as of the
date hereof. Except as set forth on Schedule 2.14, (i) the Company and its
subsidiaries conduct the Business without any material claim of infringement of
any Intellectual Property Right of others; (ii) the consummation of the
Recapitalization Transactions and the transactions contemplated by this
Agreement will not violate, terminate, impair or compromise any Intellectual
Property Right; (iii) none of the Intellectual Property Rights listed on
Schedule 2.14 is the subject of any outstanding order, ruling, decree, judgment
or stipulation; (iv) none of the authorized activities of any employee of the
Company or any of its subsidiaries on behalf thereof violates any obligations
of such employee to third parties, including, without limitation,
confidentiality or non-competition obligations under agreements with a former
employer; and (v) the Company and its subsidiaries have taken and are taking
reasonable precautions to protect any material trade secrets and other
confidential information included in the Intellectual Property Rights.
(b) Schedule 2.14 lists all material operating, management,
developmental and applications computer programs, software, databases and
related documentation owned, held or licensed by the Company and its
subsidiaries (collectively, the "Software"), except for "off-the-shelf"
programs generally available to the public at a per unit cost or license fee
not in excess of $1,000. The Software includes all software, applications,
databases and related documentation used in the conduct of the Business.
Except as set forth on Schedule 2.14, (i) the Company and its subsidiaries own
or have valid rights to use the Software without conflict with the rights of
others; (ii) no person has made or, to the best knowledge of the Company,
threatened to make, any claim that the Software, or the use by the Company or
any subsidiary thereof, violates or infringes upon any intellectual property or
other rights of any third party; (iii) the Company is not aware of any use by a
third party of any computer software programs or applications that the Company
considers to be proprietary to the Company or its subsidiaries; and (iv) the
Company and its subsidiaries have taken and are taking reasonable precautions
consistent with industry practices for such information to protect any material
trade secrets and other confidential information included in the Software.
SECTION 2.15. Labor Matters. Neither the Company nor any of
its subsidiaries is or has been a party to any collective bargaining or union
agreement, and no such agreement is or has been applicable to any employees of
the Company or any of its subsidiaries. There are no pending controversies
between the
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<PAGE> 18
Company or any of its subsidiaries and any of such employees that might
reasonably be expected to result in a Material Adverse Effect, or, to the
Company's knowledge, any unresolved labor union grievances or unfair labor
practice or labor arbitration proceedings pending or threatened relating to the
Business. To the best knowledge of the Company, there are no labor unions or
other organizations representing or purporting to represent any employees of
the Company or any of its subsidiaries and there are not any organizational
efforts currently being made or threatened involving any of such employees.
Except as set forth on Schedule 2.15 hereto, the Company and its subsidiaries
are in compliance in all material respects with all laws and regulations or
other legal or contractual requirements regarding the terms and conditions of
employment of employees, former employees or prospective employees or other
labor related matters, including without limitation laws, rules, regulations,
orders, rulings, conciliation agreements, decrees, judgments and awards
relating to wages, hours, the payment of social security and similar taxes,
equal employment opportunity, employment discrimination, fair labor standards,
occupational health and safety, wrongful discharge or violation of the personal
rights of employees, former employees or prospective employees. Neither the
Company nor any of its subsidiaries is liable for any arrears of wages or any
taxes or penalties for failure to comply with any of the foregoing.
SECTION 2.16. Severance Arrangements. Except as set forth
on Schedule 2.16 hereto, neither the Company nor any of its subsidiaries is
party to any agreement with any employee (i) the benefits of which (including,
without limitation, severance benefits) are contingent, or the terms of which
are materially altered, upon the occurrence of a transaction involving the
Company or any of its subsidiaries of the nature of any of the transactions
contemplated by this Agreement or in connection with the Recapitalization
Transactions, or (ii) providing severance benefits in excess of those generally
available under the Company's severance policies as in effect on the date
hereof (which are described on Schedule 2.16), or which are conditioned upon a
change of control, after the termination of employment of such employees
regardless of the reason for such termination of employment. Schedule 2.16
sets forth all employment agreements and compensation guarantees, regardless of
duration, to which the Company or any of its subsidiaries is a party.
SECTION 2.17. Taxes. (i) Except as set forth on Schedule
2.17 hereto, each of the Company, its subsidiaries and any affiliated, combined
or unitary group of which any such corporation is or was a member has (A)
timely filed all Federal and all material state, local and foreign returns,
declarations, reports, estimates, information returns and statements ("Re-
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<PAGE> 19
turns") required to be filed by it in respect of any Taxes (as hereinafter
defined), (B) timely paid all Taxes that are due and payable with respect to
the periods covered by the Returns referred to in clause (A) without regard to
whether such Taxes have been assessed (except for audit adjustments not
material in the aggregate or to the extent that liability therefor is fully
reserved for in the Company's most recent audited financial statements), (C)
established reserves that are adequate for the payment of all Taxes not yet due
and payable with respect to the results of operations of the Company and its
subsidiaries through the date hereof and through the Closing Date, and (D)
complied in all material respects with all applicable laws, rules and
regulations relating to the payment and withholding of Taxes, including without
limitation required withholding from employee wages.
(ii) Schedule 2.17 sets forth the last taxable period through
which the Federal income Tax Returns of the Company and any of its subsidiaries
(A) have been examined by the Internal Revenue Service and closed or (B) with
respect to which the applicable period for assessment under applicable law,
after giving effect to extensions or waivers, has expired. All deficiencies
asserted as a result of such examinations and any examination by any applicable
state, local or foreign taxing authority which have not been or will not be
appealed or contested in a timely manner have been paid, fully settled or
adequately provided for in the Company's most recent audited financial
statements. Except as set forth on Schedule 2.17, no Federal, state, local or
foreign Tax audits or other administrative proceedings or court proceedings are
currently pending with regard to any Federal or material state, local or
foreign Taxes for which the Company or any of its subsidiaries would be liable,
and no deficiency for any such Taxes has been proposed, asserted or assessed
or, to the best knowledge of the Company or any of its subsidiaries, threatened
pursuant to such examination of the Company or any of its subsidiaries by such
Federal, state, local or foreign taxing authority with respect to any period.
(iii) Except as set forth on Schedule 2.17, neither the
Company nor any of its subsidiaries has executed or entered into with the
Internal Revenue Service or any taxing authority (A) any agreement or other
document extending or having the effect of extending the period for assessments
or collection of any Federal, state, local or foreign Taxes for which the
Company or any of its subsidiaries would be liable or (B) a closing agreement
pursuant to Section 7121 of the Internal Revenue Code of 1986, as amended (the
"Internal Revenue Code"), or any predecessor provision thereof or any similar
provision of state,
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local or foreign income Tax law that relates to the assets or operations of the
Company or any of its subsidiaries.
(iv) Except as set forth on Schedule 2.17 hereto, neither the
Company nor any of its subsidiaries is a party to any agreement providing for
the allocation or sharing of liability for any Taxes.
(v) The Company has made available to the Purchasers complete
and accurate copies of all income and franchise Tax Returns and all other
material Returns filed by or on behalf of the Company or any of its
subsidiaries for the three taxable years ending on or prior to September 30,
1995, as well as for any taxable year which is under or still subject to
examination by any applicable taxing authority.
(vi) The Company is not and has not been at any time over
the last five years a "U.S. real property holding corporation," as defined in
section 897 (c)(2) of the Internal Revenue Code.
For purposes of this Agreement, "Taxes" shall mean all
Federal, state, local, foreign or other taxing authority income, franchise,
sales, use, ad valorem, property, payroll, social security, unemployment,
assets, value added, withholding, excise, severance, transfer, employment,
alternative or add-on minimum and other taxes, charges, fees, levies, imposts,
duties, licenses or other assessments, together with any interest and any
penalties, additions to tax or additional amounts imposed by any taxing
authority.
SECTION 2.18. Compliance with Law; Permits. Neither the
Company nor any of its subsidiaries is in default in any respect under any
order or decree of any court, governmental authority, arbitrator or arbitration
board or tribunal or under any laws, ordinances, governmental rules or
regulations to which the Company or any of such subsidiaries or any of their
respective properties or assets is subject, except where such default would not
have a Material Adverse Effect. Schedule 2.18 hereto sets forth a list of all
material permits, authorizations, approvals, registrations, variances and
licenses ("Permits") issued to or used by the Company or any of its
subsidiaries necessary to conduct the Business as the same is conducted as of
the date hereof. The Company possesses all Permits necessary for the Company
or its subsidiaries to own, use and maintain their properties and assets or
required for the conduct of the Business in substantially the same manner as it
is currently conducted. Each Permit is in full force and effect and no
proceeding is pending or, to the best knowledge of the Company, threatened to
modify, suspend, revoke or otherwise limit any Permit and no
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<PAGE> 21
administrative or governmental actions have been taken or, to the best
knowledge of the Company, threatened in connection with the expiration or
renewal of any Permit. Except as set forth on Schedule 2.18, neither the
Company nor any of its subsidiaries will be required, as a result of the
consummation of the transactions contemplated hereby or in connection with any
of the Recapitalization Transactions, to obtain or renew any Permit, unless the
failure to obtain or renew such Permit would not have a Material Adverse
Effect.
SECTION 2.19. Employee Benefit Plans. (i) Schedule 2.19
hereto sets forth a complete and accurate list of each plan, program,
arrangement, agreement, binding written commitment or other material binding
commitment that is an employment, consulting or deferred compensation
agreement, or an executive compensation, incentive bonus or other bonus,
employee pension, profit-sharing, savings, retirement, stock option, stock
purchase, severance pay, life, health, disability or accident insurance plan,
or vacation or other employee benefit plan, program, arrangement, agreement,
binding written commitment or other material binding commitment (collectively,
"Plans"), including, without limitation, each employee benefit plan (as defined
under Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA")) maintained by the Company or any of its subsidiaries or any
trade or business (whether or not incorporated) which, together with such
persons, would be treated as a single employer under Title IV of ERISA or
Section 414 of the Internal Revenue Code (collectively, the "ERISA Affiliates")
or to which any ERISA Affiliate contributes or has any obligation to contribute
to, or has or may have any liability (including, without limitation, a
liability arising out of an indemnification, guarantee, hold harmless or
similar agreement). Each Plan is identified on Schedule 2.19, to the extent
applicable, as one or more of the following: an "employee pension plan" (as
defined in Section 3(2)(A) of ERISA), an "employee welfare plan" (as defined in
Section 3(1) of ERISA), or as a plan intended to be qualified under Section 401
of the Internal Revenue Code.
(ii) The Company and each of its subsidiaries have
complied, and currently are in compliance, in all material respects with all
laws and regulations applicable to the Plans, including, without limitation,
ERISA and the Internal Revenue Code.
(iii) No ERISA Affiliate has, within the last six years,
maintained, adopted or established, contributed to or been required to
contribute to, or otherwise participated in or been required to participate in,
any employee benefit plan or other program or arrangement subject to Title IV
of ERISA (including, without limitation, a "multi-employer plan" (as defined in
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<PAGE> 22
Section 3(37) of ERISA), a multiple employer plan (as defined in Section 210 of
ERISA) and a defined benefit plan (as defined in Section 3(35) of ERISA), and
no ERISA Affiliate has incurred or will incur any material liability as a
result of its maintenance, adoption or establishment of, contribution to, other
participation in, or its being required to contribute to or otherwise
participate in, any such plan, program or arrangement at any time prior to the
Closing Date.
(iv) Except as set forth on Schedule 2.19, neither the
Company nor any of its subsidiaries provides or may be required to provide and
no Plan, other than a Plan that is an employee pension benefit plan (within the
meaning of Section 3(2)(A) of ERISA), provides or may be required to provide
benefits, including, without limitation, death, health or medical benefits
(whether or not insured), with respect to current or former employees of the
Company or any of its subsidiaries beyond their retirement or other termination
of service with the Company or its subsidiaries (other than (A) coverage
mandated by applicable law, (B) deferred compensation benefits accrued as
liabilities on the books of the Company or its subsidiaries, or (C) benefits
the full cost of which is borne by the current or former employee (or his or
her beneficiary)). No ERISA Affiliate maintains any Plan under which any
employee or former employee of any of the ERISA Affiliates may receive medical
benefits which cannot be modified or terminated by the ERISA Affiliates at any
time without the consent of any person (except as provided by generally
applicable legislation).
(v) Neither the transactions contemplated hereby nor the
Recapitalization Transactions will result in (i) any portion of any amount paid
or payable by the Company to a "disqualified individual" (within the meaning of
Section 280G(c) of the Internal Revenue Code and the regulations promulgated
thereunder), whether paid or payable in cash, securities of the Company or
otherwise and whether considered alone or in conjunction with any other amount
paid or payable to such a "disqualified individual", being an "excess parachute
payment" within the meaning of Section 280G(b)(1) of the Internal Revenue Code
and the regulations promulgated thereunder, (ii) any employee of the Company or
any of its subsidiaries being entitled to severance pay, unemployment
compensation, or any other payment, (iii) an acceleration of the time of
payment or vesting, or an increase in the amount of compensation due to any
such employee or former employee or (iv) any prohibited transaction described
in Section 406 of ERISA or Section 4975 of the Internal Revenue Code for which
an exemption is not available.
(vi) No ERISA Affiliates have incurred any material liability
with respect to any Plan under ERISA (including, with-
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out limitation, Title I or Title IV thereof, other than liability for premiums
due to the Pension Benefit Guaranty Corporation), the Internal Revenue Code or
other applicable law, which has not been satisfied in full or been accrued on
the consolidated balance sheet of the Company and its subsidiaries as of
December 31, 1995 pending full satisfaction, and no event has occurred, and
there exists no condition or set of circumstances which could result in the
imposition of any material liability under ERISA, the Internal Revenue Code or
other applicable law with respect to any Plan.
(vii) With respect to each Plan that is funded wholly or
partially through an insurance policy, all premiums required to have been paid
to date under such insurance policy have been paid, and, except as set forth on
Schedule 2.19, as of the Closing Date there will be no material liability of
any of the ERISA Affiliates under any such insurance policy or ancillary
agreement with respect to such insurance policy in the nature of a retroactive
rate adjustment, loss sharing arrangement or other actual or contingent
liability arising wholly or partially out of events occurring prior to the
Closing Date.
(viii) None of the ERISA Affiliates has made any
contribution to any Plan that may be subject to any material excise tax under
Section 4972 of the Internal Revenue Code.
SECTION 2.20. Environmental Matters.
(a) Except as set forth in Schedule 2.20 hereto:
(i) Neither the business or operations of the Company and
its subsidiaries, nor any of the real property owned or leased by the Company
or its subsidiaries (the "Real Property"), violates any applicable
Environmental Law (as defined below) in any material respect.
(ii) Neither the Company nor any of its subsidiaries has
stored, used, treated, released, discharged, spilled or disposed of any
pollutants, contaminants, hazardous or toxic wastes, substances or materials,
or other wastes or materials, that are subject to regulation under any
applicable Environmental Law (collectively, "Regulated Materials"), either on
or at any Real Property or at any other location, in violation in any material
respect of any Environmental Law.
(iii) Neither the Company nor any of its subsidiaries has
received any notice from any governmental authority or any other person
alleging that the Company, its subsidiaries, or their respective business,
operations, or properties are in violation of any Environmental Law or any
applicable Governmental
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Approval (as defined below), or that any of them are responsible or potentially
responsible for the investigation, removal, confinement, remediation or cleanup
(collectively, "Response Action") of any Regulated Material at, on or beneath
(A) the Real Property or any land adjacent thereto; (B) any property previously
owned, leased or operated by the Company, it subsidiaries, or any of their
predecessors; or (C) any other site.
(iv) Neither the Company nor any of its subsidiaries is subject
to any actual or, to the best knowledge of the Company, threatened government
or private litigation or proceedings involving a claim for damages or other
potential liabilities arising under or pursuant to any Environmental Law or
Common Law Environmental Principles (as defined below).
(v) There is no condition or circumstance at, on or beneath (A)
any premises owned, leased, or operated by the Company or any of its
subsidiaries, or previously owned, leased or operated by the Company, it
subsidiaries or any of their predecessors, or (B) any property at which
Regulated Materials generated by the Company, any of its subsidiaries or any of
their respective predecessors have been treated or disposed of, that could
reasonably be expected to give rise to any liability, loss or expense to the
Company under any Environmental Law or form the basis of any requirement for a
Response Action by the Company under any Environmental Law or Common Law
Environmental Principles. Neither the Company nor any of its subsidiaries have
arranged for the treatment or disposal of any Regulated Material, or arranged
for the transport of a Regulated Material for treatment or disposal, at or to
any facility listed or proposed for listing on the National Priorities List
established pursuant to CERCLA (as defined below) or on any list established by
another governmental authority of sites requiring Response Action, or to any
other location that is the subject of enforcement action or Response Action, or
to the best knowledge of the Company, an investigation by any Governmental
Authority or other party that could lead to claims against the Company or its
subsidiaries for any Response Action, property or natural resource damages, or
personal injury.
(vi) The Company and its subsidiaries now hold, and the Company,
its subsidiaries, and their respective predecessors in the past have held, all
Governmental Approvals required under any applicable Environmental Laws with
respect to their respective businesses, operations, activities, properties and
assets. Each of the Company and its subsidiaries has timely filed all material
reports required to be filed by it under applicable Environmental Laws with
respect to the properties, operations, and businesses of the Company and its
subsidiaries; and each of the Company and its subsidiaries has generated and
maintained, in all material
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respects, all data, documentation and records required to be generated or
maintained by the Company and its subsidiaries under any applicable
Environmental Laws with respect thereto.
(b) For the purposes of this Agreement, the following
terms shall have the meanings set forth below:
(i) "Common Law Environmental Principles" means any
principles of common law under which a person or entity may be held liable for
the release or discharge into the environment of any pollutants, contaminants,
hazardous or toxic wastes, substances or materials, or other wastes or
materials.
(ii) "Environmental Law" shall mean any federal, state,
provincial, foreign, or local statute, law, rule, regulation, ordinance, code,
order, consent decree, settlement agreement, or policy having the force of law
relating to protection of the environment, natural resources, or public or
employee health and safety, or relating to the production, generation, use,
storage, treatment, processing, transportation or disposal of Regulated
Materials, including, without limitation: the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. Section 9601 et seq.
("CERCLA"); the Superfund Amendments and Reauthorization Act, Public Law
99-499, 100 Stat. 1613; the Resource Conservation and Recovery Act, 42 U.S.C.
Section 6901 et seq.; the Federal Insecticide, Fungicide and Rodenticide Act, 7
U.S.C. Section 136, et seq.; the Hazardous Materials Transportation Act, 49
U.S.C. Section 1801; the Federal Water Pollution Control Act, 33 U.S.C. Section
1251 et seq.; the Oil Pollution Act of 1990, 33 U.S.C. Section 2701 et seq.;
the Clean Air Act, 42 U.S.C. Section 7401 et seq.; the Occupational Safety and
Health Act, 29 U.S.C. Section 651 et seq.; and counterpart state and local
laws, and regulations adopted thereunder.
(iii) "Governmental Approval" means any permit, license,
authorization, consent, approval, waiver, exception, variance, order, or
exemption issued by any governmental authority in respect of any Environmental
Law.
(c) The Asset Recovery Services division of the Company
is in the business (among other things) of recovering components from printed
circuit board assemblies (the "Materials") for original equipment manufacturers
("OEMs"). Following recovery of components from the Materials, the OEMs
control and are responsible for the disposition of at least 85% of the
Materials after such Materials have left the Company's facilities. In
exercising such control and responsibility, the OEMs, with respect to at least
85% of the Materials, select, specify and contract (in writing or orally) with
the entities or facilities to receive such Materials for recycling, reclamation
and/or other disposition, and the OEMs are responsible for
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arranging for such disposition and the transportation of such Materials to such
selected entities of facilities.
SECTION 2.21. Contracts. Except as set forth on Schedule
2.21 hereto or as disclosed in the Company SEC Filings, there are no contracts
or agreements that are material to the conduct of the Business or to the
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole. The Company has made available to the
Purchasers complete and accurate copies of the contracts and agreements set
forth on Schedule 2.21. Except as set forth on Schedule 2.21, the agreements
referred to on such Schedule are valid and enforceable obligations of the
Company and, to the best knowledge of the Company, of the other parties
thereto. The Company has not been notified in writing of any claim that any
agreement referred to on such Schedule is not valid and enforceable in
accordance with its terms for the periods stated therein, or that there is
under any such contract any existing default or event of default or event which
with notice or lapse of time or both would constitute such a default, other
than any such defaults which, in the aggregate, would not have a Material
Adverse Effect.
SECTION 2.22. Insurance. All policies of fire, liability,
workers' compensation and other forms of insurance providing insurance coverage
to or for the Company or any of its subsidiaries for events or occurrences
arising or taking place in the case of occurrence type insurance, and for
claims made or suits commenced in the case of claims-made type insurance,
between the date of this Agreement and the Closing Date, are listed on Schedule
2.22 hereto, and, except as set forth on Schedule 2.22, all premiums with
respect thereto covering all periods up to and including the date hereof have
been paid, and no notice of cancellation or termination has been received with
respect to any such policy. All such policies are in full force and effect,
and, except as set forth on Schedule 2.22, provide insurance in such amounts
and against such risks as is customary for companies engaged in similar
businesses to protect the employees, properties, assets, Business and
operations of the Company and its subsidiaries. All such policies will remain
in full force and effect and will not in any way be affected by, or terminate
or lapse by reason of, any of the transactions contemplated hereby or the
Recapitalization Transactions.
SECTION 2.23. Offering of the Securities. Neither the
Company nor any person authorized or employed by the Company as agent, broker,
dealer or otherwise in connection with the offering or sale of the Securities
or any similar securities of the Company has offered any such securities for
sale to, or solicited any offers to buy any such securities from, or otherwise
approached or negotiated with respect thereto with, any
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person or persons, under circumstances that involved the use of any form of
general advertising or solicitation as such terms are defined in Regulation D
of the Securities Act; and, assuming the accuracy of the representations and
warranties of the Purchasers set forth in Article III hereof, neither the
Company nor any person acting on the Company's behalf has taken or will take
any action (including, without limitation, any offer, issuance or sale of any
securities of the Company under circumstances which might require the
integration of such transactions with the sale of the Securities under the
Securities Act or the rules and regulations of the SEC thereunder) which would
subject the offering, issuance or sale of the Securities to the Purchasers to
the registration provisions of the Securities Act.
SECTION 2.24. Related Party Transactions. Except as
set forth on Schedule 2.24 hereto or as contemplated hereby, there are no
existing material arrangements or proposed material transactions between the
Company and (i) any officer or director of the Company or any member of the
immediate family of any of the foregoing persons (such officers, directors and
family members being hereinafter individually referred to as a "Related
Party"), (ii) any business (corporate or otherwise) which a Related Party owns,
directly or indirectly, or in which a Related Party has an ownership interest,
or (iii) between any Related Party and any business (corporate or otherwise)
with which the Company regularly does business.
SECTION 2.25. Brokers. Except as set forth on Schedule 2.25
hereto, all negotiations relative to this Agreement and the transactions
contemplated hereby have been carried on by the Company directly with the
Purchasers or through the Company's advisor, Alex. Brown & Sons, Incorporated
("Alex. Brown"), without the intervention of any other person on behalf of the
Company in such manner as to give rise to any valid claim by any other person
against the Purchasers for a finder's fee, brokerage commission or similar
payment.
III.
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
Each Purchaser, severally and not jointly, represents and
warrants to the Company as follows:
SECTION 3.01. Authorization. The execution, delivery and
performance by such Purchaser of this Agreement and the Registration Rights
Agreement, and the purchase and receipt by such Purchaser of the Securities
being acquired by it hereunder, have been duly authorized by all requisite
action on the part of
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such Purchaser, and will not violate any provision of law, any order of any
court or other agency of government, the charter or other governing documents
of such Purchaser, or any provision of any indenture, agreement or other
instrument by which such Purchaser or any of such Purchaser's properties or
assets are bound, or conflict with, result in a breach of or constitute (with
due notice or lapse of time or both) a default under any such indenture,
agreement or other instrument, or result in any Claim upon any of the
properties or assets of such Purchaser.
SECTION 3.02. Validity. This Agreement has been duly
executed and delivered by such Purchaser and constitutes the legal, valid and
binding obligation of such Purchaser, enforceable against such Purchaser in
accordance with its terms. The Registration Rights Agreement, when executed
and delivered in accordance with this Agreement, will constitute the legal,
valid and binding obligation of such Purchaser, enforceable against such
Purchaser in accordance with its terms.
SECTION 3.03. Investment Representations.
(a) Such Purchaser is acquiring the Securities being
purchased by such Purchaser hereunder for such Purchaser's own account, for
investment, and not with a view toward the resale or distribution thereof.
(b) Such Purchaser understands that he, she or it, as the
case may be, must bear the economic risk of such Purchaser's investment for an
indefinite period of time because the Securities are not registered under the
Securities Act or any applicable state securities laws, and may not be resold
unless subsequently registered under the Securities Act and such other laws or
unless an exemption from such registration is available. Such Purchaser also
understands that, except as provided in the Registration Rights Agreement, it
is not contemplated that any registration will be made under the Securities Act
or that the Company will take steps which will make the provisions of Rule 144
under the Securities Act available to permit resale of the Securities. Such
Purchaser agrees not to pledge, transfer, convey or otherwise dispose of any of
the Securities, except in a transaction that is the subject of either (i) an
effective registration statement under the Securities Act and any applicable
state securities laws, or (ii) an opinion of counsel to the effect that such
registration is not required (which opinion and counsel shall be reasonably
satisfactory to the Company, it being agreed that Reboul, MacMurray, Hewitt,
Maynard & Kristol shall be satisfactory, and may be relied on by the Company in
making such determination), it being intended that the agreements with respect
to the Securities contained in this sentence shall be construed consistently
with the provisions
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relating to the same subject matter contained in the Registration Rights
Agreement.
(c) Such Purchaser is able to fend for itself in the
transactions contemplated by this Agreement and such Purchaser has the ability
to bear the economic risks of the investment in the Securities being purchased
hereunder for an indefinite period of time. Without limiting or compromising
the rights of the Purchasers pursuant to Section 4.02 hereof, such Purchaser
further acknowledges that he, she or it, as the case may be, has received
copies of the Company SEC Filings and has had the opportunity to ask questions
of, and receive answers from, officers of the Company with respect to the
business and financial condition of the Company and the terms and conditions of
the offering of the Securities and to obtain additional information necessary
to verify such information or can acquire it without unreasonable effort or
expense.
(d) Such Purchaser has such knowledge and experience in
financial and business matters that such Purchaser is capable of evaluating the
merits and risks of its investment in the Securities. Such Purchaser further
represents that he, she or it, as the case may be, is an "accredited investor"
as such term is defined in Rule 501 of Regulation D of the SEC under the
Securities Act with respect to its purchase of the Securities, and that any
such Purchaser that is a limited partnership has not been formed solely for the
purpose of purchasing the Securities.
(e) If such Purchaser is a limited partnership, such
Purchaser represents that it has been organized and is existing as a limited
partnership under the laws of the State of Delaware.
SECTION 3.04. Governmental Approvals. No registration or
filing with, or consent or approval of, or other action by, any Federal, state
or other governmental agency or instrumentality is or will be necessary by the
Purchasers for the valid execution, delivery and performance of this Agreement
and the Registration Rights Agreement other than compliance with the
requirements of the HSR Act.
IV.
COVENANTS OF THE COMPANY
SECTION 4.01. Conduct of the Company's Business. The Company
covenants and agrees that, prior to the Closing Date, unless the Purchasers
shall otherwise consent in writing or as otherwise expressly contemplated by
this Agreement:
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(a) the Business shall be conducted only in, and the
Company and its subsidiaries shall not take any action except in, the ordinary
course of business consistent with past practice and each of the Company and
its subsidiaries shall use its best efforts to preserve intact its present
business organization, keep available the services of its current officers and
employees, maintain its assets (other than those permitted to be disposed of
hereunder) in good repair and condition, maintain its books of account and
records in the usual, regular and ordinary manner and preserve its goodwill and
ongoing business;
(b) the Company shall not directly or indirectly do any
of the following: (i) issue, sell, pledge, dispose of or encumber (or permit
any of its subsidiaries to issue, sell, pledge, dispose of or encumber) (A) any
capital stock of any of its subsidiaries or (B) any property or assets
(including Intellectual Property Rights) of the Company or any of its
subsidiaries, except inventory and immaterial assets in the ordinary course of
business consistent with past practice; (ii) amend or propose to amend its
Certificate of Incorporation or By-Laws, except for the filing of the
Certificate of Designations contemplated hereby; (iii) split, combine or
reclassify any outstanding shares of its capital stock, or declare, set aside
or pay any dividend payable in cash, stock, property or otherwise with respect
to such shares (except for any dividends paid in the ordinary course to the
Company or to any wholly-owned subsidiary of the Company); (iv) redeem,
purchase, acquire or offer to acquire (or permit any of its subsidiaries to
redeem, purchase, acquire or offer to acquire) any shares of its capital stock;
or (v) enter into any contract, agreement, commitment or arrangement with
respect to any of the matters set forth in this paragraph (b);
(c) neither the Company nor any of its subsidiaries shall
(i) issue, sell, pledge or dispose of, or agree to issue, sell, pledge or
dispose of, any additional shares of, or securities convertible or exchangeable
for, or any options, warrants or rights of any kind to acquire any shares of,
its capital stock of any class or other property or assets whether pursuant to
the Company's stock option plan or otherwise or, except as contemplated by
Section 5.04 hereof, modify the terms or any outstanding options, warrants or
rights to acquire the Company's capital stock; provided that the Company may
issue shares of Company Common Stock upon the exercise of currently outstanding
options, warrants or contractual rights referred to in Section 2.03(c) hereof
or Schedule 2.03 hereof; (ii) acquire (by merger, consolidation or acquisition
of stock or assets) any corporation, partnership or other business organization
or division thereof (except an existing wholly-owned subsidiary) or any
material amount of assets; (iii) incur or guarantee any in-
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debtedness for borrowed money or refinance any such indebtedness or issue or
sell any debt securities, except pursuant to the Existing Credit Agreement in
the ordinary course of business consistent with past practice; (iv) enter into
or modify any material contract, lease, agreement or commitment, or permit or
perform any act that would cause a material breach of any such contract, lease,
agreement or commitment; (v) terminate, modify, assign, waive, release or
relinquish any material contract rights or amend any material rights or claims;
(vi) other than as disclosed on Schedule 2.09 hereof, discharge or satisfy any
material Claim or settle or compromise any material claim, action, suit or
proceeding pending or threatened against the Company or any of its
subsidiaries, or, if the Company or any of its subsidiaries may be liable or
obligated to provide indemnification, against the Company's directors or
officers, before any court, governmental agency or arbitrator; (vii) make any
loans, advances or capital contributions to or investments in, any other
person; (viii) alter through merger, liquidation, reorganization,
restructuring or in any other manner the corporate structure or ownership of
any subsidiary of the Company; (ix) violate or fail to perform, in any material
respect, any obligation imposed upon the Company or any of its subsidiaries by
any applicable laws, orders or decrees, ordinances, government rules or
regulations or conciliation agreements; or (x) to the extent not described
herein, take any action described in Section 2.09 hereof;
(d) neither the Company nor any of its subsidiaries shall
grant any increase in the salary or other compensation of its directors,
officers or employees, except reasonable salary increases, in the case of
employees who are not directors or executive officers of the Company or any of
its subsidiaries, in the ordinary course of business consistent with past
practice, or grant any bonus to any employee or enter into any employment
agreement or make any loan to or enter into any material transaction of any
other nature with any employee of the Company or any subsidiary;
(e) neither the Company nor any of its subsidiaries shall
take any action to institute any new severance or termination pay practices
with respect to any directors, officers or employees of the Company or its
subsidiaries or to increase the benefits payable under its severance or
termination pay practices;
(f) neither the Company nor any of its subsidiaries shall
(except for reasonable salary increases for employees who are not directors or
executive officers of the Company or any of its subsidiaries in the ordinary
course of business consistent with past practice) adopt or amend, in any
material respect, any
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Plan for the benefit or welfare of any directors, officers or employees, except
as contemplated hereby or as may be required by applicable law or regulation;
(g) each of the Company and its subsidiaries shall use
its best efforts, to the extent not prohibited by the foregoing provisions of
this Section 4.01, to maintain its relationships with its suppliers and
customers, clients and others having business dealings with it, and if and as
requested by the Purchasers, (i) the Company shall use its best efforts to make
reasonable arrangements for representatives of the Purchasers to meet with
customers and suppliers of the Company or any of its subsidiaries and (ii) the
Company shall schedule, and the management of the Company shall participate in,
meetings of representatives of the Purchasers with employees of the Company or
any of its subsidiaries;
(h) the Company shall provide to the Purchasers or their
representatives a draft of any Federal income Tax return or material state,
local or foreign Tax return (other than state or local sales and use taxes)
required to be filed on behalf of the Company or any subsidiary between the
date of this Agreement and the Closing Date at least 30 days prior to the date
on which such return is due (or, if later, any extensions of such date) and
shall not file any such return without the consent of the Purchasers or their
representatives, unless required by applicable law;
(i) the Company shall not, and shall not permit any
subsidiary to, (A) utilize accounting principles different from those used in
the preparation of the financial statements referred to in Section 2.07, (B)
change in any manner its method of maintaining its books of account and records
from such methods as in effect on September 30, 1995, or (C) accelerate booking
of revenues or the deferral of expenses, other than as shall be consistent with
past practice and in the ordinary course of business, except to the extent that
any such action is required by GAAP; and
(j) the Company shall not, and shall not permit any
subsidiary to, enter into any transaction or make any agreement or commitment,
or permit any event to occur, which would result in any of the representations
or warranties of the Company contained in this Agreement not being true and
correct in all material respects at and as of the time immediately after the
occurrence of such transaction or event.
SECTION 4.02. Access to Information. (a) The Company
shall, and shall cause its subsidiaries, officers, directors, employees,
representatives, advisors and agents to, afford, from
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the date hereof, the representatives, advisors and agents of the Purchasers
complete access at all reasonable times during normal business hours to its
officers, employees, agents, properties, books, records and workpapers, and
shall furnish the Purchasers all financial, operating and other information and
data as the Purchasers, through their representatives, advisors or agents, may
reasonably request and shall promptly furnish to the Purchasers a copy of (i)
each report, schedule and other document filed or received by it during such
period pursuant to the requirements of the federal securities laws or rules and
regulations of any national securities exchange, (ii) monthly operating and
financial reports in such form as the Purchasers shall reasonably request,
(iii) all material written correspondence, filings, communications (or
memoranda setting forth the substance thereof) between the Company or any of
its officers, employees, representatives, advisors or agents and any
governmental entity with respect to the obtaining of any waivers, consent or
approvals and the making of any registrations or filings, in each case that is
necessary to the transactions contemplated by this Agreement, including the
Recapitalization Transactions.
(b) The Company shall, and shall cause its officers,
directors, employees, representatives, advisors and agents to, furnish the
representatives, advisors and agents of the Purchasers with such information
and assistance concerning the Company as may be necessary for the Purchasers to
ascertain the accuracy and completeness of the information supplied by the
Company for inclusion in any pre-merger notification report filed under the HSR
Act (and any additional information or documentary material supplied in
response to any request pursuant to Section 7A(e) of the HSR Act and the
regulations thereunder).
(c) No investigation pursuant to this Section 4.02 shall
affect, add to or subtract from any representations or warranties of the
parties hereto or the conditions to the obligations of the parties hereto to
effect the transactions contemplated hereby or the Recapitalization
Transactions.
SECTION 4.03. Further Assurances. Subject to the terms and
conditions herein provided, each of the parties hereto agrees to use its
reasonable best efforts to take, or cause to be taken, all action and to do, or
cause to be done, all things necessary, proper or advisable to consummate and
make effective as promptly as practicable the transactions contemplated by this
Agreement and the Recapitalization Transactions, including, without limitation,
using all reasonable efforts to obtain all necessary waivers, consents and
approvals and to effect all necessary registrations and filings.
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SECTION 4.04. Inquiries and Negotiations. Subject to any
mutual agreement of the Company and the Purchasers to terminate this Agreement,
prior to the Closing Date, neither the Company nor any of its subsidiaries, nor
any of their respective affiliates, directors, officers, employees,
representatives, advisors or agents, shall, directly or indirectly, solicit or
initiate any discussions, submissions of proposals or offers or negotiations
with, or, subject to the fiduciary obligations of the Company's Board of
Directors under applicable law or other obligations of applicable law or the
rules of the American Stock Exchange (in each such case as advised by counsel
in writing specifying such obligations), participate in any negotiations or
discussions with, or provide any information or data of any nature whatsoever
to, or otherwise cooperate in any other way with, or assist or participate in,
facilitate or encourage any effort or attempt by, any person, other than WCAS
VII and its affiliates, representatives and agents, concerning any transaction
or series of transactions with a third party or parties concerning any merger,
consolidation, sale of substantial assets (other than the sale of assets in the
ordinary course of the Company's business consistent with past practice), sale
of shares of capital stock or other equity securities or sale of debt
securities aggregating $30 million or more (including without limitation any of
the foregoing effected by way of recapitalization, debt restructuring or other
similar transaction), involving the Company or any subsidiary, or any division
of the Company or any of its subsidiaries (such transactions being hereinafter
referred to as "Alternative Transactions"). The Company shall immediately
notify WCAS VII if any bona fide proposal, offer or other contact is received
by, any material information is requested from, or any discussions or
negotiations are sought to be initiated or continued with, the Company in
respect of an Alternative Transaction, and shall, in any such notice to WCAS
VII, indicate the identity of the offeror and the terms and conditions of any
proposals or offers or the nature of any inquiries or contacts, and thereafter
shall keep WCAS VII informed of the status and terms of any such proposals or
offers and the status of any such discussions or negotiations. The Company
shall not release any third party from, or waive any provision of, any
confidentiality or standstill agreement to which the Company is a party.
SECTION 4.05. Notification of Certain Matters. The Company
shall give prompt notice to the Purchasers, and the Purchasers shall give
prompt notice to the Company, of (i) the occurrence, or failure to occur, of
any event that such party believes would be likely to cause (x) any of its
representations or warranties contained in this Agreement to be untrue or
inaccurate in any material respect at any time from the date hereof or (y) any
covenant, condition or agreement contained in
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this Agreement not to be complied with or satisfied and (ii) any failure of the
Company or the Purchasers, as the case may be, or any officer, director,
employee or agent thereof, to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it hereunder; provided, however,
that failure to give such notice shall not constitute a waiver of any defense
that may be validly asserted.
SECTION 4.06. Public Announcements. Prior to the Closing
Date, each of the Company and the Purchasers agrees that it will not issue or
release any press release or otherwise make any public statement with respect
to this Agreement (including the Exhibits and Schedules hereto) or the
transactions contemplated hereby without the prior consent of the other party,
which consent shall not be unreasonably withheld or delayed; provided, however,
that such disclosure can be made without obtaining such prior consent if (i)
the disclosure is required by law or by obligations imposed pursuant to any
listing agreement with any national securities exchange and (ii) the party
making such disclosure has first used its reasonable best efforts to consult
with the other party about the form and substance of such disclosure.
SECTION 4.07. Consents and Approvals. Prior to the Closing
Date, the Company shall promptly apply for or otherwise seek and use its best
efforts to obtain all authorizations, consents, waivers and approvals (whether
by or from any person, entity, court or governmental agency or authority) as
may be required in connection with the consummation of this Agreement and the
Recapitalization Transactions and the transactions contemplated hereby and
thereby, including without limitation any consent or approval required to be
obtained (i) pursuant to the HSR Act, (ii) from the SEC in connection with the
Tender Offer, (iii) the Delaware Secretary of State in connection with the
Certificate of Designations, and (iv) from the stockholders of the Company
pursuant to the Delaware GCL in connection with the New Stock Option Plan at
the first stockholders' meeting following the date hereof.
SECTION 4.08. Financial Statements, Reports, Etc. So long as
(x) WCAS VII shall hold 25% or more of the outstanding Convertible Preferred
Shares, or (y) WCAS CP II shall hold 25% of the original principal amount of
the Note, the Company shall furnish to the Purchasers:
(i) within 90 days after the end of each fiscal year of the
Company, a consolidated balance sheet of the Company and its
subsidiaries as of the end of such fiscal year and the related
consolidated statements of operations, changes in stockholders' equity
and changes in financial position of
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the Company and its subsidiaries for the fiscal year then ended,
together with supporting notes thereto, certified without
qualification as to scope of audit by a firm of independent certified
public accountants of recognized national standing selected by the
Board of Directors of the Company;
(ii) within 45 days after the end of each quarter in each
fiscal year (other than the last quarter in each fiscal year), a
consolidated balance sheet of the Company and its subsidiaries and the
related consolidated statements of operations, changes in
stockholders' equity and changes in financial position of the Company
and its subsidiaries for the quarter then ended, unaudited but
certified by the principal financial officer of the Company, such
balance sheet to be as of the end of such quarter and such statements
of operations, changes in stockholders' equity and changes in
financial position to be for such quarter and for the period from the
beginning of the fiscal year to the end of such quarter, in each case
subject to normal year-end and audit adjustments;
(iii) within 30 days after the end of each month in each
fiscal year, a consolidated balance sheet of the Company and its
subsidiaries and the related consolidated statement of operations for
the month then ended, unaudited but certified by the principal
financial officer of the Company, such balance sheet to be as of the
end of such month and such statement of operations to be for such
month and for the period from the beginning of the fiscal year to the
end of such month, in each case subject to normal year-end
adjustments;
(iv) not later than the commencement of each fiscal year
of the Company, a budget or business plan for such fiscal year, in
such detail as WCAS VII or WCAS CP II may reasonably request;
(v) concurrently with the financial statements referred
to in (i) and (ii) above, a brief narrative of the primary reasons for
the variance between the Company's results of operations and its
budget or business plan for such period;
(vi) promptly upon filing, copies of all registration
statements, prospectuses, periodic reports and other documents filed
by the Company with the SEC; and
(vii) promptly, from time to time, such other information
regarding the operations, business, affairs and
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financial condition of the Company or any subsidiary as the Purchasers
may reasonably request, subject to such confidentiality agreements as
the Company may reasonably request.
SECTION 4.09. Directors of the Company. The Company agrees
that it shall nominate and use its best efforts to cause to be elected to the
Board of Directors of the Company immediately after the Closing up to four
members designated by WCAS VII and to provide that the Board of Directors of
the Company shall consist of no more than seven members.
V.
COVENANTS RELATING TO THE RECAPITALIZATION TRANSACTIONS
SECTION 5.01. The Tender Offer. (a) As promptly as
reasonably practicable after the date hereof, but no later than 5 business days
after the date hereof (the "Commencement Date"), the Company shall commence the
Tender Offer pursuant Rules 13e-3 and 13e-4 of the Exchange Act to purchase for
cash up to 6,500,000 of the issued and outstanding shares of Common Stock of
the Company at a net purchase price per share of $2.875. Pursuant to the
Tender Offer the Company shall agree to purchase up to 6,500,000 shares of
Common Stock that are validly tendered and not withdrawn prior to the
expiration date set forth in the Tender Offer Filings initially filed with the
SEC at the commencement of the Tender Offer (such expiration date being herein
called the "Initial Expiration Date"). The Company may, at any time and from
time to time until June 30, 1996 (assuming all the conditions to the Tender
Offer have not been met), extend the Initial Expiration Date (the date that is
the later of the Initial Expiration Date and the latest time and date to which
the Tender Offer is extended is hereinafter called the "Expiration Date"). The
consummation of the Tender Offer shall be conditioned upon a minimum of
2,000,000 of the issued and outstanding shares of Common Stock having been
validly tendered and not withdrawn at the Expiration Date.
(b) On or prior to the Commencement Date, the Company
shall prepare and file with the SEC under the Exchange Act a Tender Offer
Issuer Statement on Schedule 13E-3 and 13E-4 pertaining to the Tender Offer and
shall promptly publish, send or give to the holders of Common Stock the
information required by Rules 13e-3 and 13e-4 of the Exchange Act. The Company
shall cooperate fully with the Purchasers in the preparation of the Tender
Offer Filings and shall not file, publish, send or give any Tender Offer
Filing, without providing the Purchasers and
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their counsel a reasonable opportunity to review the same and comment thereon.
(c) The Company shall also comply with, make any filings
or take any other actions required to be taken under state law in connection
with the commencement and consummation of the Tender Offer.
(d) The Board of Directors of the Company has determined
that the Tender Offer is fair to and in the best interests of the Company's
stockholders and, subject to its fiduciary obligations as advised in writing by
counsel, shall recommend that the Company's stockholders tender at least a
number of shares in the Tender Offer sufficient to secure the minimum number of
shares required to be tendered up to the maximum number of shares permitted to
be tendered. The Company shall, subject as aforesaid, use its best efforts to
solicit and secure from stockholders the minimum number of shares required to
be tendered in the Tender Offer.
(e) The Company shall notify the Purchasers of the
receipt of any comments of the SEC and of any requests by the SEC for
amendments or supplements to the Tender Offer Materials, or for additional
information, and shall promptly supply the Purchasers with copies of all
correspondence between the Company (or its representatives) and the SEC (or its
staff) with respect thereto. If, at any time prior to the Expiration Date any
event should occur relating to or affecting the Company, or to their respective
officers or directors, which event should be described in an amendment or
supplement to the Tender Offer Materials, the parties shall promptly inform one
another and shall cooperate in promptly preparing, filing and clearing with the
SEC and, if required by applicable securities laws, distributing to the
Company's stockholders such amendment or supplement.
SECTION 5.02. Transactions Relating to the Company's
Indebtedness.
(a) Between the date hereof and the Closing Date, the
Company will use its best efforts to take all actions necessary in order that
the Company may, on or prior to the Closing Date, enter into (and/or to cause
any of its subsidiaries to enter into) a new bank credit facility (the "New
Bank Credit Facility") with a bank or syndicate of banks acceptable to the
Purchasers permitting total borrowings of not less than an aggregate
$35,000,000 with initial availability of not less than $15,000,000, all on
terms and conditions reasonably satisfactory to the Purchasers.
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(b) Between the date hereof and the Closing Date, the
Company will use its best efforts to take all actions necessary in order that
the Company may, on or prior to the Closing Date, (x) terminate the Company's
existing bank credit facility with Banque Paribas, as Agent, under the Existing
Credit Agreement and repay any amounts required to discharge all of its
obligations thereunder, (y) obtain the release of any and all guarantees,
pledges or security interests granted by the Company or any of its subsidiaries
in respect of the Existing Credit Agreement, and (z) terminate the Existing
Credit Agreement.
(c) As promptly as reasonably practicable after the
Closing Date, but no later than 5 business days after the date thereof, the
Company will, in accordance with the Indenture, dated as of November 15, 1989,
between BSN Corp. (then the name of the Company) and MTrust Corp., National
Association, as Trustee, as amended, pursuant to which the 9-1/4% Notes were
issued (the "Indenture"), (i) notify the Trustee and all holders of the 9-1/4%
Notes that all of the outstanding 9-1/4% Notes will be redeemed as of a date on
or prior to the Closing Date, (ii) use its best efforts to cause the Trustee to
waive the 60 day notice period set forth in the first paragraph of Section 4.02
of the Indenture, (iii) redeem all of the outstanding 9-1/4% Notes on or prior
to the Closing Date, in accordance with the terms thereof, and pay all amounts
due thereunder, and (iv) upon such redemption terminate the Indenture.
SECTION 5.03. Use of Proceeds. The Company agrees that it
shall use the cash proceeds received from the Purchasers in connection with the
issuance and sale of the Securities and from the New Bank Credit Facility,
first (i) to pay the purchase price for shares of Common Stock to be purchased
by the Company in the Tender Offer and (ii) to repay all amounts required to be
paid in connection with the termination of the Existing Credit Facility and the
redemption of the 9-1/4% Notes, and thereafter for working capital and general
corporate purposes.
SECTION 5.04. New Stock Option Plan. Between the date
hereof and the Closing Date, the Company shall adopt and approve and use its
best efforts to effect, immediately after the Closing, the New Stock Option
Plan. The New Stock Option Plan and the stock option agreements executed and
delivered thereunder shall be based on the terms outlined on Schedule III
hereto and shall provide for the grant of stock options to employees of the
Company in three tranches from a pool of stock options constituting
approximately 17.5% of the issued and outstanding shares of Common Stock of the
Company on the Closing Date on a fully-diluted basis, calculated in accordance
with Schedule III hereto. Following the adoption of the New Stock Option Plan,
the Company will use its best efforts to cause the holders of stock
34
<PAGE> 40
options granted under the Existing Stock Option Plan to exchange such options
for new options to be granted pursuant to the New Stock Option Plan. Following
the adoption of the New Stock Option Plan, the Purchasers agree to vote in
favor of the adoption and approval of the New Stock Option Plan at the time
such adoption and approval is submitted to the stockholders of the Company;
provided, however, that such New Stock Option Plan is based on the terms
outlined on Schedule III hereto.
SECTION 5.05. Certificate of Designations; Reservation of
Conversion Shares. (a) Between the date hereof and the Closing Date, the
Company shall adopt and approve the Certificate of Designations, and shall use
its best efforts to cause the Certificate of Designations to be accepted for
filing with the Secretary of State of the State of Delaware.
(b) The Company agrees that prior to June 30, 1996 it
shall authorize and reserve for issuance a sufficient number of shares of
Common Stock to permit all the Conversion Shares to be duly issued upon the
conversion of the Convertible Preferred Shares. The Purchasers agree to vote
in favor of an increase in the authorized capital stock of the Company
sufficient to permit all the Conversion Shares to be duly reserved for issuance
upon the conversion of the Convertible Preferred Shares.
SECTION 5.06. Covenant of the Purchasers. The Purchasers
agree that during the period from the Closing Date through the first
anniversary date thereof they will not cause the Company to (a) effect a
"freeze-out merger," "reverse split" or other similar transaction having the
primary intended purpose of forcing the elimination of all minority interest in
the Company, unless (i) such transaction shall have been approved by a
committee of the Board of Directors of the Company comprised of directors that
are neither designated by the Purchasers nor are members of management of the
Company and (ii) the Company shall have obtained an opinion of an investment
banking firm of national standing as to the fairness of the transaction to the
minority stockholders or (b) file an application or take actions having the
primary intended purpose of (x) causing no shares of Common Stock to be listed
on a national securities exchange or the NASDAQ NMS, or (y) suspending the
Company's duty to file periodic information, documents, reports and other
information pursuant to the Exchange Act, other than with respect to the Tender
Offer or another transaction or other events (whether or not caused by the
Purchasers) that would require the Company to effect such delisting or
deregistration under applicable law or the rules of such national securities
exchange or the NASDAQ NMS. Notwithstanding anything to the contrary contained
herein, it is understood and agreed that the foregoing covenant shall in no
event limit the Purchasers from (A) causing, facilitating or
35
<PAGE> 41
encouraging the Company to effect a transaction or a series of transactions
with an unrelated third party or parties concerning any merger, consolidation,
or sale of substantial assets of the Company, (B) making, or causing the
Company to make, a tender offer for all or less than all of the outstanding
Common Stock or (C) taking actions (other than the actions described in clause
(a) above) that are not primarily intended to result in the delisting or
deregistration described in clause (b) above.
VI.
CONDITIONS PRECEDENT
SECTION 6.01. Conditions Precedent to the Obligations of the
Purchasers. The obligations of the Purchasers hereunder are, at their option,
subject to the satisfaction, on or before the Closing Date, of the following
conditions:
(a) Representations and Warranties to Be True and
Correct. The representations and warranties of the Company contained in this
Agreement shall be true and correct in all material respects on the Closing
Date, with the same force and effect as though such representations and
warranties had been made on and as of such date, and the Company shall have so
certified to the Purchasers in writing.
(b) Performance. The Company shall have performed and
complied in all material respects with all agreements and conditions contained
herein required to be performed or complied with by it prior to or on the
Closing Date, and the Company shall have so certified to the Purchasers in
writing.
(c) All Proceedings to Be Satisfactory. All corporate
and other proceedings to be taken by the Company and all waivers and consents
to be obtained by the Company in connection with the transactions contemplated
hereby shall have been taken or obtained by the Company and all documents
incident thereto shall be satisfactory in form and substance to the Purchasers
and their counsel.
(d) Supporting Documents. On or prior to the Closing
Date the Purchasers and their counsel shall have received copies of the
following supporting documents:
(i) copies of (1) the Certificate of Incorporation of the
Company and the charter documents of each of its subsidiaries,
including all amendments thereto, certified as of a recent date by the
Secretary of State or the appropriate official of the relevant state
of incorporation,
36
<PAGE> 42
(2) certificates of said Secretary or official, dated as of a recent
date, as to the due incorporation and good standing of the Company and
each such subsidiary, and listing all documents on file with said
official, and (3) a telegram or facsimile from said Secretary or
official as of the close of business on the next business day
preceding the Closing Date as to the continued due incorporation and
good standing of the Company and each such subsidiary and to the
effect that no amendment to the respective charter documents of such
corporations has been filed since the date of the certificate referred
to in clause (2) above; and
(ii) a certificate of the Secretary or an Assistant
Secretary of the Company, dated the Closing Date and certifying (1)
that attached thereto is a true and complete copy of the By-laws of
the Company as in effect on the date of such certification and at all
times since May 20, 1993; (2) that attached thereto is a true and
complete copy of resolutions adopted by the Board of Directors of the
Company authorizing the execution, delivery and performance of this
Agreement and the Registration Rights Agreement, the issuance, sale
and delivery of the Securities, the reservation, issuance and delivery
of the Conversion Shares, and the performance of the Recapitalization
Transactions and that all such resolutions are still in full force and
effect and are all the resolutions adopted in connection with the
transactions contemplated by this Agreement; (3) that the Certificate
of Incorporation of the Company has not been amended since the date of
the last amendment referred to in the certificate delivered pursuant
to clause (i)(2) above; and (4) as to the incumbency and specimen
signature of each officer of the Company executing this Agreement, the
Note and the Registration Rights Agreement, the stock certificates
representing the Convertible Preferred Shares and the Common Shares
and any certificate or instrument furnished pursuant hereto, and a
certification by another officer of said corporation as to the
incumbency and signature of the officer signing the certificate
referred to in this paragraph (ii).
All such documents shall be satisfactory in form and substance to the
Purchasers and their counsel.
37
<PAGE> 43
(e) Opinion of Counsel. The Purchasers shall have
received from Hughes & Luce L.L.P., counsel for the Company, an opinion dated
the Closing Date, substantially in the form of Annex I attached hereto.
(f) Consents; HSR Act Waiting Period. The Company shall
have obtained all consents required to be obtained pursuant to Section 4.07
hereof. Without limiting the generality of the foregoing, all applicable
waiting periods under the HSR Act with respect to the transactions contemplated
hereby shall have expired or been terminated.
(g) Legal Proceedings. No preliminary or permanent
injunction or other order, decree or ruling issued by any court of competent
jurisdiction nor any statute, rule, regulation or order entered, promulgated or
enacted by any governmental, regulatory or administrative agency or authority,
or national securities exchange shall be in effect that would prevent the
consummation of the transactions contemplated Agreement or the Recapitalization
Transactions.
(h) Registration Rights Agreement. Each party hereto
shall have executed and delivered the Registration Rights Agreement.
(i) Certificate of Designations. The Certificate of
Designations shall have been filed with the Secretary of State of the State of
Delaware and the Convertible Preferred Share shall have been duly authorized in
accordance with the terms thereof.
(j) Calculation of Convertible Preferred Shares and
Common Shares. The Purchasers and the Company shall have agreed pursuant to
Section 1.03 hereof on the actual number of Convertible Preferred Shares and
Common Shares to be acquired by the Purchasers.
(k) Tender Offer. (i) All Tender Offer Filings (together
with any amendments or supplements thereto) required to be filed with the SEC
in connection with the Tender Offer shall have been filed, (ii) all statutory
periods (or extensions thereof) during which the Tender Offer must remain open
to the stockholders of the Company shall have expired, and (iii) the
stockholders of the Company shall have tendered and not withdrawn prior to the
Expiration Date in the aggregate not less than 2,000,000 nor more than
6,500,000 shares of the Common Stock outstanding on the Closing Date for
repurchase by the Company in accordance with the Tender Offer.
(l) Repayment of Indebtedness. (i) The Company shall
have satisfied in full its outstanding obligations under the
38
<PAGE> 44
Existing Credit Facility, the liens granted thereunder shall have been
discharged and the Existing Credit Facility shall have been terminated, and
(ii) the Company shall have provided for the redemption of all the outstanding
9-1/4% Notes and the termination of the Indenture.
(m) New Bank Credit Facility. The Company shall have
entered into the New Bank Credit Facility on terms acceptable to the Purchasers
and shall have received proceeds therefrom sufficient to permit the Company to
effect the Recapitalization Transactions.
(n) New Stock Option Plan. The New Stock Option Plan
containing terms substantially in the form of Schedule III hereto shall have
been approved by the Purchasers and the Company.
SECTION 6.02. Conditions Precedent to the Obligations of the
Company. The obligations of the Company hereunder are, at its option, subject
to the satisfaction, on or before the Closing Date, of the following
conditions:
(a) Representations and Warranties to Be True and
Correct. The representations and warranties of the Purchasers contained in
this Agreement shall be true and correct in all material respects on the
Closing Date, with the same effect as though such representations and
warranties had been made on and as of such date, and the Purchasers shall have
so certified to the Company in writing.
(b) Performance. The Purchasers shall have performed and
complied in all material respects with all agreements and conditions contained
herein required to be performed or complied with by them prior to or on the
Closing Date, and the Purchasers shall have so certified to the Company in
writing.
(c) All Proceedings to Be Satisfactory. All proceedings
to be taken by the Purchasers and all waivers and consents to be obtained by
the Purchasers in connection with the transactions contemplated hereby shall
have been taken or obtained by the Purchasers and all documents incident
thereto shall be satisfactory in form and substance to the Company and its
counsel.
(d) HSR Act Waiting Period. All applicable waiting
periods under the HSR Act with respect to the transactions contemplated hereby
shall have expired or been terminated.
(e) Legal Proceedings. No preliminary or permanent
injunction or other order, decree or ruling issued by any court of competent
jurisdiction nor any statute, rule, regulation or
39
<PAGE> 45
order entered, promulgated or enacted by any governmental, regulatory or
administrative agency or authority, or national securities exchange shall be in
effect that would prevent the consummation of the transactions contemplated
Agreement or the Recapitalization Transactions.
(f) Registration Rights Agreement. Each party hereto
shall have executed and delivered the Registration Rights Agreement.
(g) Certificate of Designations. The Certificate of
Designations shall have been filed with the Secretary of State of the State of
Delaware and the Convertible Preferred Share shall have been duly authorized in
accordance with the terms thereof.
(h) New Bank Credit Facility. The Company shall have
entered into the New Bank Credit Facility on terms acceptable to the Purchasers
and shall have received proceeds therefrom sufficient to permit the Company to
effect the Recapitalization Transactions.
(i) New Stock Option Plan. The New Stock Option Plan
containing terms substantially in the form of Schedule III hereto shall have
been approved by the Purchasers and the Company.
VII.
SURVIVAL OF REPRESENTATIONS; INDEMNITY
SECTION 7.01. Survival of Representations. Subject as set
forth below, all representations and warranties (other than representations and
warranties as to Tax matters) made by any party hereto in this Agreement or
pursuant hereto shall survive for the period commencing on the date hereof and
ending on February 7, 1997, and (ii) the representations and warranties as to
Tax matters made by any party hereto in this Agreement or pursuant hereto shall
survive for the applicable Tax statute of limitation period, including any
extensions thereof.
SECTION 7.02. General Indemnity.
(a) Subject to the terms and conditions of this Article
VII, the Company hereby agrees to indemnify, defend and hold the Purchasers
harmless from and against all demands, claims, actions or causes of action,
assessments, losses (including diminution in value of the Common Shares or the
Convertible Preferred Shares), damages, liabilities, costs and expenses,
including, without limitation, interest, penalties and reasonable attorneys'
fees and expenses (collectively, "Dam-
40
<PAGE> 46
ages"), asserted against, resulting to, imposed upon or incurred by the
Purchasers by reason of or resulting from a breach of any representation,
warranty or covenant of the Company contained in or made pursuant to this
Agreement.
(b) Subject to the terms and conditions of this Article
VII, the Purchasers hereby agrees to indemnify, defend and hold the Company
harmless from and against all Damages asserted against, resulting to, imposed
upon or incurred by the Company by reason of or resulting from a breach of any
representation, warranty or covenant of the Purchasers contained in or made
pursuant to this Agreement.
SECTION 7.03. Conditions of Indemnification. The respective
obligations and liabilities of the Purchasers, on the one hand, and the
Company, on the other hand (the "indemnifying party"), to the other (the "party
to be indemnified") under Section 7.02 hereof with respect to claims resulting
from the assertion of liability by third parties shall be subject to the
following terms and conditions:
(a) within 20 days after receipt of notice of
commencement of any action or the assertion in writing of any claim by a third
party, the party to be indemnified shall give the indemnifying party written
notice thereof together with a copy of such claim, process or other legal
pleading, and the indemnifying party shall have the right to undertake the
defense thereof by representatives of its own choosing;
(b) in the event that the indemnifying party, by the 30th
day after receipt of notice of any such claim (or, if earlier, by the tenth day
preceding the day on which an answer or other pleading must be served in order
to prevent judgment by default in favor of the person asserting such claim),
does not elect to defend against such claim, the party to be indemnified will
(upon further notice to the indemnifying party) have the right to undertake the
defense, compromise or settlement of such claim on behalf of and for the
account and risk of the indemnifying party, subject to the right of the
indemnifying party to assume the defense of such claim at any time prior to
settlement, compromise or final determination thereof, provided that the
indemnifying party shall be given at least 15 days prior written notice of the
effectiveness of any such proposed settlement or compromise;
(c) anything in this Section 7.03 to the contrary
notwithstanding (i) if there is a reasonable probability that a claim may
materially and adversely affect the indemnifying party other than as a result
of money damages or other money payments, the indemnifying party shall have the
right, at its own cost and
41
<PAGE> 47
expense, to compromise or settle such claim, but (ii) the indemnifying party
shall not, without the prior written consent of the party to be indemnified,
settle or compromise any claim or consent to the entry of any judgment which
does not include as an unconditional term thereof the giving by the claimant or
the plaintiff to the party to be indemnified a release from all liability in
respect of such claim; and
(d) in connection with any such indemnification, the
indemnified party will cooperate in all reasonable requests of the indemnifying
party.
SECTION 7.04. Limitation on Certain Indemnities.
Notwithstanding anything in this Article VII to the contrary:
(a) the Company shall not be obligated to indemnify,
defend and hold harmless the Purchasers pursuant to Section 7.02 hereof unless
the aggregate amount of such Damages exceeds $1,000,000; and
(b) the Company's aggregate liability and obligation to
indemnify, defend and hold harmless the Purchasers pursuant to said Section
7.02 shall in no event exceed the aggregate purchase price paid by the
Purchasers for the Securities pursuant to Sections 1.01 and 1.02 hereof.
VIII.
TERMINATION
SECTION 8.01. Termination by the Parties. This Agreement may
be terminated and the transactions contemplated hereby may be abandoned at any
time prior to the Closing Date:
(a) by mutual consent of the Purchasers and the Company;
(b) by either the Purchasers or the Company, if (i) the
transactions contemplated hereby have not been consummated before [June 30],
1996 or (ii) any permanent injunction or action by any governmental entity of
competent jurisdiction preventing the consummation of the transactions
contemplated by this Agreement and the Recapitalization Transactions shall have
become final and nonappealable; provided, however, that the party seeking to
terminate this Agreement pursuant to this clause (ii) shall have used all
reasonable efforts to remove such injunction or overturn such action;
42
<PAGE> 48
(c) by the Purchasers, if (i) there has been a breach in
any material respect of any of the representations and warranties of the
Company set forth herein, (ii) there has been a breach in any material respect
of any of the covenants or agreements set forth in this Agreement on the part
of the Company, which breach is not curable or, if curable, is not cured within
30 days after written notice thereof is given by the Purchasers to the Company,
or (iii) the Board of Directors of the Company (x) shall have withdrawn or
modified in a manner adverse to the Purchasers its approval or recommendation
of this Agreement, the Tender Offer or the transactions contemplated hereby
after the Company (or any of its subsidiaries or affiliates) has received, or
there has been publicly announced or otherwise made to the Company's
stockholders, a bona fide offer or proposal with respect to an Alternative
Transaction, or (y) shall have made any recommendation with respect to an
Alternative Transaction other than to reject such Alternative Transaction.
(d) by the Company if (i) there has been a breach in any
material respect of any of the representations and warranties of the Purchasers
set forth herein, or (ii) there has been a breach in any material respect of
any of the covenants or agreements set forth in this Agreement on the part of
the Purchasers which breach is not curable or, if curable, is not cured within
30 days after written notice thereof is given by the Purchasers to the Company
or, (iii) such termination is necessary to allow the Company to enter into an
Alternative Transaction that its Board of Directors has determined in good
faith, by majority vote after consultation with its financial advisors and
based upon the written of the opinion of outside counsel to the Company is more
favorable to the stockholders of the Company than the transactions contemplated
hereby.
SECTION 8.02. Effect of Termination. In the event of the
termination of this Agreement and the abandonment of the transactions
contemplated hereby pursuant to this Article VIII, this Agreement shall
thereafter become void and have no effect, and no party hereto shall have any
liability to any other party hereto, except as provided in this Section 8.02
and Sections 4.06 and 9.02 hereof, and except that nothing shall relieve any
party from liability for any breach of this Agreement.
IX.
MISCELLANEOUS
SECTION 9.01. Restrictive Legends. (a) The certificate or
instrument representing the Note shall bear a legend substantially in the
following form:
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<PAGE> 49
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND
MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS IT HAS
BEEN REGISTERED UNDER THAT ACT OR AN EXEMPTION FROM REGISTRATION IS
AVAILABLE.
(b) Each certificate representing the Convertible
Preferred Shares or the Common Shares, as the case may be, and any shares of
capital stock received in respect thereof, whether by reason of a stock split
or share reclassification thereof, a stock dividend thereon or otherwise, and
each certificate for any such securities issued to subsequent transferees of
any such certificate shall be stamped or otherwise imprinted with the legend
required to be borne by such shares by the Registration Rights Agreement,
except as expressly provided in the Registration Rights Agreement.
SECTION 9.02. Expenses, Etc. The Company shall reimburse
WCAS VII or pay on its behalf any reasonable fees and expenses incurred by WCAS
VII in connection with the negotiation and preparation of this Agreement and
the related documents and agreements contemplated hereby; provided, however,
that in the event that the transactions contemplated hereby are not
consummated, the Company shall only be obligated hereunder, if (i) within 12
months of the date hereof, the Company agrees or publicly announces its
intention to agree to an Alternative Transaction, or (ii) such failure to
consummate the transactions contemplated hereby results from the termination of
this Agreement by the Purchasers in accordance with the terms hereof due to the
breach in any material respect of representations, warranties, covenants or
agreements of the Company set forth herein. In addition, the Company shall
also pay WCAS VII a termination fee of one million dollars ($1,000,000) (the
"Termination Fee") in the event the transactions contemplated hereby are not
consummated and within 12 months of the date hereof, the Company agrees or
publicly announces its intention to agree to an Alternative Transaction. For
purposes hereof, the "fees and expenses incurred by WCAS VII" shall include,
without limitation, the fees, disbursements and expenses of counsel,
accountants, financial advisors and other experts retained by WCAS VII in
connection with this Agreement and the transactions contemplated hereby. Such
Termination Fee and/or such fees and expenses, as the case may be, shall be
payable on the Closing Date or, in the case of clause (i) above, upon the
earlier to occur of an agreement or announcement of an Alternative Transaction,
or in the case of clause (ii) above, upon the termination of this Agreement.
SECTION 9.03. WCAS VII Fee. On the Closing Date, the Company
shall pay to WCAS VII by wire transfer of immediately
44
<PAGE> 50
available funds to the account designated by WCAS VII two business days prior
to the Closing Date, an amount equal to 1% of the aggregate purchase price paid
by the Purchasers for the Securities pursuant to Sections 1.01 and 1.02 hereof.
SECTION 9.04. Survival of Agreements. All covenants,
agreements, representations and warranties made herein shall survive the
execution and delivery of this Agreement and the issuance, sale and delivery of
the Securities pursuant hereto, notwithstanding any investigation made at any
time by or on behalf of any party hereto. All statements contained in any
certificate or other instrument delivered by the Company hereunder shall be
deemed to constitute representations and warranties made by the Company.
SECTION 9.05. Parties in Interest. All covenants and
agreements contained in this Agreement by or on behalf of any party hereto
shall bind and inure to the benefit of the respective successors and assigns of
such party hereto whether so expressed or not.
SECTION 9.06. Notices. Any notice or other communications
required or permitted hereunder shall be deemed to be sufficient if contained
in a written instrument delivered in person or duly sent by first class
certified mail, postage prepaid, by nationally recognized overnight courier, or
by telecopy addressed to such party at the address or telecopy number set forth
below or such other address or telecopy number as may hereafter be designated
in writing by the addressee to the addressor listing all parties:
if to the Company, to:
Aurora Electronics, Inc.
2030 Main Street
Irvine, California 92714-7241
Telecopy Number: (714) 851-8414
Attention: President
45
<PAGE> 51
with a copy to:
Hughes & Luce, L.L.P.
1717 Main Street
Dallas, Texas 75201
Telecopy Number: (214) 939-6100
Attention: Alan J. Bogdanow, Esq.
Kenneth G. Hawari, Esq.
if to any Purchaser, to:
Welsh, Carson, Anderson & Stowe
One World Financial Center
200 Liberty Street, Suite 3601
New York, New York 10281
Telecopy Number: (212) 945-2016
Attention: Richard H. Stowe
Thomas E. McInerney
with a copy to:
Reboul, MacMurray, Hewitt, Maynard & Kristol
45 Rockefeller Plaza
New York, New York 10111
Telecopy Number: (212) 841-5725
Attention: William J. Hewitt, Esq.
or, in any case, at such other address or addresses as shall have been
furnished in writing by such party to the other parties hereto. All such
notices, requests, consents and other communications shall be deemed to have
been received (a) in the case of personal delivery, on the date of such
delivery, (b) in the case of mailing, on the fifth business day following the
date of such mailing, (c) in the case of delivery by overnight courier, on the
business day following the date of delivery to such courier, and (d) in the
case of telecopy, when received.
SECTION 9.07. Entire Agreement; Assignment. This Agreement
(including the Schedules, Exhibits and Annexes thereto) constitutes the entire
agreement of the parties with respect to the subject matter hereof and may not
be amended or modified nor any provisions waived except in a writing signed by
the Company and the Purchasers. This Agreement shall not be assigned by
operation of law of otherwise without the consent of the other parties hereto;
provided, however, that WCAS VII may freely assign to an affiliate of the
lender under the New Bank Credit Facility the right to purchase up to 2.5% of
the Convertible Preferred Shares that may be purchased by WCAS VII and WCA
Management Corporation may freely assign all of its right to
46
<PAGE> 52
purchase Convertible Preferred Shares to the individuals listed in footnote 3
to Schedule I hereto.
SECTION 9.08. Counterparts. This Agreement may be executed
in two or more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
SECTION 9.09. Governing Law. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York.
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<PAGE> 53
IN WITNESS WHEREOF, the Company and the Purchasers have
executed this Agreement as of the day and year first above written.
AURORA ELECTRONICS, INC.
By /s/ JIM C. COWART
--------------------------------
Chief Executive Officer
WELSH, CARSON, ANDERSON & STOWE VII, L.P.
By WCAS VII Partners,
General Partner
By /s/ LAURA VAN BUREN
--------------------------------
General Partner
WCAS CAPITAL PARTNERS II, L.P.
By WCAS CP II Partners,
General Partner
By /s/ LAURA VAN BUREN
-------------------------------
General Partner
WCAS INFORMATION PARTNERS, L.P.
By /s/ LAURA VAN BUREN
-------------------------------
General Partner
Attorney-in-Fact
WCA MANAGEMENT CORPORATION
By /s/ LAURA VAN BUREN
-------------------------------
Vice President of Finance
THE HARVEY CASH TRUST
By:/s/ HARVEY B. CASH
-------------------------------
Trustee
/s/ JIM C. COWART
--------------------------------
Jim C. Cowart
48
<PAGE> 54
SCHEDULE I
Purchasers
<TABLE>
<CAPTION>
Name and Address of Purchaser Fractional Interest
- ----------------------------- -------------------
<S> <C>
Welsh, Carson, Anderson 94.00%(1,2)
& Stowe VII, L.P.
WCAS Capital Partners II, L.P. 0.00%
WCAS Information Partners, L.P. 2.50%
WCA Management Corporation(3) 2.50%(4)
c/o One World Financial Center
200 Liberty Street
Suite 3601
New York, New York 10281
Attention: Richard H. Stowe
Thomas E. McInerney
Jim C. Cowart 0.50%
The Harvey Cash Trust 0.50%
c/o Aurora Electronics, Inc.
2030 Main Street
Suite 1120
Irvine, California 92714
------
Total: 100.00%
</TABLE>
- -----------------------------
1. May be reduced by 2.50% in the event that WCAS VII assigns an interest
to purchase Convertible Preferred Shares to an affiliate of the lender
under the New Bank Credit Facility.
2. May be reduced by 2.50% in the event that WCA Management elects to
purchase an additional 2.50% of the Convertible Preferred Shares.
3. Prior to the Closing Date WCA Management will assign its right to
purchase Convertible Preferred Shares to the following individuals:
Bruce K. Anderson, Russell L. Carson, Anthony J. de Nicola, Thomas E.
McInerney, James B. Hoover, Robert A. Minicucci, Andrew M. Paul,
Richard H. Stowe, Laura Van Buren and Patrick J. Welsh.
4. May be increased by 2.50% in the event that WCA Management elects to
purchase an additional 2.50% of the Convertible Preferred Shares.
<PAGE> 55
SCHEDULE II
Shares of Convertible Preferred Stock and Common Stock to be Sold
MINIMUM RANGE TENDER*
<TABLE>
<CAPTION>
Aggregate Convertible
Fractional** Purchase Preferred Common
Name of Purchaser Interest Price Shares Shares Note
- ----------------- ------------ ---------- ----------- ------ -----------
<S> <C> <C> <C> <C> <C>
Welsh, Carson, Anderson
& Stowe VII, L.P. 94.0% $32,900,000 329,000 -- --
WCAS Capital n/a $10,000,000 -- 610,022 $10,000,000
Partners II, L.P.
WCAS Information 2.5% $ 875,000 8,750 -- --
Partners, L.P.
WCA Management 2.5% $ 875,000 8,750 -- --
Corporation
Jim C. Cowart .5% $ 175,000 1,750 -- --
The Harvey Cash Trust .5% $ 175,000 1,750 -- --
TOTAL: 100.0% $45,000,000 350,000 610,022 $10,000,000
</TABLE>
- ---------------------------
* This Schedule shall be in effect if up to 2,000,000 shares of common
Stock have been tendered.
** See Schedule I for possible alternate fractional interests for WCAS
VII and WCA Management Corporation
<PAGE> 56
SCHEDULE II
Shares of Convertible Preferred Stock and Common Stock to be Sold
MIDPOINT RANGE TENDER*
<TABLE>
<CAPTION>
Aggregate Convertible
Fractional** Purchase Preferred Common
Name of Purchaser Interest Price Shares Shares Note
- ----------------- ------------ ----------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
Welsh, Carson, Anderson 94.0% $32,250,000 352,500 -- --
& Stowe VII, L.P.
WCAS Capital n/a $10,000,000 -- 608,617 $10,000,000
Partners II, L.P.
WCAS Information 2.5% $ 937,500 9,375 -- --
Partners, L.P.
WCA Management 2.5% $ 937,500 9,375 -- --
Corporation
Jim C. Cowart .5% $ 187,500 1,875 -- --
The Harvey Cash Trust .5% $ 187,500 1,875 -- --
TOTAL: 100.0% $47,500,000 375,000 608,617 $10,000,000
</TABLE>
- ---------------------------
* This schedule shall be in effect if between 2,000,001 and 4,000,000
shares of Common Stock have been tendered.
** See Schedule I for possible alternate fractional interests for WCAS
VII and WCA Management Corporation
<PAGE> 57
SCHEDULE II
Shares of Convertible Preferred Stock and Common Stock to be Sold
MAXIMUM RANGE TENDER*
<TABLE>
<CAPTION>
Aggregate Convertible
Fractional** Purchase Preferred Common
Name of Purchaser Interest Price Shares Shares Note
- ----------------- ------------ ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Welsh, Carson, Anderson 94.0% $37,600,000 376,000 -- --
& Stowe VII, L.P.
WCAS Capital n/a $10,000,000 -- 610,022 $10,000,000
Partners II, L.P.
WCAS Information 2.5% $ 1,250,000 12,500 -- --
Partners, L.P.
WCA Management 2.5% $ 1,250,000 12,500 -- --
Corporation
Jim C. Cowart .5% $ 250,000 2,500 -- --
The Harvey Cash Trust .5% $ 250,000 2,500 -- --
TOTAL: 100.0% $50,000,000 400,000 610,022 $10,000,000
</TABLE>
- ---------------------------
* This schedule shall be in effect if between 4,000,001 and 6,500,000
shares of Common Stock have been tendered.
** See Schedule I for possible alternate fractional interests for WCAS
VII and WCA Management Corporation
<PAGE> 58
SCHEDULE III
FUNDAMENTAL TERMS OF THE
NEW STOCK OPTION PLAN
The total number of options in the New Stock Option Plan (the
"Option Pool") will be equal to 17.5% of the pro forma shares outstanding at
Closing less the number of shares repurchased in the Tender Offer, plus the
number of Conversion Shares, plus the number of Common Shares issued in
connection with the Note, plus the number of shares issuable on the exercise of
the options in the Option Pool. The table below describes the calculation of
the total number of options in The Option Pool, as well as the allocation of
options into Tranche A, B and C (see below):
<TABLE>
<CAPTION>
Minimum Midpoint Maximum
Tender Tender Tender
--------- --------- ---------
<S> <C> <C> <C>
Shares tendered in Tender Offer . . . . . . . . . 2,000,000 4,250,000 6,500,000
Shares outstanding at Closing(1). . . . . . . . . 9,402,106 9,402,106 9,402,106
Shares repurchased in Offer . . . . . . . . . . . (2,000,000) (4,250,000) (6,500,000)
Conversion Shares . . . . . . . . . . . . . . . . 16,470,588 17,647,059 18,823,529
Shares issued in conjunction with Notes . . . . . 610,022 608,617 607,211
---------- ---------- ----------
Total pro forma shares outstanding at Closing . 24,482,716 23,407,782 22,332,846
========== ========== ==========
Total number of options in the Option Pool . . . 5,193,303 4,965,287 4,737,270
Pro forma percentage . . . . . . . . . . . . . 17.5% 17.5% 17.5%
Tranche A (6% of 17.5%) . . . . . . . . . . . . . 1,780,561 1,702,384 1,624,207
Tranche B (5% of 17.5%) . . . . . . . . . . . . . 1,483,801 1,418,653 1,353,506
Tranche C (6.5% of 17.5%) . . . . . . . . . . . . 1,928,941 1,844,250 1,759,557
---------- ---------- ----------
Total number of options in the Option Pool . . 5,193,303 4,965,287 4,737,270
========== ========== ==========
</TABLE>
The Option Pool will be divided into three tranches, as
follows:
Tranche A Options: Tranche A will be comprised of options
equal in number to 34.3% of the Option Pool (6% of the 17.5% pro forma
ownership). Tranche A Options vest immediately at Closing, with the exception
of Tranche A1 Options described below. 50% of the Tranche A Options issued to
Jim C. Cowart, David A. Lahar and John P. Grazer (the "Tranche A1 Options")
will vest ratably on the first day of each month for the 24 months following
the first anniversary of the closing date. If a Tranche A1 Optionholder leaves
voluntarily or is terminated for cause prior to the third anniversary of the
Closing Date, such person's unvested Tranche A1 Options will be forfeited. If
such Tranche A1 Optionholder's employment terminates for any other reason, all
of such Optionholder's Tranche A1 Options vest immediately.
Tranche B Options: Tranche B will be comprised of a number of
options equal to 28.6% of the Option Pool (5% of the 17.5% pro forma
ownership). Tranche B Options will vest 25% each
- --------------------
(1) Estimated as of the date hereof.
<PAGE> 59
year over a four year period commencing on the Closing Date, as long as the
Optionholder remains an employee of the company.
Tranche C Options: Tranche C options will be comprised of a
number of options equal to 37.1% of the Option Pool (6.5% of the 17.5% pro
forma ownership). Tranche C Options will vest 25% each year over a four year
period commencing on the sixth anniversary of the date of grant, but are
subject to accelerated vesting according to annual performance-based targets
based on the Company's actual and projected earnings before interest, taxes,
depreciation and amortization less capital expenditures. The vesting of no
more than 25% of the Tranche C Options may accelerate in any given annual
period.
Options issued as of the Closing Date will be issued with
exercise prices set equal to the Conversion Price of the Preferred Stock. Any
options in the Option Pool reserved for grant and granted at some later date
will have an exercise price not less than the fair market value of the Common
Stock at the date of the grant.
Subsequent to the Closing Date, each and every employee or
director who currently has been issued options ("Old Options") will be offered
(the "Option Exchange Offer") the opportunity to exchange Old Options for
options under the New Stock Option Plan (the "New Options"). The exchange
ratio for New Options will be as follows: (a) for Old Options with exercise
prices at or above $4.00, the exchange ratio will be 0.8 New Option for each
Old Option; and (b) for Old Options with exercise prices below $4.00, the
exchange ratio will be 1.0 New Option for each Old Option. To the extent that
employees do not accept the Option Exchange Offer, the Option Pool will be
reduced as follows: (a) Tranche A Options will be reduced by the number of
vested Old Options held by employees not accepting the Option Exchange Offer;
and (b) Tranche B Options will be reduced by the number of unvested Old Options
held by employees not accepting the Option Exchange Offer.
<PAGE> 60
DISCLOSURE SCHEDULES
All capitalized terms used but not otherwise defined in the attached
Schedules have the meanings given them in the Securities Purchase Agreement
("the Agreement"). Disclosure of any matters in the Schedules does not
constitute an admission that such matter is necessarily required to be
disclosed in order for any representation or warranty in the Agreement to be
true and correct to the extent required in the Agreement. Although a section
reference is indicated for each disclosure, disclosure with respect to one
section shall be disclosure for each other section or schedule requiring such
disclosure where Purchasers are reasonably placed on notice that such
disclosure relates to such other schedule. Each of the attachments to the
Schedules and each of the disclosures made therein are incorporated by
reference into the Schedules.
<PAGE> 61
SCHEDULE 2.01
FOREIGN QUALIFICATIONS
<TABLE>
<CAPTION>
QUALIFIED AS
NAME OF FOREIGN
PARENT CORPORATION
------------------------------ --------------
<S> <C>
Aurora Electronics, Inc. California
</TABLE>
<TABLE>
<CAPTION>
QUALIFIED AS
FOREIGN
NAME OF CORPORATION/OR
SUBSIDIARY FOREIGN BRANCH
------------------------------ --------------
<S> <C>
Aurora Electronics Group, Inc. Colorado
Illinois
Tennessee
Texas
Canada
Netherlands
United Kingdom
</TABLE>
<PAGE> 62
SCHEDULE 2.02
SUBSIDIARIES
<TABLE>
<CAPTION>
LEGAL STRUCTURE
---------------
PERCENT
NAME OF JURISDICTION AUTHORIZED OUTSTANDING OWNED BY
PARENT OF ORGANIZATION CAPITAL CAPITAL PARENT
------------------------ --------------- ------------------- ----------- --------
<S> <C> <C> <C> <C>
Aurora Electronics, Inc. Delaware 1 million shares of 8,298,293 N/A
preferred stock
25 million shares of
common stock
</TABLE>
<TABLE>
<CAPTION>
SUBSIDIARY OF PARENT
--------------------
PERCENT
NAME OF JURISDICTION AUTHORIZED OUTSTANDING OWNED BY
SUBSIDIARY OF ORGANIZATION CAPITAL CAPITAL PARENT
------------------------------ --------------- -------------------- ---------------- --------
<S> <C> <C> <C> <C>
Aurora Electronics Group, Inc. California 10 million shares of 2 million shares 100%
common stock
</TABLE>
<TABLE>
<CAPTION>
SUBSIDIARIES OF AURORA ELECTRONICS GROUP, INC. ("AEG")
------------------------------------------------------
PERCENT
NAME OF JURISDICTION AUTHORIZED OUTSTANDING OWNED BY
SUBSIDIARIES OF ORGANIZATION CAPITAL CAPITAL PARENT
-------------------------- --------------- ------------------- -------------- --------
<S> <C> <C> <C> <C>
Aurora Electronics Limited Wales L.100 L.2 100%
Micro-C (Barbados) Ltd. Barbados Unlimited shares of 100 shares 100%
common stock
</TABLE>
Liens
The shares of issued and outstanding capital stock of the subsidiaries
of Parent and AEG referred to above are pledged to secure the indebtedness
under the Existing Credit Agreement.
<PAGE> 63
SCHEDULE 2.03
CAPITAL STRUCTURE
Capitalization of Parent
The following options, warrants, and securities convertible into
or exercisable for shares of Parent Common Stock are outstanding.
1. Options.
(a) 759,340 shares of Parent Common Stock are issuable
upon exercise of certain incentive and non-qualified stock options, which
were issued to key employees and directors of Parent and/or its subsidiaries
pursuant to the Aurora Electronics, Inc. 1993 Stock Option Plan, as amended
(the "Plan"). The exercise prices range from $3.38 to $11.75.
(b) 250,000 shares of Parent Common Stock are issuable
upon exercise of nonqualified stock options, which were issued outside the
Plan. The exercise price range is from $3.625 to $6.40.
(c) 390,660 shares are available for grant pursuant to the
1993 Stock Option Plan.
2. Warrants.
(a) 560,000 shares of Parent Common Stock are issuable
upon exercise of certain outstanding common stock purchase warrants. The
exercise price is $3.625. 280,000 are held by Jim Cowart and 280,000 are
held by David Lahar or members of his family.
(b) 414,473 shares of Parent Common Stock (subject to
certain anti-dilution provisions) are issuable upon exercise of common stock
purchase warrants issued to Agent and Banque Indosuez. The exercise price of
the warrants is currently $2.18 per share of Parent Common Stock.
3. Convertible Debentures.
(a) Approximately 897,000 shares of Parent Common Stock
are issuable upon conversion of Parent's 7-3/4% Subordinated Debt. The
conversion price is currently $11.66 per share.
(b) Approximately 158,000 shares of Parent Common Stock
are issuable upon conversion of Parent's 7% Subordinated Debt. The conversion
price is currently $11.20 per share.
4. Other.
Parent is obligated to issue approximately 1,104,000 shares as final
payment on the Century acquisition. These shares are issuable at $1.99 per
share.
<PAGE> 64
SCHEDULE 2.03 (CONT.)
Parent is obligated to issue approximately 595,000 shares of Parent
Common Stock as partial settlement of a class action lawsuit. The number
of shares issuable is dependent on the stock price at the time of
issuance. For purposes of this calculation, a stock price of $2.10 per share
was assumed.
Parent may, from time to time, issue up to 350,000 shares of Parent
Common Stock pursuant to the terms of the Aurora Electronics, Inc. 1995
Employee Stock Purchase Plan.
Parent currently follows a policy of making automatic annual
grants to non-employee directors of options to purchase 5,000 shares of
Parent Common Stock at the fair market value on the date of each annual
meeting of the Parent's shareholders (assuming such director has served for
the preceding 181 consecutive days, has agreed to serve as a director upon
reelection, and is reelected to the Board of Directors).
<PAGE> 65
SCHEDULE 2.03(CONT.)
AURORA ELECTRONICS, INC.
Ajusted Number of Common Shares
As of December 31, 1995
<TABLE>
<CAPTION>
Share Total Share Fully
Price Vested Unvested Count Primary Diluted
------ ------ -------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Common Stock Outstanding 8,402,137 8,402,137 8,402,137
Treasury Shares (478,713) (478,713) (478,713)
Shares to be issued to Century Shareholders $ 1.99 374,869 (2) 374,869 374,869
1,103,813 1,103,813 1,103,813
Shares to be issued for Class Action $ 2.10 (3) 595,238 595,238 595,238
Warrants Outstanding:
Cowart/Lahar $ 3.63 560,000 - 560,000 - -
Lender Warrants $ 2.18 (4) 379,612 - 379,612 - -
Lender Warrants $ 2.18 (4) 34,861 - 34,861 - -
Employee Stock Options
Stock Options outside of Plan $ 5.85 250,000 - 250,000 - -
Terminated Employees $ 3.63 73,493 28,107 101,600
Employees $ 4.68 (5) 269,560 388,180 (6) 657,740 - -
7 3/4% Convertible Subordinated Debentures $11.66 896,913 - 896,913
7% Subordinated Convertible Promissory Notes $11.20 157,597 - 157,597
---------- ---------- ----------
13,035,667 9,997,344 11,051,854
========== ========= ==========
</TABLE>
Notes:
1. Shares issued October 2, 1995.
2. Partial payment made on January 17, 1996. 374,869 shares issued.
3. Assumed for purposes of calculation.
4. Subject to antidilution provisions.
5. Weighted average.
6. Upon the consummation of the Recapitalization transactions, 150,000 of
such options will be deemed vested.
<PAGE> 66
SCHEDULE 2.03(CONT.)
AURORA ELECTRONICS, INC.
LISTING OF STOCK OPTIONS
AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
DATE OF OPTION OPTION VESTED UNVESTED EXPIRATION
NAME GRANT PRICE GRANTED AT 12/31/95 AT 12/31/95 DATE
---- ----- ------ ------- ----------- ----------- ----
<S> <C> <C> <C> <C> <C> <C>
BOARD OF DIRECTORS
------------------
Khoury, Amin J. 01/29/93 $11.75 25,000 25,000 0 01/29/03
Muller, Don M. 01/29/93 $11.75 25,000 25,000 0 01/29/03
Watkins, William H. 01/29/93 $11.75 25,000 25,000 0 01/29/03
Muller, Don M. 06/25/93 $ 7.88 15,000 15,000 0 06/25/03
Cash, Berry 09/21/93 $ 7.25 25,000 16,666 8,333 09/21/03
Cash, Berry 03/01/94 $ 8.13 5,000 5,000 0 03/01/04
Khoury, Amin J. 03/01/94 $ 8.13 5,000 5,000 0 03/01/04
Muller, Don M. 03/01/94 $ 8.13 5,000 5,000 0 03/01/04
Watkins, William H. 03/01/94 $ 8.13 5,000 5,000 0 03/01/04
Cash, Berry 03/22/95 $ 3.75 5,000 5,000 0 03/22/05
Khoury, Amin J. 03/22/95 $ 3.75 5,000 5,000 0 03/22/05
Watkins, William H. 03/22/95 $ 3.75 5,000 5,000 0 03/22/05
EMPLOYEE OPTIONS
----------------
Anderson, Douglas 06/09/93 $ 7.50 2,400 1,320 1,080 06/07/03
Culligan, Kevin 06/09/93 $ 7.50 1,600 880 720 06/07/03
Boots, Bob 12/12/94 $ 4.50 1,600 400 1,200 12/12/04
Cahill, John 12/12/94 $ 4.50 1,600 400 1,200 12/12/04
Contreras, Laura 12/12/94 $ 4.50 1,600 400 1,200 12/12/04
Culligan, Kevin 12/12/94 $ 4.50 1,600 400 1,200 12/12/04
Finch, Jeri 12/12/94 $ 4.50 2,400 600 1,800 12/12/04
Glomb, Marc 12/12/94 $ 4.50 2,400 600 1,800 12/12/04
Kanzel, Felice 12/12/94 $ 4.50 2,400 600 1,800 12/12/04
Lund, Mike 12/12/94 $ 4.50 1,600 400 1,200 12/12/04
McMahan, Kris 12/12/94 $ 4.50 2,400 600 1,800 12/12/04
Roten, Christopher 12/12/94 $ 4.50 2,400 600 1,800 12/12/04
Schiffer, Julie 12/12/94 $ 4.50 2,400 600 1,800 12/12/04
Straky, Richard 12/12/94 $ 4.50 2,400 600 1,800 12/12/04
Tenenbaum, Allison 12/12/94 $ 4.50 1,600 400 1,200 12/12/04
Carmichael, Norman 05/15/95 $3.625 1,920 1,056 864 06/09/03
Dolan, Danny 05/15/95 $3.625 1,280 704 576 06/09/03
Edgington, Peggy 05/15/95 $3.625 2,560 1,408 1,152 06/09/03
</TABLE>
<PAGE> 67
SCHEDULE 2.03 (CONT.)
AURORA ELECTRONICS, INC.
LISTING OF STOCK OPTIONS
AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
DATE OF OPTION OPTION VESTED UNVESTED EXPIRATION
NAME GRANT PRICE GRANTED AT 12/31/95 AT 12/31/95 DATE
---- ----- ------ ------- ----------- ----------- ----
<S> <C> <C> <C> <C> <C> <C>
Fisher, Matt 05/15/95 $3.625 1,920 1,056 864 06/09/03
Fuson, Peggy 05/15/95 $3.625 1,280 704 576 06/09/03
Grazer, John 05/15/95 $3.625 64,000 35,200 28,800 06/09/03
Moorman, Joe 05/15/95 $3.625 3,200 1,760 1,440 06/09/03
Nestor, Cathy 05/15/95 $3.625 1,280 704 576 06/09/03
Nicholls, Deborah 05/15/95 $3.625 1,280 704 576 06/09/03
Shultz, Jonathan 05/15/95 $3.625 6,400 3,520 2,880 06/09/03
Sorrells, John 05/15/95 $3.625 1,920 1,056 864 06/09/03
Spurr, Charles 05/15/95 $3.625 1,280 704 576 06/09/03
Haagsma, Dutch 05/15/95 $3.625 16,000 7,200 8,800 10/15/03
Turner, Mel 05/15/95 $3.625 6,400 2,880 3,520 10/15/03
Barrett, Richard 05/15/95 $3.625 20,000 9,000 11,000 10/15/03
Berestecky, Mike 05/15/95 $3.625 640 288 352 11/23/03
Cahill, John 05/15/95 $3.625 640 288 352 11/23/03
Plummer, Candy 05/15/95 $3.625 800 360 440 11/23/03
Davidson, Sara 05/15/95 $3.625 1,280 512 768 03/01/04
Dehaini, Nader 05/15/95 $3.625 1,280 512 768 03/01/04
Whiteside, Bill 05/15/95 $3.625 1,280 512 768 03/01/04
Owen, Gary 05/15/95 $3.625 12,800 4,480 8,320 05/13/04
Smith, Richard 05/15/95 $3.625 20,000 7,000 13,000 05/13/04
McMahon, Bill 05/15/95 $3.625 28,000 9,800 18,200 05/25/04
Augusta, Eric 05/15/95 $3.625 6,400 1,600 4,800 12/12/04
Barrett, Richard 05/15/95 $3.625 2,560 640 1,920 12/12/04
Bogatz, Larry 05/15/95 $3.625 2,560 640 1,920 12/12/04
Carmichael, Norman 05/15/95 $3.625 1,280 320 960 12/12/04
Cowart, Jim C. 05/15/95 $3.625 16,000 4,000 12,000 12/12/04
Dolan, Danny 05/15/95 $3.625 1,280 384 896 12/12/04
Fisher, Matt 05/15/95 $3.625 1,280 320 960 12/12/04
Fuson, Peggy 05/15/95 $3.625 1,280 320 960 12/12/04
Gallagher, Paul 05/15/95 $3.625 1,920 416 1,504 12/12/04
Grazer, John 05/15/95 $3.625 16,000 2,592 13,408 12/12/04
Hoiness, Stuart 05/15/95 $3.625 1,280 1,792 (512) 12/12/04
Lahar, David A. 05/15/95 $3.625 16,000 2,528 13,472 12/12/04
Mandre, Sandra 05/15/95 $3.625 2,560 1,984 576 12/12/04
McMahon, Bill 05/15/95 $3.625 12,000 2,056 9,944 12/12/04
Moorman, Joe 05/15/95 $3.625 3,200 1,680 1,520 12/12/04
</TABLE>
<PAGE> 68
SCHEDULE 2.03 (CONT.)
AURORA ELECTRONICS, INC.
LISTING OF STOCK OPTIONS
AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
DATE OF OPTION OPTION VESTED UNVESTED EXPIRATION
NAME GRANT PRICE GRANTED AT 12/31/95 AT 12/31/95 DATE
---- ----- ------ ------- ----------- ----------- ----
<S> <C> <C> <C> <C> <C> <C>
Nicholls, Deborah 05/15/95 $3.625 1,280 512 768 12/12/04
Parker, Leslie 05/15/95 $3.625 2,560 512 2,048 12/12/04
Spurr, Charles 05/15/95 $3.625 1,920 544 1,376 12/12/04
Turner, Mel 05/15/95 $3.625 1,600 800 800 12/12/04
Whiteside, Bill 05/15/95 $3.625 640 416 224 12/12/04
Cowart, Jim C. 05/15/95 $ 3.38 50,000 - 50,000
Grazer, John P. 05/15/95 $ 3.38 50,000 - 50,000
Lahar, David A. 05/15/95 $ 3.38 50,000 - 50,000
Ahrens, Richard 08/04/95 $ 3.50 1,300 130 1,170 08/04/05
Conner, Stan 08/04/95 $ 3.50 15,000 1,500 13,500 08/04/05
Kain, Richard 08/04/95 $ 3.50 20,000 2,000 18,000 08/04/05
-------------------------------------
TOTAL 657,740 269,560 388,179
TERMINATED EMPLOYEES - STOCK OPTION OUTSIDE OF PLAN:
Botts, William 09/30/92 $6.400 106,250 106,250 06/09/03
Lambert, Barrett 09/30/92 $6.400 31,250 31,250 06/09/03
Morgan, Diane 09/30/92 $6.400 62,500 62,500 06/09/03
Haagsma, Dutch 05/15/95 $3.625 50,000 50,000 - 09/30/97
TERMINATED EMPLOYEES:
Allison, Robert (08-31-95) 05/15/95 $3.625 85,600 69,493 16,107 10/15/03
Allison, Robert (08/31/95) 05/15/95 $3.625 16,000 4,000 12,000 12/12/04
</TABLE>
<PAGE> 69
SCHEDULE 2.07
LIABILITIES
Liabilities noted in the Company's Form 10-Q for the three month
period ended December 31, 1995.
Except those incurred in the ordinary course of business, liabilities
due to the (a) Third Amendment to the May 1994 Senior Secured Credit Agreement,
(b) expenses incurred due to the Recapitalization Transactions, (c) expenses
incurred to arranging bank financing, and (d) the Century Division s
Information Systems Project.
See also Schedules 2.03, 2.09, 2.11, 2.15, 2.16, 2.17, and 2.20.
<PAGE> 70
SCHEDULE 2.09
CERTAIN CHANGES OR EVENTS
Certain changes or events:
- McGurk litigation settlement (see Note L to the Consolidated
Financial Statements in the Company's Form 10-K for year ended
September 30, 1995; such matter was settled on December 13, 1995
(subject to court approval) and involved the payment by the
Company or its subsidiaries of not more than $60,000).
- IRS verbal settlement on tax years 1988 through 1991. See Schedule
2.17 for further detail.
- Third Amendment to the Existing Senior Secured Credit facility.
Issuance of partial payment in the form of Common Shares for the
final payment of the Century acquisition. See Schedule 2.03, Item
4.
- Commencement of the Century Information System Project.
- Recommended bonuses upon completion of the Recapitalization of
$111,920, $113,799 and $105,333, respectively, and recommended base
salary increases of $50,000, $50,000 and $35,000, respectively, for
Messrs. Cowart, Lahar and Grazer.
See also Schedule 2.07.
<PAGE> 71
SCHEDULE 2.11
PENDING LAWSUITS
In accordance with Section 2.11 of the Agreement, set forth below is a
list of litigation pending, or to the Parent's knowledge, threatened against
Parent or any of its Subsidiaries as of the date of the Agreement.
1. Federal Insurance Company, a member of the Chubb Group of Insurance
Companies v. Aurora Electronics, Inc.; Aurora Electronics Group; and
Aurora Electronics, Ltd.; No. 95-3706-K(LSP), in the United States
District Court for the Southern District of California.
2. Donnie Ray Lee, as Father and Next Friend of Steven Ray Lee, a Minor
v. BSN Corporation; Riddell Sports, Inc.; and Don Wigginton,
Individually and as Agent for BSN Corporation; No. CV93-2006B, in the
Circuit Court for Madison County, State of Alabama
3. Berenice N. McGurk, Guardian of Michael T. McGurk, a Disabled Person
v. MHI Liquidation, Inc. f/k/a Maxpro Helmets, Inc. and AA Liquidation
Corp. f/k/a All American Corp.; No. 94-L-00018, in the Circuit Court
of Cook County, Illinois, County Department - Law Division
4. Roman Reed, Gloria Reed & Don Reed v. Riddell, Inc., Riddell Sporting
Goods, Inc., BSN, Inc.; Riddell/All American; All American Sports
Corporation; All American Sports Corporation, d.b.a. All American
Reconditioning Corporation; T and B Sports, Inc.; West Coast Sporting
Goods; Chabot-Las Positas Community College District; Chabot-Las
Positas Community College District Financing Corporation; Peter
Davis; Bob Matheny; Daniel Miller; Mike Christensen and Does
1-200, inclusive; No. H-184889-6, in the Superior Court of the
State of California, Alameda County.
SPORT SUPPLY GROUP, INC. LITIGATION
Parent is also a party to the following litigation. By virtue of its
indemnification agreement with Sport Supply Group, Inc. ("SSG"), however,
Parent should be able to obtain indemnification from SSG for any adverse
outcome suffered in any of these cases.
1. John Ali and Nancy Ali, Individually and as Next Friends of Zahra Ali
v. Aurora Electronics f/k/a BSN Corporation and Sport Supply Group,
Inc. d/b/a Alumagoal; No. 85,207, 240th Judicial District Court of
Fort Bend County, State of Texas
2. Nicholas Cove v. BSN Corporation d/b/a Champion Bar Bell, Cliffside
Park Board of Education, Boro of Cliffside Park; No. BER-L-8294-91, in
the Superior Court of the State of New Jersey (Law Division), Bergen
County
3. John C. Gaw, Jr. and Courtney McNeil Gaw v. Dare County Board of
Education, Sports Supply Group, Inc., and BSN Corp. t/a U.S. Games,
Inc., and Alumagoal Athletic; No.
<PAGE> 72
SCHEDULE 2.11 (CONT.)
92-CV-S634, General Court of Justice, Superior Court Division, County
of Dare, State of North Carolina
4. Fiske et al vs. Aurora Electronics, Inc. d/b/a Alumagoal; Township of
Washington; Washington Township Board of Education; Sports Supply
Group; John Doe (first and last name being fictitious) and ABC Corp.
(a fictitious partnership, corporation and/or entity); No. MER-L-
005001-95, Law Division, Superior Court of New Jersey, County of
Mercer, State of New Jersey
WORKERS' COMPENSATION CLAIMS
Aurora Electronics Group, Inc. and its Subsidiaries are subject to the
Workers' Compensation Claims listed on Annex A hereto.
See also Schedule 2.15, 2.17, and 2.20.
<PAGE> 73
SCHEDULE 2.11 (CONT.)
ANNEX A
WORKERS' COMPENSATION CLAIMS
<PAGE> 74
SCHEDULE 2.13
REAL PROPERTY (LEASED)
Parent
1. Irvine, California. Office Building Lease dated March 24, 1993, by
and between Koll Tower Four Associates, as Landlord and Parent as
Lessee, for the real property located at 2030 Main Street, Suite 1120,
Irvine, California 92714.
2. Chicago, Illinois. Lease dated July 14, 1988, by and between
American National Bank and Trust Company of Chicago as trustee U/T/A
dated May 18, 1988, as Landlord, and BSN Corp. (now Parent), as
Tenant, for the real property located at 5800 W. Bloomingdale,
Chicago, Illinois.
3. Ontario, Canada. Lease dated June 27, 1995, by and between Appropak
Corporation, as Lessor, and Aurora Electronics, Inc. as Lessee, for
the real property located at 7100 Warden Avenue, Unit #4, Markham,
Ontario, Canada L3R 8B5.
4. San Francisco, California. Lease dated September 1, 1994, by and
between Richard or Molly Casey, as Lessor, and Aurora Electronics,
Inc. as Lessee, for the real property located at 2101 Bush Street,
San Francisco, California 94115. Lease expired on September 30, 1995
and is now on a month-to-month basis.
Aurora Electronics Group, Inc. ("AEG")
1. San Diego, California. Standard Multi-Tenant Net Lease dated November
3, 1992, as amended, by and between Sorrento Mesa Properties, Inc., as
Landlord, and AEG, as Tenant, for the real property located at 9477
Waples Street, Suite 150, San Diego, California, 92121.
2. Irvine, Scotland. Lease dated February 28, 1990, by and between
Irvine Development Corporation, as Landlord, and AEG, as Tenant, for
the real property located at 1 Whittle Place, South Newmoor Industrial
Estate, Irvine, Scotland KA11 4HR.
3. Sacramento, California. Standard Industrial Lease - Net dated March
27, 1984, as amended, by and between Northgate Investment Company
(now David Pick), as Landlord, and Repair Services, Inc. (now AEG),
as Tenant, for the real property located at 1101 National Drive,
Sacramento, California 95834.
4. Sacramento, California. Addendum VII dated August 1, 1992 to that
certain Standard Industrial Lease - Net dated March 27, 1984, as
amended, by and between David Pick, as Landlord, and FRS (now AEG),
as Tenant, for the real property located at 1214 West North Market
Boulevard, Sacramento, California 95834.(1)
<PAGE> 75
SCHEDULE 2.13
5. San Jose, California. Office Building Lease dated August 19, 1992, as
amended, by and between Pinn Brothers Property, as Landlord, and AEG,
as Assignee of CCB, as Tenant, for the real property located at 1475
Saratoga Avenue, Suite 120, San Jose, California 95129.
6. Memphis, Tennessee. Standard Lease Agreement dated October 27, 1992,
by and between Crow-Brindell-Mitchell, as Landlord, and AEG, as
Assignee of CCB, doing business as Century Computer Services, Inc.,
as Tenant, for the real property located at 5170 East Raines Road,
Building No. 7, Willow Lake Business Park, Memphis, Tennessee 38115.
7. Hull, Quebec. Deed of Lease dated April 22, 1992, by and between
Digital Equipment of Canada, Ltd., as Landlord, and AEG, as Assignee
of CCB, as Tenant, for the real property located at 200 Boulevard de
la Technologie, Hull Quebec.
8. Hoofddorp, The Netherlands. Lease for Business Premises commencing
April 1, 1994, by and between Stichting Pensioenfonds Hoogovens, as
Lessor, and AEG, as Assignee of CCM, doing business as Century
Computer Marketing International, as Lessee, for the real property
located at Parellaan 58-60, NL-2132 WS Hoofddorp, The Netherlands.
9. Manchester, England. Business License Agreement dated April 1, 1994,
by and between Carrington Business Park Limited, as Licensor and AEG,
as Assignee of CCM, doing business as Century Computer Marketing
International, as Licensee, for the real property located at H4/5
building, 1/10 Helsby Square, Carrington Business Park, Urmston,
Manchester, England.
10. Irvine, California. Lease Agreement by and between The Irvine
Company, as Landlord, and AEG, as Lessee, for the real property
located at One Technology Drive, Suite I-821, Irvine, California
92718.
11. Birmingham, England. License Agreement dated June 29, 1995, by and
between Chester Investments Three Limited, as Landlord, and AEG as
Tenant, for the real property located at 1st Floor, Four Oaks House,
160 Lichfield Road, Sutton Coldfield, West Midlands, England B74 2TZ.
12. Marina del Rey, California. Standard Industrial/ Commercial Single
Tenant Lease-Net dated November 30, 1994, by and between The
Equitable Life Assurance Society of the United States, as Lessor, and
AEG, as Lessee, for the real property located at 4755 Alla Road,
Marina del Rey, California, 90292.(1)
13. Sacramento, California. Industrial Real Estate Lease (Multi-Tenant
Facility) dated April 13, 1994, as amended, by and between JB
Company, as Landlord, and AEG, as Tenant, for the real property
located 1037 West North Market Boulevard, Unit 2, Sacramento,
California 95834.(1)
<PAGE> 76
SCHEDULE 2.13
14. Fort Collins, Colorado. Lease dated October 4, 1994, by and between
Double Eagle Investments, as Lessor, and AEG, as Lessee, for the real
property located at 419 Canyon Avenue, Suite 300, No. 14, Fort
Collins, Colorado.
- ------------------------------------------------------------------------------
(1) Part or all of such real property has been subleased to a third
party.
<PAGE> 77
SCHEDULE 2.14
INTELLECTUAL PROPERTY RIGHTS
INTELLECTUAL PROPERTY OF AURORA ELECTRONICS GROUP, INC. AND ITS SUBSIDIARIES
Unregistered Trade Names and Service Marks:
- Micro-C
Registered Trade Names and Service Marks:
- TQR (Serial No. 74/432,958 Service Mark Application Filed with
the U.S. Patent & Trademark Office)
- TOTAL QUALITY RECOVERY (Serial No. 74/432,957 Service Mark
Application Filed with the U.S. Patent & Trademark Office)
- FRS, Inc. (Reg. No. 038567, dated May 21, 1991 Service Mark
Certificate of Registration Issued By the Secretary of State
of the State of California to FRS, Inc.)
- AURORA ELECTRONICS (Serial No. 74/549,774 Service Mark
Application Filed with the U.S. Patent & Trademark Office)
Unregistered Trademarks:
- MM
Registered Trademarks:
- None
INTELLECTUAL PROPERTY OF CENTURY
Unregistered Tradenames and Service Marks:
- Century Computer Marketing
- Century Computer Marketing International
- Century Computer Brokers, Inc.
- CCM Computer International Ltd.
Registered Tradenames and Service Marks:
- None
<PAGE> 78
SCHEDULE 2.14 (CONT.)
Unregistered Trademarks:
- CCM "Logo"
Registered Trademarks:
- None
- -------------------------
<PAGE> 79
SCHEDULE 2.15
LABOR MATTERS
Received January 1996: OSHA Complaint filed relating to the Asset Recovery
Division. Issues center around inadequate ventilation by ovens causing
exposure to lead from soldering and the employees by the tubing machines not
wearing eye protection. The Company has responded to this complaint and
expects no further action.
Received January 1996: The Company received notification from the Department
of Fair Employment & Housing California of a complaint being filed due to
complainant's "Election of Court Action". The issue was brought forth by a
temporary employee who filed the complaint, alleging that in 1994 she was
harassed at the Sacramento facility and forced to quit due to two employees
humiliating her on the production floor. To date, the Company has received no
written or oral notice or information from her attorney. The Company knows of
no actionable basis for the complainant's claim. According to the DFEH, DFEH
is not pursuing the matter.
<PAGE> 80
SCHEDULE 2.16
SEVERANCE ARRANGEMENTS
1. Employment letter dated March 1, 1994, by and between Jim C. Cowart
and Parent.
2. Employment letter dated May 18, 1995, by and between Jim C. Cowart and
Parent.
3. Employment letter dated March 1, 1994, by and between David A. Lahar
and Parent.
4. Employment letter dated May 18, 1995, by and between David A. Lahar
and Parent.
5. Employment letter dated March 19, 1993, by and between John P. Grazer
and Parent.
6. Employment letter dated May 18, 1995, by and between John P. Grazer
and Parent.
7. Employment letter dated April 4, 1994, by and between Gary Owen and
Parent.
8. Employment letter dated April 4, 1994, by and between Richard Smith
and Parent.
Severance Arrangements
Aurora provides the following notice of layoff policy for all employees.
Exceptions to this policy are listed below:
NOTICE OF LAYOFF POLICY
When practical, advance notice of layoff is given to a regular employee who
is terminated by Aurora because of a work force reduction or reorganization.
It is not Aurora's policy to make severance payments. During the notice
period, the employee's job responsibilities are reduced to allow time to
conduct a job search. In some circumstances, employees may be terminated
because of a work force reduction or reorganization without notice.
Where a notice period is required by law, it runs concurrent with, and not in
addition to, Aurora's notice period.
The following table shows the amount of notice that Aurora will endeavor to
provide:
<TABLE>
<CAPTION>
Full Years of Weeks of
Continuous Service Advance Notice
------------------ --------------
<S> <C>
Less than 1 2
1 to 2 3
3 to 4 5
5 to 7 8
8 or more 12
</TABLE>
NOTE: The notice period described above will be tripled if employment is
terminated because of a change in control of Aurora.
<PAGE> 81
SCHEDULE 2.16 (CONT.)
EXCEPTIONS TO ABOVE POLICY:
The following employees have separate severance arrangements with Aurora:
Jim Cowart One Year Severance
Dave Lahar One Year Severance
John Grazer One Year Severance
Bill McMahon Six Months Severance
Dutch Haagsma Six Months Severance
<PAGE> 82
SCHEDULE 2.17
TAXES
In January 1996, the Company reached a verbal settlement with the IRS
for tax years 1988 through 1991. The Company will pay no more than $80,000 to
compromise and resolve all IRS claims relating to these tax years. The
Company's last closed tax year was 1991. See Note L to Consolidated Financial
Statements in the Company's Form 10-K for the year ended September 30, 1995 and
the Company's Form 10-Q for the quarter ended December 31, 1995.
<PAGE> 83
SCHEDULE 2.18
PERMITS
The Company holds a Health Permit issued by the County of San Diego,
Departmental of Environmental Health that is necessary to conduct the disposal
of waste generated by the Company's ARS division.
Other than this Permit, the Company possesses no other Permits other
than immaterial permits, authorizations, approvals, registrations, variances
and licenses that are commonly issued to or used by similarly situated
organizations operating in the similar lines of business (e.g., sales tax
permits, occupational tax permits, equipment operation permits, etc.).
<PAGE> 84
SCHEDULE 2.19
EMPLOYEE BENEFIT PLANS
1. Aurora Electronics, Inc. 1993 Stock Option Plan
2. Aurora Electronics, Inc. 1995 Employee Stock Purchase Plan
3. Aurora Electronics, Inc. 401(k) Plan
4. Aurora Electronics Group, Inc. Pre-Tax Election Plans for medical
expenses, dependent day care and pre-tax premiums
5. Aurora Electronics Group, Inc. Incentive Plans
Asset Recovery Services
Century Computer Marketing
6. Aurora Electronics Group, Inc. Health Benefit Plans
Medical and Vision Plan
Short Term and Long Term Disability Plans
Life Insurance Plans
Travel Accident Plan
Vacation Plan
Sick Leave Plan
Bereavement Pay
Jury Duty Witness Pay
Employee Assistance Program (Counselors for Employees)
Education Reimbursement
Paid Holidays
See also Schedule 2.16.
<PAGE> 85
SCHEDULE 2.20
ENVIRONMENTAL MATTERS
The Company is involved in the site assessment and classification
process with the Illinois Emergency Management Agency ("IEPA") with respect
to three underground storage tanks located at 5750 W. Bloomingdale Road,
Chicago, Illinois. Complete and accurate information regarding the background
and status of this process has been delivered separately to Purchasers on the
date hereof.
<PAGE> 86
SCHEDULE 2.21
CONTRACTS
None, other than as described in or filed as exhibits to the Company's
SEC Filings.
<PAGE> 87
SCHEDULE 2.22
SCHEDULE OF INSURANCE
<TABLE>
<CAPTION>
COMPANY
TYPE OF COVERAGE POLICY NUMBER POLICY PERIOD
- ---------------- ------------- -------------
<S> <C> <C>
Commercial Package Federal Ins. Co. September 30, 1995 to
3532-04-34 September 30, 1996
<CAPTION>
COMPANY POLICY
POLICY NUMBER PERIOD LIMITS OF LIABILITY PREMIUM
- ------------- ------ ------------------- -------
<S> <C> <C>
Property $ 94,894
$17,000,000 Personal Property - Special Form, Replacement Cost, Reporting Form
Subject to a $5,000 Deductible Per Claim
$ 2,000,000 Blanket Property of others
$ 875,000 Blanket EDP Including Transit
$ 200,000 Personal Property Any Other Location
Business Income
$10,000,000 Business Income, 33-1/3% Monthly Limitation
including Extra Expense, Extended Period of Indemnity with No Time Limit
Building and Rental Income for two sites
Alla Road, MDR $3,995,213 for building/$5,000 deductible
$ 576,271 rental income
Bloomingdale, Chicago $4,680,000 for building/$5,000 deductible
$ 85,000 rental income
Boiler & Machinery
Same Limits as Package for Covered Causes of Loss which are Electric Arcing,
Mechanical Breakdown and Steam Boiler Explosion, Subject to a $5,000
Deductible Per Claim
Business Income Coverage for 24 Hours
same LIABILITY $110,786
$2,000,000 General Aggregate other than Products/Completed Operations
$2,000,000 Products/Completed Operations Aggregate
$2,000,000 Personal/Advertising Injury
$2,000,000 Property Damage to Rented Premises
$2,000,000 Each Occurrence
$10,000 Medical Expense
Included in Policy Form: Blanket Contractual/Broad Form Property Damage/Employees as Insureds
Personal Injury/Advertising Injury/Incidental Malpractice/Intentional Acts
Coverage for BI resulting from Reasonable Force to Protect Persons or Property/
New Entity Coverage - 90 Days/Non-Owned Watercraft for PI & AI/Written Contractual
for PI & AI/Coverage Applies "Anywhere" for Suits Brought in the United States/
PI & BI to Employees Coverage for Officers and Supervisors/Employee Benefits Liability
</TABLE>
<PAGE> 88
SCHEDULE 2.22
SCHEDULE OF INSURANCE
<TABLE>
<CAPTION>
COMPANY
TYPE OF COVERAGE POLICY NUMBER POLICY PERIOD LIMITS OF LIABILITY PREMIUM
- ---------------- ------------ ------------- ------------------- -------
<S> <C> <C> <C> <C>
Basis of Liability Premium $67,000,000 Gross Sales
(Electronics Mfg. & Repair)
Products/Completed Operations
- Excluding Foreign Sales
$600,000 Gross Payroll Office
Machines/Appliance Installation
57,151 Square Feet MDR location
Buildings/Premises Lessors Risk
Only
5,600 Square Feet Sacramento
Buildings/Premises
Lessors Risk Only
12,000 Square Feet Tennessee
Buildings/Premises
Lessors Risk Only
Pollution Liability National Union Fire Ins 3/31/95 to Environmental Impairment, Pollution
PLL 5872876 3/31/96 Liability $32,299
limits of liability are $2,000,000
each loss
$2,000,000
total for
all losses
This coverage protects Aurora from
lawsuits alleging bodily injury or
property damage caused by Toxic Fumes,
Harmful or other pollutants emanating
from our premises.
$50,000 deductible per loss and legal
fees are within the policy limits
Crime Federal Ins. Co. September 30, 1995 $500,000 Employee Dishonesty $19,612
3532-04-34 September 30, 1996 $ 10,000 Deductible
$500,000 Depositors Forgery
$ 5,000 Deductible
Includes Aurora Electronics 401(k) Plan
Business Auto Federal Ins Co. $1,000,000 Bodily Injury and Property
BAP7318-93-67 Damage Combined Single Limit $11,531
including non-owned/hired
$5,000 Medical Payments
$1,000,000 Uninsured/Underinsured Motorists
Bodily Injury
$500 Deductible Comprehensive/Collision
$1,000,000 Hired/Non-Owned Automobile
Liability
Includes Hired/Non-Owned Auto Physical
Damage
------
$25,000 Limit Per Vehicle, Subject to a
$1,000 Deductible for both
Comprehensive and Collision Worldwide.
</TABLE>
<PAGE> 89
SCHEDULE 2.22
SCHEDULE OF INSURANCE
<TABLE>
<CAPTION>
COMPANY
TYPE OF COVERAGE POLICY NUMBER POLICY PERIOD LIMITS OF LIABILITY PREMIUM
- ---------------- ------------- ------------- ------------------- -------
<S> <C> <C> <C> <C>
Vehicles:
1. 1986 Isuzu Pickup #1607
2. 1986 Dodge Van #7071
Employee Benefits Federal Ins Co
Programs Admin Liab 3532-04-34 $1,000,000 per employee $ 300
$1,000,000 Aggregate
$1,000 Deductible
Claims made from Retroactive
Date: 3/12/94
Umbrella Liability Federal Ins. Co. $8,000,000 General Aggregate $27,500
7965-12-13 $8,000,000 Each Occurrence
-0- Retained Limit
Underlying Coverages: Workers'
Compensation, General Liability,
Automobile Liability and
Foreign Liability
Cargo Coverage Federal Ins. Co. Ocean Cargo - Deposit $29,040
CM 41955 Domestic-Foreign Transit - Deposit $37,380
$1,000,000 Air Shipment Limit - per
Vessel
$ 25,000 Deductible - Drams -
Memory Chips
$ 1,000 Deductible - all other
$1,000,000 Domestic/Foreign
Transit Limit
$ 25,000 Deductible - Drams
- Memory Chips
$ 1,000 Deductible - all other
Shipments over 1 mil are to be reported
Coverage applies to shipments by
Common Carrier only
International Vigilant Ins. Co. September 30, 1995 to Liability $ 8,280
3533-20-59 September 30, 1996 $1,000,000 per occurrence
$1,000,000 Persona/Advertising Injury
$1,000,000 Products/Completed Operations
$ 100,000 Property Damage to Rented Premises
$ 1,000 Medical Expense - Per Person
$ 10,000 Medical Expense - Per Accident
</TABLE>
<PAGE> 90
SCHEDULE 2.22
SCHEDULE OF INSURANCE
<TABLE>
<CAPTION>
COMPANY
TYPE OF COVERAGE POLICY NUMBER POLICY PERIOD LIMITS OF LIABILITY PREMIUM
- ---------------- ------------- ------------- ------------------- -------
<S> <C> <C> <C> <C>
International Auto Difference In Conditions $ 500
$1,000,000 Bodily Injury - Per Person
$1,000,000 Bodily Injury - Per Occurrence
$1,000,000 Property Damage - Per Occurrence
$ 1,000 Medical Expense - Per Person
$ 10,000 Medical Expense - Per Occurrence
Foreign Voluntary Workers Compensation $ 3,050
$1,000,000 Employers Liability*
$ 25,000 Repatriation Expenses - Per Person
*Excludes United Kingdom (This coverage provided
under separate
policy expiring in November)
International Property $ 18,744
4 locations for Stock, Inventory & Fixed Assets
Loc 1 $ 209,000 West Midlands, Eng
Loc 2 $ 209,000 Manchester, Eng
Loc 3 $ 1,075,000 Irvine, Scotland
Loc 4 $ 650,000 Hoofddorp, Netherlands
Any other Location $200,000
$1,000 Deductible
TOTAL PREMIUM COST FOR PROPERTY AND CASUALTY $393,916
========
Workers Comp. CIGNA June 1, 1995 to Workers Compensation - Statutory Limits $165,000
C37999349CA June 1, 1996 EMPLOYER'S LIABILITY
C37999581TX $1,000,000 Bodily Injury By
Accident - Each Accident
$1,000,000 Bodily Injury By Disease -
Policy Limit
$1,000,000 Bodily Injury By Disease
- Each Employee
Class Code Description Est. Payroll
3178 Elec Elem Mfg. $2,068,363
5191 Off Mach Repair $6,119,185
8742 Salespersons $1,875,890
8810 Clerical $8,556,066
Current Experience Modification Factor is 76%
</TABLE>
<PAGE> 91
SCHEDULE 2.22
<TABLE>
<CAPTION>
COMPANY
TYPE OF COVERAGE POLICY NUMBER POLICY PERIOD LIMITS OF LIABILITY PREMIUM
- ---------------- ------------- ------------- ------------------- -------
<S> <C> <C> <C> <C>
Director & Officer Lexington March 1, 1995 to $3,000,000 $ 150,000
8698691 March 1. 1995
Aetna same $2,000,000 $ 72,000
752-001-554-95
Medical/Dental Prudential January to January $1,229,254
Life/AD&D Prudential Same $ 8,566
Vision Vision Services Plan Same $ 52,368
LTD CIGNA Same $ 27,298
Travel Accident AIG Same $ 1,267
EAP Ann Clark & Assoc June to June $ 13,862
401(k) John Hancock January to January
125 Plan
Dependent Care Voucher Plan January to January
Flexible Spending Prudential same
Premium Pre-tax ADP same
</TABLE>
<PAGE> 92
SCHEDULE 2.24
RELATED PARTY TRANSACTIONS
None, other than as described in the Company's SEC Filings.
<PAGE> 93
SCHEDULE 2.25
BROKERS
The Company is a party to letter agreements dated May 13, 1994 and
January 13, 1996 with Indosuez Capital, Inc. ("Indosuez"), copies of which
have been provided to WCAS, pursuant to which, among other things, Indosuez
is entitled to certain fees in the event that certain levels of debt financing
are attained to refinance certain indebtedness.
<PAGE> 94
EXHIBIT A
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933 AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF UNLESS REGISTERED UNDER THAT ACT
OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
THIS NOTE IS ISSUED WITH ORIGINAL ISSUE DISCOUNT ("OID")
AS DEFINED BY SECTION 1273(a)(1) OF THE INTERNAL REVENUE
CODE OF 1986, AS AMENDED. THE FOLLOWING INFORMATION IS
PROVIDED PURSUANT TO THE INFORMATION REPORTING REQUIREMENTS
SET FORTH IN TREASURY REGULATION 1.1275-3.
THE ISSUE PRICE OF THIS DEBT INSTRUMENT IS $ .
THE AMOUNT OF OID ON THIS DEBT INSTRUMENT IS $ .
THE ISSUE DATE OF THIS DEBT INSTRUMENT IS MARCH , 1996
THE PER ANNUM YIELD TO MATURITY OF THIS DEBT INSTRUMENT IS %
COMPOUNDED SEMI-ANNUALLY.
AURORA ELECTRONICS, INC.
------------------------
10% Senior Subordinated Note
Due September 30, 2001
$10,000,000 March , 1996
AURORA ELECTRONICS, INC., a Delaware corporation (hereinafter
called the "Company"), for value received, hereby promises to pay to WCAS
CAPITAL PARTNERS II, L.P. ("WCAS CP II"), or registered assigns, the principal
sum of TEN MILLION DOLLARS ($10,000,000), on September 30, 2001 and to pay
interest (computed on the basis of a 360-day year consisting of twelve 30-day
months) from the date hereof on the unpaid principal amount hereof at the rate
of 10% per annum semi-annually in arrears on September 30 and March 31 of each
year (each said day being an "Interest Payment Date"), commencing on September
30, 1996, until the principal amount hereof shall have become due and payable,
whether at maturity or by acceleration or otherwise, and thereafter at the rate
of 12% per annum on any overdue principal amount and (to the extent permitted
by applicable law) on any overdue interest until paid.
All payments of principal and interest on this Note shall be in such
coin or currency of the United States of America as at the time of payment
shall be legal tender for payment of public and private debts.
<PAGE> 95
On any Interest Payment Date on or after March , 2001, the
Company shall pay any amount of accrued original issue discount on this Note as
shall be necessary to ensure that this Note shall not be considered an
"applicable high yield discount obligation" within the meaning of Section
163(i) of the Internal Revenue Code of 1986, as amended (the "Code"), or any
successor provision. The amount of principal payable on this Note shall be
reduced by the amount of any accrued original issue discount that is paid
pursuant to this paragraph.
If any payment on this Note is due on a day which is not a
Business Day, it shall be due on the next succeeding Business Day. For
purposes of this Note, "Business Day" shall mean any day other than a Saturday,
Sunday or a legal holiday or day on which banks are authorized or required to
be closed in Chicago or New York.
1. The Note. This Note is issued pursuant to and is
subject to the terms and provisions of the Securities Purchase Agreement dated
as of February 20, 1996 (the "Purchase Agreement"), among the Company, Welsh,
Carson, Anderson & Stowe VII, L.P., a Delaware limited partnership ("WCAS
VII"), WCAS CP II and the several purchasers named on Schedule I thereto and
the terms of this Note include those stated in the Purchase Agreement. As used
herein, the term "Note" or "Notes" includes the 10% Senior Subordinated Note
due September 30, 2001 of the Company originally so issued and any 10% Senior
Subordinated Note or Notes due September 30, 2001 subsequently issued upon
exchange or transfer thereof.
2. Transfer, Etc. of Notes. The Company shall keep at
its office or agency maintained as provided in paragraph (a) of Section 7 a
register in which the Company shall provide for the registration of this Note
and for the registration of transfer and exchange of this Note. The holder of
this Note may, at its option, and either in person or by its duly authorized
attorney, surrender the same for registration of transfer or exchange at the
office or agency of the Company maintained as provided in Section 7 and,
without expense to such holder (except for taxes or governmental charges
imposed in connection therewith), receive in exchange therefor a Note or Notes
each in such denomination or denominations (in integral multiples of $100,000)
as such holder may request, dated as of the date to which interest has been
paid on the Note or Notes so surrendered for transfer or exchange, for the same
aggregate principal amount as the then unpaid principal amount of the Note or
Notes so surrendered for transfer or exchange, and registered in the name of
such person or persons as may be designated by such holder. Every Note
presented or surrendered for registration of transfer or exchange shall be duly
endorsed, or shall be accompanied by a written instrument of transfer,
satisfactory in form to the Company, duly executed by the holder of such Note
or its attorney duly authorized in writing. Every Note so made and delivered
in exchange for such Note shall in all other
2
<PAGE> 96
respects be in the same form and have the same terms as such Note. No transfer
or exchange of any Note shall be valid (x) unless made in the foregoing manner
at such office or agency and (y) unless registered under the Securities Act of
1933, as amended, or any applicable state securities laws or unless an
exemption from such registration is available.
3. Loss, Theft, Destruction or Mutilation of Note. Upon
receipt of evidence satisfactory to the Company of the loss, theft, destruction
or mutilation of this Note, and, in the case of any such loss, theft or
destruction, upon receipt of an affidavit of loss and an indemnity reasonably
acceptable in form and substance to the Company from the holder thereof, or, in
the case of any such mutilation, upon surrender and cancellation of this Note,
the Company will make and deliver, in lieu of this Note, a new Note of like
tenor and unpaid principal amount and dated as of the date to which interest
has been paid on this Note.
4. Persons Deemed Owners; Holders. The Company may deem
and treat the person in whose name this Note is registered as the owner and
holder of this Note for the purpose of receiving payment of principal of and
interest on this Note and for all other purposes whatsoever, whether or not
this Note shall be overdue. With respect to any Note at any time outstanding,
the term "holder", as used herein, shall be deemed to mean the person in whose
name such Note is registered as aforesaid at such time.
5. Prepayments.
(a) Optional Prepayment. Subject to any applicable
restrictions contained in the Credit Agreement (as hereinafter defined), upon
notice given as provided in Section 5(b), the Company may, at its option,
prepay this Note, as a whole at any time or in part from time to time in
amounts which shall be integral multiples of $100,000, at the prepayment prices
(expressed as percentages of the principal amount so to be prepaid) set forth
below with respect to the periods indicated below, in each case, together with
any accrued and unpaid interest thereon through the date of such prepayment:
<TABLE>
<CAPTION>
Period Percentage
------ ----------
<S> <C>
Prepayment between March , 1996
and September 30, 1998 105.0%
Prepayment between October 1, 1998
and September 30, 1999 102.5%
Prepayment after September 30, 1999 100.0%.
</TABLE>
3
<PAGE> 97
(b) Notice of Prepayment. The Company shall give written
notice of any prepayment of this Note or any portion hereof pursuant to Section
5(a) not less than 20 nor more than 60 days prior to the date fixed for such
prepayment. Such notice of prepayment and all other notices to be given to the
holder of this Note shall be given by registered or certified mail to the
person in whose name this Note is registered at its address designated on the
register maintained by the Company on the date of mailing such notice of
prepayment or other notice. Upon notice of prepayment being given as
aforesaid, the Company covenants and agrees that it will prepay, on the date
therein fixed for prepayment, this Note or the portion hereof, as the case may
be, so called for prepayment, at the prepayment price determined in accordance
with Section 5(a) hereof. A prepayment of less than all of the outstanding
principal amount of this Note shall not relieve the Company of its obligation
to make scheduled payments of interest payable in respect of the principal
remaining outstanding on the Interest Payment Dates.
(c) Allocation of All Payments. In the event of any
partial payment of less than all of the interest then due on the Notes then
outstanding or any prepayment, purchase, redemption or retirement of less than
all of the outstanding Notes, the Company will allocate the amount of interest
so to be paid and the principal amount so to be prepaid, purchased, redeemed or
retired to each Note in proportion, as nearly as may be, to the aggregate
principal amount of all Notes then outstanding.
(d) Interest After Date Fixed for Prepayment. If this
Note or a portion hereof is called for prepayment as herein provided, this Note
or such portion shall cease to bear interest on and after the date fixed for
such prepayment unless, upon presentation for such purpose, the Company shall
fail to pay this Note or such portion, as the case may be, in which event this
Note or such portion, as the case may be, and, so far as may be lawful, any
overdue installment of interest, shall bear interest on and after the date
fixed for such prepayment and until paid at the rate per annum provided herein.
(e) Surrender of Note; Notation Thereon. Upon any
prepayment of a portion of the principal amount of this Note, the holder
hereof, at its option, may require the Company to execute and deliver at the
expense of the Company (other than for transfer taxes, if any), upon surrender
of this Note, a new Note registered in the name of such person or persons as
may be designated by such holder for the principal amount of this Note then
remaining unpaid, dated as of the date to which the interest has been paid on
the principal amount of this Note then remaining unpaid, or may present this
Note to the Company for notation hereon of the payment of the portion of the
principal amount of this Note so prepaid.
6. Offer to Repurchase Upon a Change of Control
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<PAGE> 98
(a) Upon the occurrence of a Change of Control (as
hereinafter defined), the holder of this Note shall have the right, at such
holder's option, to require the Company to repurchase all or any part of such
holder's Note in amounts which shall be in integral multiples of $100,000
pursuant to the offer described below, at a purchase price equal to 101% of the
principal amount thereof so to be repurchased, plus accrued and unpaid
interest, if any, to the date of purchase (a "Change of Control Payment").
Within 10 Business Days after the Company knows, or reasonably should know, of
the occurrence of any Change of Control, the Company shall make an irrevocable,
unconditional offer (except that such offer may be conditioned upon the closing
of the transaction constituting the Change of Control) (a "Change of Control
Offer") to all holders of the Notes to purchase all of the Notes for cash in an
amount equal to the Change of Control Payment by sending written notice (the
"Change of Control Notice") of such Change of Control Offer to each holder by
registered or certified mail to the person in whose name the Note is registered
at its address maintained by the Company on the date of the mailing of such
notice. The Change of Control Notice shall contain all instructions and
materials required by applicable law and shall contain or make available to the
holder other information material to such holder's decision to tender this Note
pursuant to the Change of Control Offer. The Change of Control Notice, which
shall govern the terms of the Change in Control Offer, shall state:
(i) that the Change of Control Offer is being made
pursuant to this Section 6, and that all Notes validly tendered will
be accepted for payment;
(ii) the Change of Control Payment (including the amount of
accrued and unpaid interest) and the purchase date, which will be no
later than 30 days from the date such notice is mailed (the "Change of
Control Payment Date");
(iii) that any Note not validly tendered will continue to
accrue interest;
(iv) that, unless the Company defaults in the payment of
the Change of Control Payment, any Note accepted for payment pursuant
to the Change of Control Offer shall cease to accrue interest after the
Change of Control Payment Date;
(v) that holders electing to have a Note, or portion
thereof, purchased pursuant to a Change of Control Offer will be
required to surrender the Note to the Company at the address specified
in the notice not later than the close of business on the Business Day
prior to the Change of Control Payment Date;
(vi) that holders will be entitled to withdraw their
election if the Company receives, not later than the close of
5
<PAGE> 99
business on the second Business Day prior to the Change of Control
Payment Date, a telegram, facsimile transmission or letter setting
forth the name of the holder, the principal amount of the Note
delivered for purchase and a statement that such holder is withdrawing
its election to have such principal amount of Note purchased; and
(vii) that holders whose Notes are being purchased only in
part will be issued a new Note equal in principal amount to the
unpurchased portion of the Note surrendered, which unpurchased portion
must be equal to $100,000 in principal amount or an integral multiple
thereof.
On or before the Change of Control Payment Date, the Company
shall (i) accept for payment the Notes or portions thereof validly tendered
pursuant to the Change of Control Offer prior to the close of business on the
Change of Control Payment Date, (ii) promptly mail to the holders of Notes so
accepted payment in an amount equal to the Change of Control Payment (including
accrued and unpaid interest) for such Notes, and the Company shall promptly
mail or deliver to such holders a new Note equal in principal amount to any
unpurchased portion of the Note surrendered; provided, that each such new Note
will be in a principal amount of $100,000 or an integral multiple thereof. Any
Notes not so accepted shall be promptly mailed or delivered by the Company to
the holder thereof.
(b) In the event of a Change of Control, the Company will
promptly, in good faith, (i) seek to obtain any required consent of the holders
of any Senior Indebtedness (as defined herein) to permit the Change of Control
Offer and the Change of Control Payment contemplated by this Section 6, or (ii)
repay some or all of such Senior Indebtedness to the extent necessary
(including, if necessary, payment in full of such Senior Indebtedness and
payment of any prepayment premiums, fees, expenses or penalties) to permit the
Change of Control Offer and the Change of Control Payment contemplated hereby
without such consent. Failure to comply with the foregoing shall not relieve
the Company from its obligations pursuant to paragraph (a) above.
(c) For purposes of this Note "Change of Control" means (i)
the sale, lease or transfer, whether direct or indirect, of all or
substantially all of the assets of the Company and its subsidiaries, taken as a
whole, in one transaction or a series of related transactions, to any "person"
or "group" (other than the WCAS Group), (ii) the liquidation or dissolution of
the Company or the adoption of a plan of liquidation or dissolution of the
Company, (iii) the acquisition of "beneficial ownership" by any "person" or
"group" (other than the WCAS Group) of voting stock of the Company representing
more than 50% of the voting power of all outstanding shares of such voting
stock, whether by way of merger or consolidation or otherwise, or (iv) during
any period of two consecutive
6
<PAGE> 100
years, the failure of those individuals who at the beginning of such period
constituted the Company's Board of Directors (together with any new directors
whose election or appointment by such Board or whose nomination for election or
appointment by the shareholders of the Company was approved by a vote of a
majority of the directors then still in office who were either directors at the
beginning of such period or whose election or nomination for election was
previously so approved) to constitute a majority of the Company's Board of
Directors then in office.
For purposes of this definition, (i) the terms "person" and
"group" shall have the meaning set forth in Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), whether or not
applicable, (ii) the term "beneficial owner" shall have the meaning set forth
in Rules 13d-3 and 13d-5 under the Exchange Act, whether or not applicable,
except that a person shall be deemed to have "beneficial ownership" of all
shares that any such person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time or upon the
occurrence of certain events, (iii) any "person" or "group" will be deemed to
beneficially own any voting stock of the Company so long as such person or
group beneficially owns, directly or indirectly, in the aggregate a majority of
the voting stock of a registered holder of the voting stock of the Company, and
(iv) the term "WCAS Group" shall mean WCAS VII, WCAS CP II and any general
partners thereof.
7. Covenants Relating to the Note. The Company
covenants and agrees that so long as the Note shall be outstanding and, in the
case of paragraphs (k) through (n) below, so long as one million dollars
($1,000,000) of aggregate principal amount of the Notes is outstanding:
(a) Maintenance of Office. The Company will maintain an
office or agency in such place in the United States of America as the Company
may designate in writing to the registered holder of this Note, where this Note
may be presented for registration of transfer and for exchange as herein
provided, where notices and demands to or upon the Company in respect of this
Note may be served and where this Note may be presented for payment. Until the
Company otherwise notifies the holder hereof, said office shall be the
principal office of the Company located at 2101 Bush Street, San Francisco,
California 94115.
(b) Payment of Taxes. The Company will promptly pay and
discharge or cause to be paid and discharged, before the same shall become in
default, all material lawful taxes and assessments imposed upon the Company or
any of its subsidiaries or upon the income and profits of the Company or any of
its subsidiaries, or upon any property, real, personal or mixed, belonging to
the Company or any of its subsidiaries, or upon any part thereof by the United
States or any State thereof, as well as all material lawful
7
<PAGE> 101
claims for labor, materials and supplies which, if unpaid, would become a lien
or charge upon such property or any part thereof; provided, however, that
neither the Company nor any of its subsidiaries shall be required to pay and
discharge or to cause to be paid and discharged any such tax, assessment,
charge, levy or claim so long as both (x) the Company has established adequate
reserves for such tax, assessment, charge, levy or claim and (y)(i) the Company
or a subsidiary shall be contesting the validity thereof in good faith by
appropriate proceedings or (ii) the Company shall, in its good faith judgment,
deem the validity thereof to be questionable and the party to whom such tax,
assessment, charge, levy or claim is allegedly owed shall not have made written
demand for the payment thereof.
(c) Corporate Existence. The Company will do or cause to
be done all things necessary and lawful to preserve and keep in full force and
effect its corporate existence, rights and franchises and the corporate
existence, rights and franchises of each of its subsidiaries.
(d) Maintenance of Property. The Company will at all
times maintain and keep, or cause to be maintained and kept, in good repair,
working order and condition (reasonable wear and tear excepted) all significant
properties of the Company and its subsidiaries used in the conduct of the
Business, and will from time to time make or cause to be made all needful and
proper repairs, renewals, replacements, betterments and improvements thereto,
so that the Business may be conducted at all times in the ordinary course
consistent with past practice.
(e) Insurance. The Company will, and will cause each of
its subsidiaries to, (i) keep adequately insured, by financially sound and
reputable insurers, all property of a character usually insured by corporations
engaged in the same or a similar business similarly situated against loss or
damage of the kinds customarily insured against by such corporations and (ii)
carry, with financially sound and reputable insurers, such other insurance
(including without limitation liability insurance) in such amounts as are
available at reasonable expense and to the extent believed advisable in the
good faith business judgment of the Company.
(f) Keeping of Books. The Company will at all times
keep, and cause each of its subsidiaries to keep, proper books of record and
account in which proper entries will be made of its transactions in accordance
with generally accepted accounting principles consistently applied.
(g) Transactions with Affiliates. The Company shall not
enter into, or permit any of its subsidiaries to enter into, any transaction
with any of its or any subsidiary's officers, directors, employees or any
person related by blood or marriage to any such person or any entity in which
any such person owns any
8
<PAGE> 102
beneficial interest, except for (i) normal employment arrangements, benefit
programs and employee incentive option programs on reasonable terms, (ii) any
transaction approved by the Board of Directors of the Company in accordance
with the provisions of Section 144 of the Delaware General Corporation Law, or
otherwise permitted by such Section, (iii) customer transactions in the
ordinary course of business and on arm's length terms and (iv) the transactions
contemplated by the Purchase Agreement.
(h) Notice of Certain Events. The Company shall,
immediately after it becomes aware of the occurrence of (i) any Event of
Default (as hereinafter defined) or any event which, upon notice or lapse of
time or both, would constitute such an Event of Default, or (ii) any action,
suit or proceeding at law or in equity or by or before any governmental
instrumentality or agency which, if adversely determined, would materially
impair the right of the Company to carry on its business substantially as now
or then conducted, or would have a material adverse effect on the properties,
assets, financial condition, prospects, operating results or business of the
Company and its subsidiaries taken as a whole, give notice to the holder of
this Note, specifying the nature of such event.
(i) Payment of Principal and Interest on the Note. The
Company will use its best efforts, subject to the provisions of applicable
credit arrangements (including the Credit Agreement), contractual obligations
of the Company and/or its subsidiaries and any applicable law restricting the
same, to provide funds from its subsidiaries to the Company, by dividend,
advance or otherwise, sufficient to permit payment by the Company of the
principal of and interest on this Note in accordance with its terms. The
Company will not, and will not permit any subsidiary to, directly or indirectly
create or otherwise cause to exist any encumbrance or restriction on the
ability of any subsidiary to pay dividends or make any other distributions to
the Company or any wholly-owned subsidiary of the Company in respect of its
capital stock.
(j) Consolidation, Merger and Sale. The Company will not
consolidate or merge with or into, or sell or otherwise dispose of all or
substantially all of its property in one or more related transactions to, any
other corporation or other entity, unless:
(i) the Company is the surviving corporation or the
entity formed by or surviving any such consolidation or merger (if
other than the Company) or to which such sale or other disposition
shall have been made is a corporation organized or existing under the
laws of the United States of any state thereof or the District of
Columbia;
(ii) the surviving corporation or other entity (if other
than the Company) shall expressly and effectively assume in writing
the due and punctual payment of the principal of and
9
<PAGE> 103
interest on this Note, according to its tenor, and the due and
punctual performance and observance of all the terms, covenants,
agreements and conditions of this Note to be performed or observed by
the Company to the same extent as if such surviving corporation had
been the original maker of this Note;
(iii) the Company or such other corporation or other entity
shall not otherwise be in default in the performance or observance of
any covenant, agreement or condition of this Note or the Purchase
Agreement; and
(iv) the holder of this Note shall have received, in
connection therewith, an opinion of counsel for the Company (or other
counsel satisfactory to the holder), in form and substance
satisfactory to the holder, to the effect that any such consolidation,
merger, sale or conveyance and any such assumption complies with the
provisions of this paragraph (j).
(k) Limitation on Indebtedness and Disqualified Stock.
The Company will not, and will not permit any of its subsidiaries to, (i) incur
or permit to remain outstanding any indebtedness for money borrowed
("Indebtedness"), except (A) Senior Indebtedness (as defined in Section 13),
(B) Indebtedness existing on the date of original issuance of this Note, (C)
Indebtedness permitted to be incurred under the Credit Agreement as in effect
from time to time after the original issuance of this Note (other than
Indebtedness that is subordinate or junior in right of payment (to any extent)
to any Senior Indebtedness and senior or pari passu in right of payment (to any
extent) to the Notes), or (D) in the event that the Credit Agreement has
terminated, Indebtedness permitted to be incurred under any successor credit
agreement of the Company with respect to Senior Indebtedness, or if there
exists no such credit agreement, such Indebtedness as may be mutually agreed
upon by the Company and the holders of a majority of the aggregate principal
amount of the Notes then outstanding, or (ii) issue any capital stock
("Disqualified Stock") of the Company or any of its subsidiaries (other than
the Convertible Preferred Stock (as hereinafter defined)) which by its terms
(or by the terms of any security into which it is convertible or for which it
is exchangeable), or upon the happening of any event, matures, or is
mandatorily redeemable, whether pursuant to a sinking fund obligation or
otherwise, or redeemable at the option of the holder thereof, in whole or in
part, on or prior to December 31, 2001.
(l) Restricted Payments. The Company will not, and will
not permit any of its subsidiaries to: (i) declare or pay any dividends
on, or make any other distribution or payment on account of, or redeem, retire,
purchase or otherwise acquire, directly or indirectly, any shares of any class
of stock of the Company, whether now or hereafter outstanding, or make any
other distribution in respect thereof, either directly or indirectly, whether
in
10
<PAGE> 104
cash, property or in obligations of the Company or any of its subsidiaries,
except for (X) distributions of shares of the same class or of a different
class of stock pro rata to all holders of shares of a class of stock, (Y) the
payment of cash dividends on account of the Company's Convertible Preferred
Stock, $.01 par value (the "Convertible Preferred Stock"), or (Z) dividends,
distributions or payments by any subsidiary to the Company or to any
wholly-owned subsidiary of the Company, or (ii) make any payments of principal
of, or retire, redeem, purchase or otherwise acquire any Indebtedness other
than any Senior Indebtedness or the Notes (such declarations, payments,
purchases, redemptions, retirements, acquisitions or distributions being herein
called "Restricted Payments").
(m) Limitation on Liens. The Company shall not, and shall
not permit any of its subsidiaries to, directly or indirectly, create, incur,
assume or otherwise cause or suffer to exist any lien, pledge , charge,
security interest or encumbrance (collectively, "Liens") on any asset now owned
or hereafter acquired, or on any income or profits therefrom or assign or
convey any right to receive income therefrom, except for (i) Liens permitted
under the Credit Agreement, (ii) liens for current taxes not yet due, (iii)
landlord's liens, (iv) purchase money liens and (v) workman's, materialman's,
warehouseman's and similar liens arising by law or statute.
(n) Inspection of Property. The Company will permit the
holder hereof to visit and inspect any of the properties of the Company and any
other subsidiaries and their books and records and to discuss the affairs,
finances and accounts of any of such corporations with the principal officers
of the Company and such subsidiaries and their independent public accountants,
all at such reasonable times and as often as such holders may reasonably
request.
8. Modification by Holders; Waiver. The Company may,
with the written consent of the holders of not less than a majority in
principal amount of the Notes then outstanding, modify the terms and provisions
of this Note or the rights of the holders of this Note or the obligations of
the Company hereunder, and the observance by the Company of any term or
provision of this Note may be waived with the written consent of the holders of
not less than a majority in principal amount of the Notes then outstanding;
provided, however, that no such modification or waiver shall:
(i) change the maturity of any Note or reduce the
principal amount thereof or reduce the rate or extend the time of
payment of interest thereon without the consent of the holder of each
Note so affected; or
11
<PAGE> 105
(ii) give any Note any preference over any other Note,
including, without limitation, by amending the allocation provisions
of Section 5(c) hereof; or
(iii) reduce the percentage of principal amount outstanding
under any Note, the consent of the holder of which is required for any
such modification; or
(iv) amend the provisions of Section 13 hereof in any
manner adverse to the interests of the holder of this Note,
without the consent of the holder of each Note so affected.
Any such modification or waiver shall apply equally to each
holder of the Notes and shall be binding upon them, upon each future holder of
any Note and upon the Company, whether or not such Note shall have been marked
to indicate such modification or waiver, but any Note issued thereafter shall
bear a notation referring to any such modification or waiver. Promptly after
obtaining the written consent of the holders as herein provided, the Company
shall transmit a copy of such modification or waiver to the holders of the
Notes at the time outstanding.
9. Events of Default. If any one or more of the
following events, herein called "Events of Default," shall occur (for any
reason whatsoever, and whether such occurrence shall, on the part of the
Company or any of its subsidiaries, be voluntary or involuntary or come about
or be effected by operation of law or pursuant to or in compliance with any
judgment, decree or order of a court of competent jurisdiction or any order,
rule or regulation of any administrative or other governmental authority) and
such Event of Default shall be continuing:
(i) default shall be made in the payment of the principal
of this Note when and as the same shall become due and payable,
whether at maturity or at a date fixed for prepayment or repurchase
(including default of any optional prepayment in accordance with the
requirements of Section 5 or any Change of Control Payment in
accordance with the requirements of Section 6, as the case may be) or
by acceleration or otherwise; or
(ii) default shall be made in the payment of any
installment of interest on this Note according to its terms when and
as the same shall become due and payable; or
(iii) default shall be made in the due observance or
performance of any covenant, condition or agreement on the part of
the Company contained herein Section 7(j); or
(iv) default shall be made in the due observance or
performance of any other covenant, condition or agreement on
12
<PAGE> 106
the part of the Company to be observed or performed pursuant to the
terms hereof or of the Purchase Agreement, and such default shall
continue for 10 days after written notice thereof, specifying such
default and requesting that the same be remedied; or
(v) any representation or warranty made by or on behalf
of the Company herein or in the Purchase Agreement shall prove to have
been false or incorrect in any material respect on the date on or as
of which made; or
(vi) the entry of a decree or order for relief by a court
having jurisdiction in the premises in respect of the Company or any
of its subsidiaries in any involuntary case under the federal
bankruptcy laws, as now constituted or hereafter amended, or any
other applicable federal or state bankruptcy, insolvency or other
similar laws, or appointing a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or similar official) of the Company
or any of its subsidiaries for any substantial part of any of their
property or ordering the winding-up or liquidation of any of their
affairs and the continuance of any such decree or order unstayed and
in effect for a period of 30 consecutive days; or
(vii) the commencement by the Company or any of its
subsidiaries of a voluntary case under the federal bankruptcy laws,
as now constituted or hereafter amended, or any other applicable
federal or state bankruptcy, insolvency or other similar laws, or the
consent by any of them to the appointment of or taking possession by a
receiver, liquidator, assignee, trustee, custodian, sequestrator (or
other similar official) of the Company or any of its subsidiaries for
any substantial part of any of their property, or the making by any of
them of any general assignment for the benefit of creditors, or the
failure of the Company or of any of its subsidiaries generally to pay
its debts as such debts become due, or the taking of corporate action
by the Company or any of its subsidiaries in furtherance of or
which might reasonably be expected to result in any of the foregoing;
or
(viii) a default or an event of default as defined in any
instrument evidencing or under which the Company or any of its
subsidiaries has outstanding at the time any Indebtedness in excess of
$500,000 in aggregate principal amount shall occur and as a result
thereof the maturity of any such Indebtedness shall have been
accelerated so that the same shall have become due and payable prior
to the date on which the same would otherwise have become due and
payable and such acceleration shall not have been rescinded or
annulled within 20 days; or
(ix) final judgment for the payment of money in excess of
$500,000 shall be rendered against the Company or any of its
13
<PAGE> 107
subsidiaries and the same shall remain undischarged for a period of 30
days during which execution shall not be effectively stayed;
then, the holders of at least 33-1/3% in aggregate principal amount of the
Notes at the time outstanding may, at their option, by a notice in writing to
the Company declare this Note to be, and this Note shall thereupon be and
become immediately due and payable together with interest accrued thereon,
without diligence, presentment, demand, protest or further notice of any kind,
all of which are expressly waived by the Company to the extent permitted by
law.
At any time after any declaration of acceleration has been
made as provided in this Section 9, the holders of a majority in principal
amount of the Notes then outstanding may, by notice to the Company, rescind
such declaration and its consequences, provided, however, that no such
rescission shall extend to or affect any subsequent default or Event of Default
or impair any right consequent thereon.
Without limiting the foregoing, the Company hereby waives any
right to trial by jury in any legal proceeding related in any way to this Note
and agrees that any such proceeding may, if the holder so elects, be brought
and enforced in the Supreme Court of the State of New York for New York County
or the United States District Court for the Southern District of New York and
the Company hereby waives any objection to jurisdiction or venue in any such
proceeding commenced in such court. The Company further agrees that any
process required to be served on it for purposes of any such proceeding may be
served on it, with the same effect as personal service on it within the State
of New York, by registered mail addressed to it at its office or agency set
forth in paragraph (a) of Section 7 for purposes of notices hereunder.
10. Suits for Enforcement. Subject to the provisions of
Section 13 of this Note, in case any one or more of the Events of Default
specified in Section 9 of this Note shall happen and be continuing (subject to
any applicable cure period expressly set forth herein), the holder of this Note
may proceed to protect and enforce its rights by suit in equity, action at law
and/or by other appropriate proceeding, whether for the specific performance of
any covenant or agreement contained in this Note or in aid of the exercise of
any power granted in this Note, or may proceed to enforce the payment of this
Note or to enforce any other legal or equitable right of the holder of this
Note.
In case of any default under this Note, the Company will pay
to the holder hereof reasonable collection costs and reasonable attorneys'
fees, to the extent actually incurred.
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<PAGE> 108
11. Remedies Cumulative. No remedy herein conferred upon
the holder of this Note is intended to be exclusive of any other remedy and
each and every such remedy shall be cumulative and shall be in addition to
every other remedy given hereunder or now or hereafter existing at law or in
equity or by statute or otherwise.
12. Remedies Not Waived. No course of dealing between
the Company and the holder of this Note or any delay on the part of the holder
hereof in exercising any rights hereunder shall operate as a waiver of any
right of the holder of this Note.
13. Subordination.(1) Anything contained in this Note to
the contrary notwithstanding, the indebtedness evidenced by the Notes shall be
subordinate and junior to the extent set forth in the following paragraphs (A),
(B) and (C), to all Senior Indebtedness of the Company. Senior Indebtedness
shall mean (i) the principal of, and premium, if any, payable on redemption or
prepayment of, and interest on, all indebtedness for borrowed money now
existing or hereafter incurred which by its terms is not subordinated to any
other indebtedness of the Company, (ii) all indebtedness, obligations and
liabilities of any nature of the Company to [ ] Bank or any successor
or assignee thereof under the terms of that certain Credit Agreement (as the
same may be modified, the "Credit Agreement") dated as of , 1996
among Aurora Electronics Group, Inc., the Company and [ ] Bank, as Agent
for the Lenders, whether such indebtedness, obligations, and liabilities are
now existing or hereafter arising or incurred, and (iii) any renewals or
extensions of the indebtedness incurred pursuant to any such Senior
Indebtedness described in clauses (i) and (ii) above.
(A) In the event of any insolvency, bankruptcy,
liquidation, reorganization or other similar proceedings, or any
receivership proceedings in connection therewith, relative to the
Company or its creditors or its property, and in the event of any
proceedings for voluntary liquidation, dissolution or other winding up
of the Company, whether or not involving insolvency or bankruptcy
proceedings, then all Senior Indebtedness shall first be paid in full,
before any payment on account of principal or interest is made upon
the Notes.
(B) In any of the proceedings referred to in paragraph
(A) above, any payment or distribution of any kind or character,
whether in cash, property, stock or obligations which may be payable
or deliverable in respect of the Notes shall be paid or delivered
directly to the holders of Senior Indebtedness for application in
payment thereof, unless and until all Senior Indebtedness shall have
been paid in full.
____________________
(1) Subject to bank comments.
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<PAGE> 109
(C) In the event (i) the Company shall default under any
Senior Indebtedness obligation held by any bank or other financial
institution and the effect of such default is to accelerate the
maturity of such Senior Indebtedness or (ii) the holder thereof shall
cause such obligation to become due prior to the stated maturity
thereof or (iii) the Company shall not pay such obligation at maturity
or (iv) an Event of Default (as defined in Credit Agreement) shall
have occurred and as a result of such Event of Default the Obligations
(as defined in the Credit Agreement) become due and payable (x) then
the Company will not make, directly or indirectly, to the holder of
the Notes any payment of any kind of or on account of all or any part
of the Notes; (y) the holders of the Notes will not accept from the
Company any payment of any kind of or on account of all or any part of
the Notes and (z) the holders of the Notes may not take, demand,
receive, sue for, accelerate or commence any remedial proceedings with
respect to any amount payable under the Notes, unless and until in
each case described in clauses (x), (y) and (z) all such Senior
Indebtedness shall have been paid in full; provided, however, that if
(i) such default or Event of Default shall have occurred and be
continuing for a period (a "Blockage Period") of 179 days or more (it
being understood that not more than one Blockage Period may be
commenced with respect to the Notes during any period of 360
consecutive days), (ii) such default or Event of Default shall not
have been cured or waived (iii) the holder of such Senior Indebtedness
obligation shall not have made a demand for payment and commenced an
action, suit or other proceeding against the Company and (iv) none of
the events described in subsection (A) above shall have occurred, then
(to the extent not otherwise prohibited by subsections (A) or (B)
above, the Company may make and the holders of the Notes may accept
from the Company all past due and current payments of any kind of or
on account of the Notes, and such holder may demand, receive, retain,
sue for or otherwise seek enforcement or collection of all amounts
payable on account of principal of or interest on the Notes. The
holder of the Note agrees that whatever right, title, and interest
(including security interest or judgment lien) that the holders of the
Notes have in and to any assets of the Company as security for the
amounts owing in connection with the Notes shall, at all times and in
all respects, be subject and subordinate to the holder's of the Senior
Indebtedness right, title, and interest (including security interest
or judgment lien) in such assets.
Subject to the payment in full of all Senior Indebtedness as
aforesaid, the holders of the Notes shall be subrogated to the rights of the
holders of Senior Indebtedness to receive payments or distributions of any kind
or character, whether in cash, property, stock or obligations, which may be
payable or deliverable to the holders of Senior Indebtedness, until the
principal of, and
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<PAGE> 110
interest on, the Notes shall be paid in full, and, as between the Company, its
creditors other than the holders of Senior Indebtedness, and the holders of the
Notes, no such payment or distribution made to the holders of Senior
Indebtedness by virtue of this Section 13 which otherwise would have been made
to the holder of the Notes shall be deemed a payment by the Company on account
of the Senior Indebtedness, it being understood that the provisions of this
Section 13 are and are intended solely for the purposes of defining the
relative rights of the holders of the Notes, on the one hand, and the holder of
the Senior Indebtedness, on the other hand. Subject to the rights, if any,
under this Section 13 of holders of Senior Indebtedness to receive cash,
property, stock or obligations otherwise payable or deliverable to the holders
of the Notes, nothing herein shall either impair, as between the Company and
the holder of the Notes, the obligation of the Company, which is unconditional
and absolute, to pay to the holder thereof the principal thereof and interest
thereon in accordance with its terms or prevent (except as otherwise specified
therein) the holders of the Notes from exercising all remedies otherwise
permitted by applicable law or hereunder upon default hereunder.
14. Covenants Bind Successors and Assigns. All the
covenants, stipulations, promises and agreements in this Note contained by or
on behalf of the Company shall bind its successors and assigns, whether so
expressed or not.
15. Governing Law. This Note shall be governed by and
construed in accordance with the laws of the State of New York.
16. Headings. The headings of the sections and
paragraphs of this Note are inserted for convenience only and do not constitute
a part of this Note.
17. Third Party Beneficiaries. The provisions of Section
13 are intended to be for the benefit of, and shall be enforceable directly by
each holder of, the Senior Indebtedness.
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<PAGE> 111
IN WITNESS WHEREOF, Aurora Electronics, Inc. has caused this Note to
be signed in its corporate name by one of its officers thereunto duly
authorized and to be dated as of the day and year first above written.
AURORA ELECTRONICS, INC.
By:_________________________
Name:
Title:
18
<PAGE> 112
Draft of February 20, 1996
EXHIBIT B
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS
OF
CONVERTIBLE PREFERRED STOCK
OF
AURORA ELECTRONICS, INC.
(Pursuant to Section 151 of the
Delaware General Corporation Law)
___________________________________________
AURORA ELECTRONICS, INC., a corporation organized and existing
under the laws of the State of Delaware (the "Corporation"), hereby certifies
that, pursuant to authority vested in the Board of Directors of the Corporation
by Article Fourth of the Restated Certificate of Incorporation, as amended, of
the Corporation, the following resolution was adopted as of February , 1996
by the Board of Directors of the Corporation pursuant to Section 141 of the
Delaware General Corporation Law:
"RESOLVED that, pursuant to authority vested in the Board of
Directors of the Corporation by Article Fourth of the Corporation's Restated
Certificate of Incorporation, as amended, of the total authorized number of
1,000,000 shares of Preferred Stock, par value $.01 per share, of the
Corporation, there shall be designated a series of 400,000 shares which shall
be issued in and constitute a single series to be known as "Convertible
Preferred Stock" (hereinafter called the "Convertible Preferred Stock"). The
shares of Convertible Preferred Stock shall have the voting powers,
designations, preferences and other special rights, and qualifications,
limitations and restrictions thereof set forth below:
1. Dividends. (a) The holders of shares of Convertible
Preferred Stock shall be entitled to receive, out of funds legally available
for such purpose, cash dividends at the rate of $7.00 per share per annum, and
no more, payable as provided herein or when and as declared by the Board of
Directors of the Corporation. Such dividends shall be cumulative and shall
accrue from and after the date of issue whether or not declared and whether or
not there are any funds of the Corporation legally available for the payment of
dividends. Accrued but unpaid
<PAGE> 113
dividends shall not bear interest. The Board of Directors of the Corporation
may fix a record date for the determination of holders of Convertible Preferred
Stock entitled to receive payment of a dividend declared thereon, which record
date shall be no more than 60 days prior to the date fixed for the payment
thereof.
(b) As long as any shares of Convertible Preferred Stock
shall remain outstanding, in no event shall any dividend be declared or paid
upon, nor shall any distribution be made upon, any Junior Capital Stock (as
defined herein), other than a dividend or distribution payable solely in shares
of common stock of the Corporation, nor shall any shares of Junior Capital
Stock be purchased or redeemed by the Corporation, nor shall any moneys be paid
to or made available for a sinking fund for the purchase or redemption of
shares of any Junior Capital Stock, unless, in each such case, (i) full
cumulative dividends on the outstanding shares of Convertible Preferred Stock
shall have been declared and paid and (ii) any arrears or defaults in any
redemption of shares of Convertible Preferred Stock shall have been cured. The
term "Junior Capital Stock" as used herein means any shares of capital stock of
the Corporation, including the Corporation's Common Stock, par value $.03 per
share (the "Common Stock"), other than shares of the Corporation's capital
stock permitted to rank on a parity with or senior to the Convertible Preferred
Stock pursuant to Section 6 hereof.
2. Redemption. The shares of Convertible Preferred
Stock shall be redeemable as follows:
(a) Mandatory Redemption. On September 30, 2006, subject
to the terms of the Credit Agreement dated as of [ ], 1996 (the "Credit
Agreement"), among Aurora Electronics Group, Inc., the Corporation and [
] Bank, as Agent, the Corporation shall redeem (the "Mandatory Redemption") all
of the shares of Convertible Preferred Stock then outstanding, at a redemption
price of $100 per share, plus all accrued but unpaid dividends to which the
holders of the Convertible Preferred Stock are then entitled pursuant to
Section 1 above as of such date.
(b) Optional Redemption. Subject to the terms of the
Credit Agreement, upon the occurrence of any of the following (each a "Corporate
Disposition"):
(i) the sale, lease or transfer, whether direct or
indirect, of all or substantially all of the assets of the Company and
its subsidiaries, taken as a whole, in one transaction or a series of
related transactions, to any "person" or "group" other than the WCAS
Group, or
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<PAGE> 114
(ii) the acquisition of "beneficial ownership" by any
"person" or "group" other than the WCAS Group, of voting stock of the
Corporation representing more than 50% of the voting power of all
outstanding shares of such voting stock, whether by way of merger or
consolidation or otherwise,
then each holder of any share or shares of Convertible Preferred Stock shall
have the right, at such holder's option, to require the Corporation to redeem
(the "Optional Redemption"), any or all of such holder's shares of Convertible
Preferred Stock (any such redemption of less than all of a holder's shares to
be in integral multiples of 1,000 shares) on or prior to the effective date of
such Corporate Disposition, at a redemption price of $100 plus all accrued but
unpaid dividends to which the holders of the Convertible Preferred Stock are
then entitled pursuant to Section 1 above as of such date. Such option shall
be exercised by written notice to the Corporation given within fifteen days of
the date of receipt of the Redemption Notice (as defined herein) to be
delivered pursuant to Section 2(e) below.
For purposes of this Certificate of Designations: (i) the
terms "person" and "group" shall have the meaning set forth in Section 13(d)(3)
of the Exchange Act, whether or not applicable, (ii) the term "beneficial
owner" shall have the meaning set forth in Rules 13d-3 and 13d-5 under the
Exchange Act, whether or not applicable, except that a person shall be deemed
to have "beneficial ownership" of all shares that any such person has the right
to acquire, whether such right is exercisable immediately or only after the
passage of time or upon the occurrence of certain events, (iii) any "person" or
"group" will be deemed to beneficially own any voting stock of the Company so
long as such person or group beneficially owns, directly or indirectly, in the
aggregate a majority of the voting stock of a registered holder of the voting
stock of the Company, and (iv) the term "WCAS Group" shall mean Welsh, Carson,
Anderson & Stowe VII, L.P., a Delaware limited partnership ("WCAS VII"), WCAS
Capital Partners II, L.P., a Delaware limited partnership ("WCAS CP II"), and
any general partners thereof.
Any date on which any shares of Convertible Preferred Stock
are to be redeemed as herein provided is hereinafter called a "Redemption
Date." The price at which any shares of Convertible Preferred Stock are to be
redeemed as herein provided is hereinafter called the "Redemption Price."
(c) Notice of Redemption. At least 20 days (and not more
than 60 days) prior to any Redemption Date (which in the case of any Optional
Redemption shall be prior to the effective date of any such sale, lease or
transfer of assets or consolidation, merger or other transaction), written
notice thereof (a "Redemption Notice") shall be mailed, by first class or
regis-
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<PAGE> 115
tered mail, postage prepaid, to each holder of record of Convertible Preferred
Stock, at his, her or its address last shown on the records of the transfer
agent of the Convertible Preferred Stock (or the records of the Corporation, if
it serves as its own transfer agent). The Redemption Notice shall set forth
(i) the Redemption Date, (ii) the Redemption Price, (iii) in the case of the
Mandatory Redemption, the total number of shares to be redeemed from all
holders and the number of shares to be redeemed from such holder, and (iv) in
the case of an Optional Redemption, a description of the events which will,
upon the occurrence thereof, constitute a Corporate Disposition, including a
summary description of the terms thereof, and such holder's right to exercise
its option to require a redemption under Section 2(b) hereof. In the case of a
Mandatory Redemption, the Redemption Notice shall call upon such holder to
surrender to the Corporation, in the manner and at the place designated, his or
its certificate or certificates representing any shares of Convertible
Preferred Stock to be redeemed.
(d) Redeemed or Otherwise Acquired Shares to be Retired.
On or prior to a Redemption Date, all holders of shares of Convertible
Preferred Stock to be redeemed shall surrender their certificates representing
such shares to the Corporation, in the manner and at the place designated in
the Redemption Notice, and against such surrender the Redemption Price of such
shares shall be paid to the order of the person whose name appears on each such
certificate as the owner thereof. Each surrendered certificate shall be
canceled. From and after the Redemption Date, unless there shall have been a
default in payment of the Redemption Price, all rights of the holders of the
shares of redeemed Convertible Preferred Stock as holders of such shares of
Convertible Preferred Stock (except the right to receive the Redemption Price
without interest against surrender of their certificate or certificates) shall
cease with respect to such shares, and such shares shall not thereafter be
transferred on the books of the Corporation (or its transfer agent, if any) or
be deemed to be outstanding for any purpose whatsoever.
(e) Shares to be Redeemed or Purchased. If the funds of
the Corporation legally available for redemption of Convertible Preferred Stock
on any Redemption Date are insufficient, after redemption of any other shares
ranking senior thereto, to redeem the full number of shares of Convertible
Preferred Stock to be redeemed on such date, those funds which are legally
available shall be used to redeem the maximum possible number of such shares of
Convertible Preferred Stock ratably from each holder whose shares are otherwise
required to be redeemed. At any time thereafter when additional funds of the
Corporation become legally available for the redemption of Convertible
Preferred Stock, such funds will be used, at the end of the next succeeding
fiscal quarter, to redeem the balance of the shares
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<PAGE> 116
which the Corporation was theretofore obligated to redeem, ratably on the basis
set forth in the preceding sentence.
3. Liquidation, Dissolution or Winding Up. (a) In the
event of any voluntary or involuntary liquidation, dissolution or winding up of
the Corporation, the holders of shares of Convertible Preferred Stock then
outstanding shall be entitled to be paid out of the assets of the Corporation
available for distribution to its stockholders, before any payment shall be
made to the holders of any shares of Junior Capital Stock by reason of their
ownership thereof, an amount equal to $100 per share of Convertible Preferred
Stock, plus all accrued but unpaid dividends to which the holders of the
Convertible Preferred Stock are then entitled pursuant to Section 1 above as of
such date, and no more. If upon any such liquidation, dissolution or winding
up of the Corporation the remaining assets of the Corporation available for
distribution to its stockholders (after making all distributions to which
holders of capital stock ranking senior to the Convertible Preferred Stock
shall be entitled) shall be insufficient to pay the holders of shares of
Convertible Preferred Stock the full amount to which they shall be entitled
pursuant to this Section 3(a), the holders of shares of Convertible Preferred
Stock, and any other shares ranking on a parity therewith, shall share ratably
in any distribution of the remaining assets and funds of the Corporation in
proportion to the respective amounts which would otherwise be payable in
respect of the shares of Convertible Preferred Stock held by them upon such
distribution if all amounts payable on or with respect to such shares were paid
in full.
(b) After the payment of all amounts required to be paid
pursuant to Section 3(a) to the holders of shares of Convertible Preferred
Stock, and any other shares ranking on a parity therewith, upon the
dissolution, liquidation or winding up of the Corporation, the holders of
shares of Junior Capital Stock then outstanding shall share in any distribution
of the remaining assets and funds of the Corporation in the manner provided by
law, in the Restated Certificate of Incorporation of the Corporation, as
amended, or as provided in any pertinent Certificate of Designations of the
Corporation, as the case may be.
(c) No Corporate Disposition shall be deemed to be a
liquidation, dissolution or winding up of the Corporation for purposes of this
Section 3 (unless in connection therewith the liquidation of the Corporation is
specifically approved).
4. Conversion. The shares of Convertible Preferred
Stock shall be convertible as follows:
(a) Right to Convert. Subject to the terms and
conditions of this Section 4, the holder of any share or shares of Convertible
Preferred Stock shall have the right, at his, her or
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<PAGE> 117
its option at any time, to convert any such shares of Convertible Preferred
Stock (except that upon any liquidation of the Corporation the right of
conversion shall terminate as to all shares at the close of business 15 days
after notice thereof has been given to the holders of Convertible Preferred
Stock as provided in Section 4(h) hereof) into such number of fully paid and
nonassessable whole shares of Common Stock as is obtained by (i) multiplying
the number of shares of Convertible Preferred Stock so to be converted by $100,
(ii) adding the Additional Conversion Amount (as defined in Section 4(c)
herein), if any, and (iii) dividing the result by the conversion price of
$2.125 or, if there has been an adjustment of the conversion price, by the
conversion price as last adjusted and in effect at the date any share or shares
of Convertible Preferred Stock are surrendered for conversion (such price, or
such price as last adjusted, being referred to herein as the "Conversion
Price"). Such right of conversion shall be exercised by the holder thereof by
giving written notice that the holder elects to convert a stated number of
shares of Convertible Preferred Stock into Common Stock (such number shall
either be an integral multiple of 1,000 or the total number of shares held by
such holder) and by surrender of a certificate or certificates for the shares
so to be converted to the Corporation at its principal office (or such other
office or agency of the Corporation as the Corporation may designate by notice
in writing to the holder or holders of the Convertible Preferred Stock) at any
time during its usual business hours on the date set forth in such notice,
together with a statement of the name or names (with address), subject to
compliance with applicable laws to the extent such designation shall involve a
transfer, in which the certificate or certificates for shares of Common Stock
shall be issued.
(b) Issuance of Certificates; Time Conversion Effected.
Promptly after the receipt by the Corporation of the written notice referred to
in Section 4(a) above and surrender of the certificate or certificates for the
share or shares of the Convertible Preferred Stock to be converted, the
Corporation shall issue and deliver, or cause to be issued and delivered, to
the holder, registered in such name or names as such holder may direct, subject
to compliance with applicable laws to the extent such designation shall involve
a transfer, a certificate or certificates for the number of whole shares of
Common Stock issuable upon the conversion of such share or shares of
Convertible Preferred Stock. To the extent permitted by law, such conversion
shall be deemed to have been effected and the Conver- sion Price shall be
determined as of the close of business on the date on which such written notice
shall have been received by the Corporation and the certificate or certificates
for such share or shares shall have been surrendered as aforesaid, and at such
time the rights of the holder of such share or shares of Convertible Preferred
Stock shall cease, and the person or persons in whose name or names any
certificate or certificates for shares of
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<PAGE> 118
Common Stock shall be issuable upon such conversion shall be deemed to have
become the holder or holders of record of the shares represented thereby.
(c) Fractional Shares; Dividends; Partial Conversion.
(i) No fractional shares shall be issued upon conversion
of the Convertible Preferred Stock into Common Stock and the number of
shares of Common Stock to be issued shall be rounded to the nearest
whole share. If any fractional interest in a share of Common Stock
would, except for the provisions of this Section 4(c), be deliverable
upon any such conversion, the Corporation, in lieu of delivering the
fractional share thereof, shall pay to the holder surrendering the
Convertible Preferred Stock for conversion an amount in cash equal to
the current fair market value of such fractional interest as
determined in good faith by the Board of Directors of the Corporation.
(ii) Upon the conversion of any shares of Convertible
Preferred Stock, the Corporation will pay the holder thereof, out of
funds legally available for such purpose, any accrued but unpaid
dividends thereon to the date of such conversion. In the event that
the Corporation is for any reason unable to pay some or all of such
accrued but unpaid dividends, any amount not so paid shall (for
purposes of Section 4(a) hereof) constitute the "Additional Conversion
Amount." No other payment or adjustment shall be made upon any
conversion on account of the Convertible Preferred Stock so
converted or the Common Stock issued upon such conversion.
(iii) In case the number of shares of Convertible Preferred
Stock represented by the certificate or certificates surrendered
pursuant to Section 4(a) exceeds the number of shares converted, the
Corporation shall, upon such conversion, execute and deliver to the
holder thereof, at the expense of the Corporation, a new certificate
or certificates for the number of shares of Convertible Preferred
Stock represented by the certificate or certificates surrendered which
are not to be converted.
(d) Adjustment of Price Upon Issuance of Common Shares.
Except as provided in Section 4(e) hereof, if and whenever (after the date of
effectiveness of this Certificate of Designation and whether or not any shares
of Convertible Preferred Stock shall at the time have been issued and be
outstanding) the Corporation shall issue or sell, or is, in accordance with
subparagraphs (d)(i) through (d)(vii), deemed to have issued or sold, any
shares of its Common Stock without consideration or for a consideration per
share less than the Conversion Price in
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<PAGE> 119
effect immediately prior to the time of such issue or sale, then, forthwith
upon such issue or sale, the Conversion Price shall be adjusted to the price
(calculated to the nearest cent) determined by dividing (x) an amount equal to
the sum of (A) the number of shares of Common Stock outstanding immediately
prior to such issue or sale (including as outstanding all shares of Common
Stock issuable upon conversion of outstanding Convertible Preferred Stock)
multiplied by the then existing Conversion Price, and (B) the consideration, if
any, received by the Corporation upon such issue or sale, by (y) the total
number of shares of Common Stock outstanding immediately after such issue or
sale (including as outstanding all shares of Common Stock issuable upon
conversion of outstanding Convertible Preferred Stock without giving effect to
any adjustment in the number of shares so issuable by reason of such issue and
sale).
No adjustment of the Conversion Price, however, shall be made
in an amount less than $.01 per share, and any such lesser adjustment shall be
carried forward and shall be made at the time and together with the next
subsequent adjustment which together with any adjustments so carried forward
shall amount to $.01 per share or more.
For purposes of this Section 4(d), the following subparagraphs
(i) through (vii) shall also be applicable:
(i) Issuance of Rights or Options. Subject to Section
4(e) hereof, in case at any time the Corporation shall in any manner
grant (whether directly or by assumption in a merger or otherwise) any
rights to subscribe for or to purchase, or any options for the
purchase of, Common Stock or any stock (other than shares of
Convertible Preferred Stock) or securities convertible into or
exchangeable for Common Stock (such rights or options being herein
called "Options" and such convertible or exchangeable stock or
securities being herein called "Convertible Securities") whether or
not such Options or the right to convert or exchange any such
Convertible Securities are immediately exercisable, and the price per
share for which Common Stock is issuable upon the exercise of such
Options or upon conversion or exchange of such Convertible Securities
(determined by dividing (A) the total amount, if any, received or
receivable by the Corporation as consideration for the granting of
such Options, plus the minimum aggregate amount of additional
consideration payable to the Corporation upon the exercise of all such
Options, plus, in the case of such Options which relate to Convertible
Securities, the minimum aggregate amount of additional consideration,
if any, payable upon the issue or sale of such Convertible Securities
and upon the conversion or exchange thereof, by (B) the total maximum
number of shares of Common Stock issuable upon the exercise of such
Options or upon the conversion or
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<PAGE> 120
exchange of all such Convertible Securities issuable upon the exercise
of such Options) shall be less than the Conversion Price in effect
immediately prior to the time of the granting of such Options, then
the total maximum number of shares of Common Stock issuable upon the
exercise of such Options or upon conversion or exchange of the total
maximum amount of such Convertible Securities issuable upon the
exercise of such Options shall be deemed to have been issued for such
price per share as of the date of granting of such Options and
thereafter shall be deemed to be outstanding. Except as otherwise
provided in subparagraph (iii) below, no adjustment of the Conversion
Price shall be made upon the actual issue of such Common Stock or of
such Convertible Securities upon exercise of such Options or upon the
actual issue of such Common Stock upon conversion or exchange of such
Convertible Securities.
(ii) Issuance of Convertible Securities. Subject to
Section 4(e) hereof, in case the Corporation shall in any manner issue
(whether directly or by assumption in a merger or otherwise) or sell
any Convertible Securities, whether or not the rights to exchange or
convert thereunder are immediately exercisable, and the price per
share for which Common Stock is issuable upon such conversion or
exchange (determined by dividing (A) the total amount received or
receivable by the Corporation as consideration for the issue or sale
of such Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Corporation upon the
conversion or exchange thereof, by (B) the total maximum number of
shares of Common Stock issuable upon the conversion or exchange of all
such Convertible Securities) shall be less than the Conversion Price
in effect immediately prior to the time of such issue or sale, then
the total maximum number of shares of Common Stock issuable upon
conversion or exchange of all such Convertible Securities shall be
deemed to have been issued for such price per share as of the date of
the issue or sale of such Convertible Securities and thereafter shall
be deemed to be outstanding, provided that (x) except as otherwise
provided in subparagraph (iii) below, no adjustment of the Conversion
Price shall be made upon the actual issue of such Common Stock upon
conversion or exchange of such Convertible Securities, and (y) if any
such issue or sale of such Convertible Securities is made upon
exercise of any Option to purchase any such Convertible Securities for
which adjustments of the Conversion Price have been or are to be made
pursuant to other provisions of this Section 4(d), no further
adjustment of the Conversion Price shall be made by reason of such
issue or sale.
(iii) Change in Option Price or Conversion Rate. Upon the
happening of any of the following events, namely, if the
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<PAGE> 121
purchase price provided for in any Option referred to in subparagraph
(i), the additional consideration, if any, payable upon the conversion
or exchange of any Convertible Securities referred to in subparagraph
(i) or (ii), or the rate at which any Convertible Securities referred
to in subparagraph (i) or (ii) are convertible into or exchangeable
for Common Stock shall change at any time (in each case other than
under or by reason of provisions designed to protect against
dilution), the Conversion Price in effect at the time of such event
shall forthwith be readjusted to the Conversion Price which would have
been in effect at such time had such Options or Convertible Securities
still outstanding provided for such changed purchase price, additional
consideration or conversion rate, as the case may be, at the time
initially granted, issued or sold; and on the expiration of any such
Option or the termination of any such right to convert or exchange
such Convertible Securities, the Conversion Price then in effect
hereunder shall forthwith be increased to the Conversion Price which
would have been in effect at the time of such expiration or
termination had such Option or Convertible Securities, to the extent
outstanding immediately prior to such expiration or termination, never
been issued, and the Common Stock issuable thereunder shall no longer
be deemed to be outstanding. If the purchase price provided for in
any such Option referred to in subparagraph (i) or the rate at which
any Convertible Securities referred to in subparagraph (i) or (ii) are
convertible into or exchangeable for Common Stock shall be reduced at
any time under or by reason of provisions with respect thereto
designed to protect against dilution, then, in case of the delivery of
Common Stock upon the exercise of any such Option or upon conversion
or exchange of any such Convertible Securities, the Conversion Price
then in effect hereunder shall forthwith be adjusted to such
respective amount as would have been obtained had such Option or
Convertible Securities never been issued as to such Common Stock and
had adjustments been made upon the issuance of the shares of Common
Stock delivered as aforesaid, but only if as a result of such
adjustment the Conversion Price then in effect hereunder is thereby
reduced.
(iv) Stock Dividends. In case the Corporation shall
declare a dividend or make any other distribution upon any stock of
the Corporation payable in Common Stock, Options or Convertible
Securities, any Common Stock, Options or Convertible Securities, as
the case may be, issuable in payment of such dividend or distribution
shall be deemed to have been issued or sold without consideration.
(v) Subdivision or Combination of Stock. In case the
Corporation shall at any time subdivide its outstanding shares of
Common Stock into a greater number of shares, the
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Conversion Price in effect immediately prior to such subdivision shall
be proportionately reduced, and conversely, in case the outstanding
shares of Common Stock of the Corporation shall be combined into a
smaller number of shares, the Conversion Price in effect immediately
prior to such combination shall be proportionately increased.
(vi) Consideration for Stock. In case any shares of
Common Stock, Options or Convertible Securities shall be issued or
sold for cash, the consideration received therefor shall be deemed to
be the amount received by the Corporation therefor, without deduction
therefrom of any expenses incurred or any underwriting commissions or
concessions paid or allowed by the Corporation in connection
therewith. In case any shares of Common Stock, Options or Convertible
Securities shall be issued or sold for a consideration other than
cash, the amount of the consideration other than cash received by the
Corporation shall be deemed to be the fair value of such consideration
as determined in good faith by the Board of Directors of the
Corporation, without deduction of any expenses incurred or any
underwriting commissions or concessions paid or allowed by the
Corporation in connection therewith. The amount of consideration
deemed to be received by the Corporation pursuant to the foregoing
provisions of this subparagraph (vi) upon any issuance and/or sale of
shares of Common Stock, Options or Convertible Securities, pursuant to
an established compensation plan of the Corporation, to directors,
officers or employees of the Corporation in connection with their
employment shall be increased by the amount of any tax benefit
realized by the Corporation as a result of such issuance and/or sale,
the amount of such tax benefit being the amount by which the Federal
and/or state income or other tax liability of the Corporation shall be
reduced by reason of any deduction or credit in respect of such
issuance and/or sale. In case any Options shall be issued in
connection with the issue and sale of other securities of the
Corporation, together comprising one integral transaction in which no
specific consideration is allocated to such Options by the parties
thereto, such Options shall be deemed to have been issued without
consideration.
(vii) Record Date. In case the Corporation shall take a
record of the holders of its Common Stock for the purpose of entitling
them (A) to receive a dividend or other distribution payable in Common
Stock, Options or Convertible Securities, or (B) to subscribe for or
purchase Common Stock, Options or Convertible Securities, then such
record date shall be deemed to be the date of the issue or sale of the
shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend or the making of such
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other distribution or the date of the granting of such right of
subscription or purchase, as the case may be.
(e) Certain Issues of Stock Excepted. Anything herein to
the contrary notwithstanding, the Corporation shall not make any adjustment of
the Conversion Price in the case of (i) the issuance of shares of Convertible
Preferred Stock pursuant to that certain Securities Purchase Agreement, dated
as of February , 1996 among the Corporation, WCAS VII, WCAS CP II and the
several persons named on Schedule I thereto; (ii) the issuance of shares of
Common Stock upon conversion of Convertible Preferred Stock; (iii) the issuance
of up to [ ](1) shares of Common Stock to employees of the Corporation or
its subsidiaries, either directly or pursuant to stock options, pursuant to
plans or arrangements approved by the Board of Directors of the Corporation; or
(iv) the issuance of shares of Common Stock in respect of any Convertible
Securities issued by the Corporation prior to the date of said Securities
Purchase Agreement.
(f) Reorganization or Reclassification. If any capital
reorganization or reclassification of the capital stock of the Corporation (a
"Reorganization") shall be effected in such a way (including, without
limitation, by way of consolidation or merger) that holders of Common Stock
shall be entitled to receive stock, securities or assets with respect to or in
exchange for Common Stock, then, as a condition of such Reorganization, lawful
and adequate provision (in form satisfactory to the holders of a majority of
the then outstanding shares of Convertible Preferred Stock) shall be made
whereby each holder of a share or shares of Convertible Preferred Stock shall
thereafter have the right to receive, upon the basis and upon the terms and
conditions specified herein and in lieu of the shares of Common Stock of the
Corporation immediately theretofore receivable upon the conversion of such
share or shares of the Convertible Preferred Stock, such shares of stock,
securities or assets as may be issued or payable with respect to or in exchange
for a number of outstanding shares of such Common Stock equal to the number of
shares of such stock immediately theretofore so receivable had such
Reorganization not taken place, and in any such case appropriate provision
shall be made with respect to the rights and interests of such holder to the
end that the provisions hereof (including without limitation provisions for
adjustments of the Conversion Price) shall thereafter be applicable, as nearly
as may be, in relation to any shares of stock, securities or assets thereafter
deliverable upon the exercise of such conversion rights (including an immediate
adjustment, by reason of such Reorganization, of the Conversion Price to the
value for the Common Stock reflected by the terms of such Reorganization if the
value so reflected is less than the Conversion Price in effect immediately
prior to
____________________
(1) To be determined at Closing.
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<PAGE> 124
such Reorganization). In the event of a merger or consolidation of the
Corporation as a result of which a greater or lesser number of shares of common
stock (or other equity interests, of the case may be) of the surviving
corporation or business entity are issuable to holders of Common Stock of the
Corporation outstanding immediately prior to such merger or consolidation, the
Conversion Price in effect immediately prior to such merger or consolidation
shall be adjusted in the same manner as though there were a subdivision or
combination of the outstanding shares of Common Stock of the Corporation. The
Corporation will not effect any Corporate Disposition unless prior to the
consummation thereof the acquiring corporation or other business entity, or
successor corporation or other business entity (if other than the Corporation)
resulting from such Corporate Disposition, as the case may be, shall assume by
written instrument (in form reasonably satisfactory to the holders of a
majority of the shares of Convertible Preferred Stock at the time outstanding)
executed and mailed or delivered to each holder of a share or shares of
Convertible Preferred Stock at the last address of such holder appearing on the
books of the Corporation (or its transfer agent, if any), the obligation to
deliver to such holder such shares of stock, securities or assets as, in
accordance with the foregoing provisions, such holder may be entitled to
receive.
(g) Notice of Adjustment. Upon any adjustment of the
Conversion Price, then and in each such case the Corporation shall give written
notice thereof, by first class mail, postage prepaid, addressed to each holder
of shares of Convertible Preferred Stock at the address of such holder as shown
on the books of the Corporation (or its transfer agent, if any), which notice
shall state the Conversion Price resulting from such adjustment, setting forth
in reasonable detail the method of calculation and the facts upon which such
calculation is based.
(h) Other Notices. In case at any time:
(i) the Corporation shall declare any dividend upon
its Common Stock payable in cash or stock or make any other
distribution to the holders of its Common Stock;
(ii) the Corporation shall offer for subscription pro rata
to the holders of its Common Stock any additional shares of stock of
any class or other rights;
(iii) there shall be any Reorganization or Corporate
Disposition or the Corporation shall become aware of any event or
events that could reasonably be expected to result in a Reorganization
or Corporate Disposition; or
(iv) there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the Corporation;
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then, in any one or more of said cases, the Corporation shall give, by first
class mail, postage prepaid, addressed to each holder of any shares of
Convertible Preferred Stock at the address of such holder as shown on the books
of the Corporation (or its transfer agent, if any), (A) at least 15 days' prior
written notice of the date on which the books of the Corporation (or its
transfer agent) shall close or a record shall be taken for such dividend,
distribution or subscription rights or for determining rights to vote in
respect of any such Reorganization or Corporate Disposition, and (B) in the
case of any such Reorganization or Corporate Disposition, at least 15 days'
prior written notice of the date when the same shall take place. Such notice
in accordance with the foregoing clause (A) shall also specify, in the case of
any such dividend, distribution or subscription rights, the date on which the
holders of Common Stock shall be entitled thereto, and such notice in
accordance with the foregoing clause (B) shall also specify the date on which
the holders of Common Stock shall be entitled to exchange their Common Stock
for securities or other property deliverable upon such Reorganization or
Corporate Disposition, as the case may be.
(i) Conversion at Corporation's Option. All outstanding
shares of Convertible Preferred Stock shall, at the option of the Corporation,
be automatically converted into Common Stock if at any time the Corporation
shall effect a firm commitment public offering of Common Stock or Convertible
Securities registered pursuant to the Securities Act of 1933, as amended,
resulting in proceeds to the Corporation and/or selling stockholders of not
less than $20,000,000, after deduction of underwriting discounts and
commissions but before deduction of other expenses of issuance, and in which
the offering price to the public (or, in the case of a sale of Convertible
Securities, the price per share of Common Stock payable upon conversion
thereof) is not less than two times the Conversion Price. Such conversion
shall be effected at the time of and subject to the closing of the sale of such
shares of Common Stock.
(j) Stock to be Reserved. The Corporation will at all
times reserve and keep available out of its authorized but unissued Common
Stock, solely for the purpose of issuance upon the conversion of the
Convertible Preferred Stock as herein provided, such number of shares of Common
Stock as shall then be issuable upon the conversion of all outstanding shares
of Convertible Preferred Stock. All shares of Common Stock which shall be so
issued shall be duly and validly issued and fully paid and nonassessable and
free from all taxes, liens and charges arising out of or by reason of the issue
thereof, and, without limiting the generality of the foregoing, the Corporation
covenants that it will from time to time take all such action as may be
requisite to assure that the par value per share of the Common Stock is at all
times equal to or less than the effective Conversion Price. The Corporation
will take all such action within its control as
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<PAGE> 126
may be necessary on its part to assure that all such shares of Common Stock may
be so issued without violation of any applicable law or regulation, or of any
requirements of any national securities exchange upon which the Common Stock of
the Corporation may be listed. The Corporation will not take any action which
results in any adjustment of the Conversion Price if after such action the
total number of shares of Common Stock issued and outstanding and thereafter
issuable upon exercise of all options and conversion of Convertible Securities,
including upon conversion of the Convertible Preferred Stock, would exceed the
total number of shares of Common Stock then authorized by the Corporat- ion's
Restated Certificate of Incorporation.
(k) No Reissuance of Convertible Preferred Stock. Shares
of Convertible Preferred Stock that are converted into shares of Common Stock
as provided herein shall not be reissued.
(l) Issue Tax. The issuance of certificates for shares
of Common Stock upon conversion of the Convertible Preferred Stock shall be
made without charge to the holders thereof for any issuance tax in respect
thereof, provided that the Corporation shall not be required to pay any tax
which may be payable in respect of any transfer involved in the issuance and
delivery of any certificate in a name other than that of the holder of the
Convertible Preferred Stock which is being converted.
(m) Closing of Books. The Corporation will at no time
close its transfer books against the transfer of any Convertible Preferred
Stock or of any shares of Common Stock issued or issuable upon the conversion
of any shares of Convertible Preferred Stock in any manner which interferes
with the timely conversion of such Convertible Preferred Stock.
(n) Definition of Common Stock. As used in this Section
4, the term "Common Stock" shall mean and include the Corporation's authorized
Common Stock, par value $.03 per share, as constituted on the date of filing of
this Certificate of Designation and shall also include any capital stock of any
class of the Corporation thereafter authorized that shall not be limited to a
fixed sum or percentage of par value in respect of the rights of the holders
thereof to participate in dividends or in the distribution of assets upon the
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation; provided, however, that such term, when used to describe the
securities receivable upon conversion of shares of the Convertible Preferred
Stock of the Corporation, shall include only shares designated as Common Stock
of the Corporation on the date of filing of this Certificate of Designations,
any shares resulting from any combination or subdivision thereof referred to in
subparagraph (v) of Section 4(d), or in case of any reorganiza-
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tion or reclassification of the outstanding shares thereof, the stock,
securities or assets provided for in Section 4(f).
5. Voting. Except as otherwise provided by law or in
Section 6 below, the holders of Convertible Preferred Stock shall vote together
with the holders of Common Stock on all matters to be voted on by the
stockholders of the Corporation, and each holder of Convertible Preferred Stock
shall be entitled to one vote for each share of Common Stock that would be
issuable to such holder upon the conversion of all the shares of Convertible
Preferred Stock held by such holder on the record date for the determination of
stockholders entitled to vote.
6. Restrictions. So long as any shares of Convertible
Preferred Stock are outstanding, without the consent of the holders of a
majority of the Convertible Preferred Stock at the time outstanding given in
person or by proxy, either in writing or at a special meeting called for that
purpose at which the holders of the Convertible Preferred Stock shall vote
separately as a class, the Corporation may not (i) effect, validate or permit a
Corporate Disposition; (ii) effect or validate the amendment, alteration or
repeal of any provision hereof which would amend or repeal the dividend,
voting, conversion, redemption or liquidation rights of the Convertible
Preferred Stock set forth herein; (iii) effect or validate the amendment,
alteration or repeal of any provision of the Restated Certificate of
Incorporation or the By-laws of the Corporation; or (iv) (A) create or
authorize any additional class or series of stock ranking senior to or on a
parity with the Convertible Preferred Stock as to dividends or as to rights
upon redemption, liquidation, dissolution or winding up, or (B) increase the
authorized number of shares of the Convertible Preferred Stock or of any other
class or series of capital stock of the Corporation ranking senior to or on a
parity with the Convertible Preferred Stock as to dividends or as to rights
upon redemption, liquidation, dissolution or winding up, whether any such
creation or authorization or increase shall be by means of amendment hereof,
amendment of the Restated Certificate of Incorporation of the Corporation,
Certificate of Designation or amendment thereof, merger, consolidation or
otherwise.
7. Reacquired Shares. Any shares of Convertible
Preferred Stock, which are redeemed or otherwise acquired by the Corporation in
any manner whatsoever shall be retired and canceled promptly after the
acquisition thereof and the number of authorized shares of Convertible
Preferred Stock shall be reduced accordingly.
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IN WITNESS WHEREOF, this Certificate of Designation has been
executed by the Corporation by its President this day of March, 1996.
AURORA ELECTRONICS, INC.
By __________________________
President
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Draft of February 20, 1996
EXHIBIT C
REGISTRATION RIGHTS AGREEMENT
March , 1996
To the several persons named
in Schedule I hereto
Ladies and Gentlemen:
This will confirm that with respect to the several individuals
and entities named as Purchasers in the Securities Purchase Agreement dated as
of February 21, 1996 (the "Purchase Agreement"), among Aurora Electronics,
Inc., a Delaware corporation (the "Company"), Welsh, Carson, Anderson & Stowe
VII, L.P., a Delaware limited partnership ("WCAS VII"), WCAS Capital Partners
II, L.P., a Delaware limited partnership ("WCAS CP II"), and the several
persons named therein, in consideration of (i) the purchase by WCAS VII and the
several persons named in Part A of Schedule I hereto (collectively, "the
Preferred Share Purchasers") from the Company of [ ](1) shares (the
"Preferred Shares") of Convertible Preferred Stock, $.01 par value
("Convertible Preferred Stock"), of the Company, and (ii) the purchase by WCAS
CP II of (x) the Company's 10% Senior Subordinated Note due September 30, 2001,
in the principal amount of $10,000,000, and (y) [ ]1 shares (the "Common
Shares") of Common Stock, $.03 par value ("Common Stock"), of the Company, all
on the terms and subject to the conditions set forth in the Purchase Agreement,
and as an inducement to the Purchasers to consummate the transactions
contemplated by the Purchase Agreement, the Company hereby covenants and agrees
with each of you, and with each subsequent holder of Restricted Stock (as
defined herein) as follows:
1. Certain Definitions. As used herein, the following
terms shall have the following respective meanings:
"Commission" means the Securities and Exchange Commission, or
any other federal agency at the time administering the Securities Act.
____________________
(1) To be determined at Closing.
<PAGE> 130
"Conversion Shares" means the shares of Common Stock issuable
upon conversion of any of the Preferred Shares.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, or any similar federal statute, and the rules and regulations
of the Commission thereunder, all as the same shall be in effect at
the time.
"Registration Expenses" means the expenses so described in
Section 8 hereof.
"Restricted Stock" means the shares of capital stock of the
Company, the certificates for which are required to bear the legend
set forth in Section 2 hereof.
"Securities Act" means the Securities Act of 1933, as amended,
or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"Selling Expenses" means the expenses so described in Section
8 hereof.
2. Restrictive Legend. Each certificate representing
the Common Shares, each certificate representing the Preferred Shares, each
certificate representing the Conversion Shares and each certificate issued upon
exchange, adjustment or transfer of any of the foregoing, other than in a
public sale or as otherwise permitted by the last paragraph of Section 3
hereof, shall be stamped or otherwise imprinted with a legend substantially in
the following form:
"THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AND MAY NOT BE
SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS THEY HAVE
BEEN REGISTERED UNDER THAT ACT OR AN EXEMPTION FROM
REGISTRATION IS AVAILABLE."
3. Notice of Proposed Transfer. Prior to any proposed
transfer of any Restricted Stock (other than under the circumstances described
in Sections 4, 5 or 6 hereof), the holder thereof shall give written notice to
the Company of its intention to effect such transfer. Each such notice shall
describe the manner of the proposed transfer and, if requested by the Company,
shall be accompanied by an opinion of counsel reasonably satisfactory to the
Company (it being agreed that Reboul, MacMurray, Hewitt, Maynard & Kristol is
and shall be satisfactory) to the effect that the proposed transfer of the
Restricted Stock may be effected without registration under the Securities Act,
whereupon the holder of such Restricted Stock shall be entitled to transfer
such Restricted Stock in accordance with the terms of its notice. Each
certificate for Restricted
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Stock transferred as above provided shall bear the legend set forth in Section
2, unless (i) such transfer is in accordance with the provisions of Rule 144
(or any other rule permitting public sale without registration under the
Securities Act) or (ii) the opinion of counsel referred to above is to the
further effect that the transferee and any subsequent transferee (other than an
affiliate of the Company) would be entitled to transfer such securities in a
public sale without registration under the Securities Act.
The foregoing restrictions on transferability of Restricted
Stock shall terminate as to any particular shares of Restricted Stock when such
shares shall have been effectively registered under the Securities Act and sold
or otherwise disposed of in accordance with the intended method of disposition
by the seller or sellers thereof set forth in the registration statement
concerning such shares. Whenever a holder of Restricted Stock is able to
demonstrate to the Company (and its counsel) that the provisions of Rule 144(k)
of the Securities Act are available to such holder without limitation, such
holder of Restricted Stock shall be entitled to receive from the Company,
without expense, a new certificate not bearing the restrictive legend set forth
in Section 2.
4. Required Registration.
(a) Subject to the provisions of paragraph (e) below, at
any time the holders of Restricted Stock constituting at least a
majority of the Restricted Stock outstanding at such time may request
the Company to register under the Securities Act all or any portion of
the Restricted Stock held by such requesting holder or holders for
sale in the manner specified in such notice; provided, however, that
the only securities which the Company shall be required to register
pursuant hereto shall be shares of Common Stock. For the purposes of
calculating the number of outstanding shares of Restricted Stock for
purposes of this Section 4(a) and Section 13(d), holders of
Convertible Preferred Stock shall be treated as the holders of the
number of shares of Conversion Stock then issuable upon conversion of
such shares.
(b) Promptly following receipt of any notice under this
Section 4, the Company shall notify any holders of Restricted Stock
from whom notice has not been received, and shall use its best efforts
to register under the Securities Act, for public sale in accordance
with the method of disposition specified in such notice from such
requesting holders, the number of shares of Restricted Stock specified
in such notice (and in any notices received from other such holders of
Restricted Stock within 30 days after their receipt of such notice
from the Company); provided, however, that if the proposed method of
disposition specified by the
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requesting holders shall be an underwritten public offering, the
number of shares of Restricted Stock to be included in such an
offering may be reduced (pro rata among the requesting holders of
Restricted Stock based on the number of shares of Restricted Stock so
requested to be registered) if and to the extent that the managing
underwriter shall be of the opinion that such inclusion would
adversely affect the marketing of the Restricted Stock to be sold. If
such method of disposition shall be an underwritten public offering,
the Company may designate the managing underwriter of such offering,
subject to the approval of the selling holders of a majority of the
Restricted Stock included in the offering, which approval shall not be
unreasonably withheld. Notwithstanding anything to the contrary
contained herein, the obligation of the Company under this Section 4
shall be deemed satisfied only when a registration statement covering
all shares of Restricted Stock specified in notices received as
aforesaid, for sale in accordance with the method of disposition
specified by the requesting holder, shall have become effective and,
if such method of disposition is a firm commitment underwritten public
offering, all such shares shall have been sold pursuant thereto.
(c) In the event that the Board of Directors of the
Company determines in good faith that the filing of a registration
statement pursuant hereto would be detrimental to the Company, the
Board of Directors may defer such filing for a period not to exceed
sixty (60) days. The Board of Directors may not effect more than one
such deferral during any twelve month period. The Board of Directors
agrees to promptly notify all holders of Restricted Stock of any such
deferral, and shall provide to such holders a reasonably complete
explanation therefor.
(d) The Company shall be entitled to include in any
registration statement referred to in this Section 4, for sale in
accordance with the method of disposition specified by the requesting
holders, shares of Common Stock to be sold by the Company for its own
account, except to the extent that, in the opinion of the managing
underwriter (if such method of disposition shall be an underwritten
public offering), such inclusion would adversely affect the marketing
of the Restricted Stock to be sold. Except as provided in this
paragraph (d), the Company will not effect any other registration of
its Common Stock, whether for its own account or that of other
holders, from the date of receipt of a notice from requesting holders
pursuant to this Section 4 until the completion of the period of
distribution of the registration contemplated thereby.
(e) Notwithstanding anything to the contrary contained
herein, the Company shall be obligated to register
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Restricted Stock pursuant to this Section 4 on two occasions only.
5. Form S-3 Registration.
(a) If the Company shall receive from any holder or
holders of Restricted Stock a written request or requests that the Company
effect a registration on Form S-3 and any related qualification or compliance
with respect to Restricted Stock owned by such holder or holders, the
reasonably anticipated aggregate price to the public of which would exceed
$1,000,000, the Company will:
(i) promptly give written notice of the proposed
registration, and any related qualification or compliance, to all
other holders of Restricted Stock; and
(ii) as soon as is reasonably practicable, use its best
efforts to effect such registration (including, without limitation,
the execution of an undertaking to file post-effective amendments,
appropriate qualifications under applicable blue sky or other state
securities laws and appropriate compliance with applicable regulations
issued under the Securities Act and any other government requirements
or regulations) as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such
holder's or holders' Restricted Stock as is specified in such request,
together with all or such portion of the Restricted Stock of any
holder or holders joining in such request as are specified in a
written request given within 30 days after receipt of such written
notice from the Company; provided, however that the Company shall not
be obligated to effect any such registration, qualification or
compliance pursuant to this Section 5 (A) more than once in any
180-day period, or (B) if the Company is not entitled to use Form S-3;
and provided, further, that the only securities which the Company
shall be required to register pursuant hereto shall be shares of
Common Stock. Subject to the foregoing, the Company shall file a
registration statement covering the Restricted Stock so requested to
be registered as soon as is reasonably practicable after receipt of
the request or requests of the holders of the Restricted Stock.
(b) Notwithstanding anything to the contrary contained
herein, the Company shall be obligated to register Restricted Stock pursuant to
this Section 5 on two occasions only.
6. Incidental Registration. If the Company at any time
(other than pursuant to Section 4 or 5 hereof) proposes to register any of its
Common Stock under the Securities Act for sale to the public, whether for its
own account or for the account of other security holders or both (except with
respect to
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<PAGE> 134
registration statements on Form S-4 or Form S-8 or another form not available
for registering the Restricted Stock for sale to the public), it will give
written notice at such time to all holders of outstanding Restricted Stock of
its intention to do so. Upon the written request of any such holder, given
within 30 days after receipt of any such notice by the Company, to register any
of its Restricted Stock (which request shall state the intended method of
disposition thereof), the Company will use its best efforts to cause the
Restricted Stock as to which registration shall have been so requested to be
included in the securities to be covered by the registration statement proposed
to be filed by the Company, all to the extent requisite to permit the sale or
other disposition by the holder (in accordance with its written request) of
such Restricted Stock so registered; provided that nothing herein shall prevent
the Company from abandoning or delaying such registration at any time;
provided, further, that the only securities which the Company shall be required
to register shall be shares of Common Stock. In the event that any
registration pursuant to this Section 6 shall be, in whole or in part, an
underwritten public offering of Common Stock, any request by a holder pursuant
to this Section 6 to register Restricted Stock shall specify that either (i)
such Restricted Stock is to be included in the underwriting on the same terms
and conditions as the shares of Common Stock otherwise being sold through
underwriters in connection with such registration or (ii) such Restricted Stock
is to be sold in the open market without any underwriting, on terms and
conditions comparable to those normally applicable to offerings of common stock
in reasonably similar circumstances. The number of shares of Restricted Stock
to be included in an underwriting in accordance with clause (i) above may be
reduced pro rata among the requesting holders of Restricted Stock based upon
the number of shares of Restricted Stock so requested to be registered, if and
to the extent that the managing underwriter shall be of the opinion that such
inclusion would adversely affect the marketing of the securities to be sold by
the Company therein; provided, however, that if any shares are to be included
in such underwriting for the account of any person other than the Company, the
shares to be so included shall be subject first to reduction before the shares
of Restricted Stock are reduced pro rata.
Notwithstanding anything to the contrary contained in this
Section 6, in the event that there is a firm commitment underwritten public
offering of securities of the Company pursuant to a registration covering
Restricted Stock and a holder of Restricted Stock does not elect to sell his
Restricted Stock to the underwriters of the Company's securities in connection
with such offering, such holder shall refrain from selling such Restricted
Stock so registered pursuant to this Section 6 during the period of
distribution of the Company's securities by such underwriters and the period in
which the underwriting syndicate participates in the after market; provided,
however, that such
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holder shall, in any event, be entitled to sell its Restricted Stock commencing
on the 90th day after the effective date of such registration statement or, if
later, on such date (but in no event later than the 180th day after such
effective date) as contractual "lock-up" restrictions imposed by the
underwriters shall expire or be released.
7. Registration Procedures. If and whenever the Company
is required by the provisions of Section 4, 5 or 6 hereof to use its best
efforts to effect the registration of any of the Restricted Stock under the
Securities Act, the Company will, as expeditiously as possible:
(a) prepare (and afford counsel for the selling holders
reasonable opportunity to review and comment thereon) and file with
the Commission a registration statement on the most appropriate form
adequate for the purposes thereof with respect to such securities and
use its best efforts to cause such registration statement to become
and remain effective for the period of the distribution contemplated
thereby (to be determined as hereinafter provided);
(b) prepare (and afford counsel for the selling holders
reasonable opportunity to review and comment thereon) and file with
the Commission such amendments and supplements to such registration
statement and the prospectus used in connection therewith as may be
necessary to keep such registration statement effective for the period
specified in paragraph (a) above and to comply with the provisions of
the Securities Act with respect to the disposition of all Restricted
Stock covered by such registration statement in accordance with the
sellers' intended method of disposition set forth in such registration
statement for such period;
(c) furnish to each seller and to each underwriter such
number of copies of the registration statement and the prospectus
included therein (including each preliminary prospectus) as such
persons may reasonably request in order to facilitate the public sale
or other disposition of the Restricted Stock covered by such
registration statement;
(d) use its best efforts to register or qualify the
Restricted Stock covered by such registration statement under the
securities or blue sky laws of such jurisdictions as the sellers of
Restricted Stock or, in the case of an underwritten public offering,
the managing underwriter, shall reasonably request (provided that the
Company will not be required to (i) qualify generally to do business
in any jurisdiction where it would not otherwise be required to
qualify but for this paragraph (d), (ii) subject itself to
7
<PAGE> 136
taxation in any such jurisdiction or (iii) consent to general service
of process in any such jurisdiction);
(e) immediately notify each seller under such
registration statement and each underwriter, at any time when a
prospectus relating thereto is required to be delivered under the
Securities Act, of the happening of any event as a result of which the
prospectus contained in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the
circumstances then existing (following which notification the sellers
agree to discontinue sales of their Restricted Stock covered by such
registration statement until such misstatement or omission shall have
been remedied);
(f) use all reasonable efforts (if the offering is
underwritten) to furnish, at the request of any seller, on the date
that Restricted Stock is delivered to the underwriters for sale
pursuant to such registration: (i) an opinion of counsel representing
the Company for the purposes of such registration, addressed to the
underwriters and to such seller and dated such date, stating that such
registration statement has become effective under the Securities Act
and that (A) to the best knowledge of such counsel, no stop order
suspending the effectiveness thereof has been issued and no
proceedings for that purpose have been instituted or are pending or
contemplated under the Securities Act, (B) the registration statement,
the related prospectus, and each amendment or supplement thereof
comply as to form in all material respects with the requirements of
the Securities Act and the applicable rules and regulations of the
Commission thereunder (except that such counsel need express no
opinion as to financial statements, the notes thereto, and the
financial schedules and other financial and statistical data contained
therein) and (C) to such other effects as may reasonably be requested
by counsel for the underwriters or by such seller or its counsel and
which are customary in underwritings of the type being undertaken, and
(ii) a letter dated such date from the independent public accountants
retained by the Company, addressed to the underwriters, stating that
they are independent public accountants within the meaning of the
Securities Act and that, in the opinion of such accountants, the
financial statements of the Company included in the registration
statement or the prospectus, or any amendment or supplement thereof,
comply as to form in all material respects with the applicable
accounting requirements of the Securities Act, and such letter shall
additionally cover such other financial matters (including information
as to the period ending no more than five business days prior to the
date of such
8
<PAGE> 137
letter) with respect to the registration in respect of which such
letter is being given as such underwriters or seller may reasonably
request; and
(g) make available for inspection by each seller, any
underwriter participating in any distribution pursuant to such
registration statement, and any attorney, accountant or other agent
retained by such seller or underwriter, all financial and other
records, pertinent corporate documents and properties of the Company,
and cause the Company's officers, directors and employees to supply
all information reasonably requested by any such seller, underwriter,
attorney, accountant or agent in connection with such registration
statement and permit such seller, attorney, accountant or agent to
participate in the preparation of such registration statement.
For purposes of paragraphs (a) and (b) above and of Section 4(d) hereof, the
period of distribution of Restricted Stock in a firm commitment underwritten
public offering shall be deemed to extend until each underwriter has completed
the distribution of all securities purchased by it, and the period of
distribution of Restricted Stock in any other registration shall be deemed to
extend until the earlier of the sale of all Restricted Stock covered thereby or
six months after the effective date thereof.
In connection with each registration hereunder, the selling
holders of Restricted Stock will furnish to the Company in writing such
information with respect to themselves and the proposed distribution by them as
shall be reasonably necessary in order to assure compliance with federal and
applicable state securities laws.
In connection with each registration pursuant to Sections 4, 5
and 6 hereof covering an underwritten public offering, the Company agrees to
enter into a written agreement with the managing underwriter selected in the
manner herein provided in such form and containing such provisions as are
customary in the securities business for such an arrangement between major
underwriters and companies of the Company's size and investment stature;
provided, however, that such agreement shall not contain any such provision
applicable to the Company which is inconsistent with the provisions hereof, and
provided, further, that the time and place of the closing under said agreement
shall be as mutually agreed upon among the Company, such managing underwriter
and the selling holders of Restricted Stock.
8. Expenses. All expenses incurred by the Company in
complying with Sections 4, 5 and 6 hereof, including without limitation all
registration and filing fees, printing expenses, fees and disbursements of
counsel and independent public accountants for the Company, fees of the
National Association of Securities Dealers, Inc., transfer taxes, fees of
transfer agents
9
<PAGE> 138
and registrars and fees and expenses of one counsel for the sellers of
Restricted Stock, but excluding any Selling Expenses, are herein called
"Registration Expenses". All underwriting discounts and selling commissions
applicable to the sale of Restricted Stock are herein called "Selling
Expenses".
The Company will pay all Registration Expenses in connection
with each registration statement filed pursuant to Section 4, 5 or 6 hereof.
All Selling Expenses in connection with any registration statement filed
pursuant to Section 4, 5 or 6 hereof shall be borne by the participating
sellers in proportion to the number of shares sold by each, or by such persons
other than the Company (except to the extent the Company shall be a seller) as
they may agree.
9. Indemnification. In the event of a registration of
any of the Restricted Stock under the Securities Act pursuant to Section 4, 5
or 6 hereof, the Company will indemnify and hold harmless each seller of such
Restricted Stock thereunder and each underwriter of Restricted Stock thereunder
and each other person, if any, who controls such seller or underwriter within
the meaning of the Securities Act, against any losses, claims, damages or
liabilities, joint or several, to which such seller or underwriter or
controlling person may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any registration statement under
which such Restricted Stock was registered under the Securities Act pursuant to
Section 4, 5 or 6, any preliminary prospectus or final prospectus contained
therein, or any amendment or supplement thereof, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, and will reimburse each such seller, each such underwriter and each
such controlling person for any legal or other expenses reasonably incurred by
them in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the Company will not be
liable in any such case if and to the extent that any such loss, claim, damage
or liability arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission so made in conformity with
information furnished by such seller, such underwriter or such controlling
person in writing specifically for use in such registration statement or
prospectus.
In the event of a registration of any of the Restricted Stock
under the Securities Act pursuant to Section 4, 5 or 6 hereof, each seller of
such Restricted Stock thereunder, severally and not jointly, will indemnify and
hold harmless the Company and each person, if any, who controls the Company
within the meaning of the Securities Act, each officer of the Company
10
<PAGE> 139
who signs the registration statement, each director of the Company, each
underwriter and each person who controls any underwriter within the meaning of
the Securities Act, against all losses, claims, damages or liabilities, joint
or several, to which the Company or such officer, director, underwriter or
controlling person may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the registration statement under
which such Restricted Stock was registered under the Securities Act pursuant to
Section 4, 5 or 6, any preliminary prospectus or final prospectus contained
therein, or any amendment or supplement thereof, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Company and each such officer, director,
underwriter and controlling person for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that such seller will be
liable hereunder in any such case if and only to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue statement
or alleged untrue statement or omission or alleged omission made in reliance
upon and in conformity with information pertaining to such seller, as such,
furnished in writing to the Company by such seller specifically for use in such
registration statement or prospectus; and provided, further, that the liability
of each seller hereunder shall be limited to the proceeds (net of underwriting
discounts and commissions) received by such seller from the sale of Restricted
Stock covered by such registration statement.
Promptly after receipt by an indemnified party hereunder of
notice of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against the indemnifying party
hereunder, notify the indemnifying party in writing thereof, but the omission
so to notify the indemnifying party shall not relieve it from any liability
which it may have to any indemnified party other than under this Section 9. In
case any such action shall be brought against any indemnified party and it
shall notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate in and, to the extent it
shall wish, to assume and undertake the defense thereof with counsel
satisfactory to such indemnified party, and, after notice from the indemnifying
party to such indemnified party of its election so to assume and undertake the
defense thereof, the indemnifying party shall not be liable to such indemnified
party under this Section 9 for any legal expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation and of liaison with counsel so selected; provided,
however, that if the defendants in any
11
<PAGE> 140
such action include both the indemnified party and the indemnifying party and
the indemnified party shall have reasonably concluded that there may be
reasonable defenses available to it which are different from or additional to
those available to the indemnifying party, or if the interests of the
indemnified party reasonably may be deemed to conflict with the interests of
the indemnifying party, the indemnified party shall have the right to select a
separate counsel and to assume such legal defenses and otherwise to participate
in the defense of such action, with the expenses and fees of such separate
counsel and other expenses related to such participation to be reimbursed by
the indemnifying party as incurred.
Notwithstanding the foregoing, any indemnified party shall
have the right to retain its own counsel in any such action, but the fees and
disbursements of such counsel shall be at the expense of such indemnified party
unless (i) the indemnifying party shall have failed to retain counsel for the
indemnified person as aforesaid or (ii) the indemnifying party and such
indemnified party shall have mutually agreed to the retention of such counsel.
It is understood that the indemnifying party shall not, in connection with any
action or related actions in the same jurisdiction, be liable for the fees and
disbursements of more than one separate firm qualified in such jurisdiction to
act as counsel for the indemnified party. The indemnifying party shall not be
liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent, the indemnifying party agrees to
indemnify the indemnified party from and against any loss or liability by
reason of such settlement.
If the indemnification provided for in the first two
paragraphs of this Section 9 is unavailable or insufficient to hold harmless an
indemnified party under such paragraphs in respect of any losses, claims,
damages or liabilities or actions in respect thereof referred to therein, then
each indemnifying party shall, in lieu of indemnifying such indemnified party,
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities or actions in such proportion as
appropriate to reflect the relative fault of the Company, on the one hand, and
the underwriters and the sellers of such Restricted Stock, on the other, in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or actions as well as any other relevant equitable
considerations, including the failure to give any notice under the third
paragraph of this Section 9. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact relates to information supplied by the Company, on
the one hand, or the underwriters and the sellers of such Restricted Stock, on
the other, and to the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and
12
<PAGE> 141
each of you agree that it would not be just and equitable if contributions
pursuant to this paragraph were determined by pro rata allocation (even if all
of the sellers of such Restricted Stock were treated as one entity for such
purpose) or by any other method of allocation which did not take account of the
equitable considerations referred to above in this paragraph. The amount paid
or payable by an indemnified party as a result of the losses, claims, damages,
liabilities or action in respect thereof, referred to above in this paragraph,
shall be deemed to include any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this paragraph, the sellers
of such Restricted Stock shall not be required to contribute any amount in
excess of the amount, if any, by which the total price at which the Common
Stock sold by each of them was offered to the public exceeds the amount of any
damages which they would have otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission. No person guilty of fraudulent
misrepresentations (within the meaning of Section 11(f) of the Securities Act),
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation.
The indemnification of underwriters provided for in this
Section 9 shall be on such other terms and conditions as are at the time
customary and reasonably required by such underwriters. In that event, the
indemnification of the sellers of Restricted Stock in such underwriting shall
at the sellers' request be modified to conform to such terms and conditions.
10. Changes in Common Stock. If, and as often as, there
are any changes in the Common Stock by way of stock split, stock dividend,
combination or reclassification, or through merger, consolidation,
reorganization or recapitalization, or by any other means, appropriate
adjustment shall be made in the provisions hereof, as may be required, so that
the rights and privileges granted hereby shall continue with respect to the
Common Stock as so changed.
11. Representations and Warranties of the Company. The
Company represents and warrants to you as follows:
(a) The execution, delivery and performance of this
Agreement by the Company have been duly authorized by all requisite
corporate action and will not violate any provision of law, any order
of any court or other agency of government, the Restated Certificate
of Incorporation or By-laws of the Company, or any provision of any
indenture, agreement or other instrument to which it or any of its
properties or assets is bound, or conflict with, result in a breach of
or constitute (with due notice or lapse of time or both) a default
under any such indenture, agreement or other instrument, or result in
the creation or imposition of any lien,
13
<PAGE> 142
charge or encumbrance of any nature whatsoever upon any of the
properties or assets of the Company.
(b) This Agreement has been duly executed and delivered
by the Company and constitutes the legal, valid and binding obligation
of the Company, enforceable in accordance with its terms, subject to
considerations of public policy in the case of the indemnification
provisions hereof.
12. Rule 144 Reporting. The Company agrees with you as
follows:
(a) The Company shall make and keep public information
available, as those terms are understood and defined in Rule 144(c)(1)
or (c)(2), whichever is applicable, under the Securities Act, at all
times from and after the date it is first required to do so.
(b) The Company shall file with the Commission in a
timely manner all reports and other documents as the Commission may
prescribe under Section 13(a) or 15(d) of the Exchange Act at all
times during which the Company is subject to such reporting
requirements of the Exchange Act.
(c) The Company shall furnish to such holder of
Restricted Stock forthwith upon request (i) a written statement by the
Company as to its compliance with the reporting requirements of Rule
144 (at any time from and after the date it first becomes subject to
such reporting requirements) and of the Securities Act and the
Exchange Act (at any time during which it is subject to such reporting
requirements), (ii) a copy of the most recent annual or quarterly
report of the Company and (iii) such other reports and documents so
filed as a holder may reasonably request to avail itself of any rule
or regulation of the Commission allowing a holder of Restricted Stock
to sell any such securities without registration.
13. Miscellaneous.
(a) All covenants and agreements contained in this
Agreement by or on behalf of any of the parties hereto shall bind and
inure to the benefit of the respective successors and assigns of the
parties hereto whether so expressed or not. Without limiting the
generality of the foregoing, the registration rights conferred herein
on the holders of Restricted Stock shall inure to the benefit of any
and all subsequent holders from time to time of the Restricted Stock
for so long as the certificates representing the Restricted Stock
shall be required to bear the legend specified in Section 2 hereof.
14
<PAGE> 143
(b) All notices, requests, consents and other
communications hereunder shall be in writing and shall be mailed by
first class registered mail, postage prepaid, addressed as follows:
if to the Company, to it at:
Aurora Electronics, Inc.
2030 Main Street
Suite 1120
Irvine, California 92714-7241
Attention: David Lahar, President
with a copy to:
Hughes & Luce L.L.P.
1717 Main Street
Suite 2800
Dallas, Texas 75201
Attention: Alan J. Bogdanow, Esq.
Kenneth G. Hawari, Esq.
if to any holder of Restricted Stock, to such holder at the
address as set forth under such holder's name in Annex I to the
Purchase Agreement;
if to any subsequent holder of Restricted Stock, to such
holder at such address as may have been furnished to the Company in
writing by such holder;
or, in any case, at such other address or addresses as shall have been
furnished in writing to the Company (in the case of a holder of
Restricted Stock) or to the holders of Restricted Stock (in the case
of the Company).
(c) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
(d) This Agreement constitutes the entire agreement of
the parties with respect to the subject matter hereof. This Agreement
may not be modified or amended except in a writing signed by the
Company and the holders of not less than a majority of the Restricted
Stock then outstanding, provided that no modification or amendment
shall deprive any holder of Restricted Stock of any material right
under this Agreement without such holder's consent. The Company will
not grant any registration rights to any other person without the
written consent of the holders of a majority of the Restricted Stock
then outstanding if such rights could reasonably be expected to
conflict with, or be on a parity with, the rights of holders of
Restricted Stock granted under this Agreement.
15
<PAGE> 144
(e) This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
16
<PAGE> 145
Please indicate your acceptance of the foregoing by signing
and returning the enclosed counterpart of this letter, whereupon this letter
(herein sometimes called "this Agreement") shall be a binding agreement between
the Company and you.
Very truly yours,
AURORA ELECTRONICS, INC.
By _____________________________
AGREED TO AND ACCEPTED
as of the date first
above written.
THE PURCHASERS:
WELSH CARSON, ANDERSON & STOWE VII, L.P.
By WCAS VII Partners, L.P., General Partner
By:___________________________
WCAS CAPITAL PARTNERS II, L.P.
By WCAS CP II Partners, General Partner
By:___________________________
_____________________________________
Patrick J. Welsh
_____________________________________
Russell L. Carson
_____________________________________
Bruce K. Anderson
<PAGE> 146
_____________________________________
Richard H. Stowe
_____________________________________
Andrew M. Paul
_____________________________________
Thomas E. McInerney
_____________________________________
Laura VanBuren
_____________________________________
James B. Hoover
_____________________________________
Robert A. Minicucci
_____________________________________
Anthony J. de Nicola
[OTHER PURCHASERS]
<PAGE> 1
February 21, 1996
Board of Directors
Aurora Electronics, Inc.
2030 Main Street, Suite 1120
Irvine, CA 92714
Dear Sirs:
We understand that Aurora Electronics, Inc. ("Aurora") and Welsh,
Carson, Anderson & Stowe VII, L.P. ("WCAS VII"), WCAS Capital Partners II, L.P.
("WCAS CP II") and certain other purchasers (such purchasers, together with
WCAS VII, being the "Purchasers") propose to enter into a Securities Purchase
Agreement (the "Agreement"), pursuant to which the Purchasers will purchase
between $35,000,000 and $40,000,000 of 7% Convertible Preferred Stock,
convertible at a price of $2.125 (the "Preferred Stock"), of the Company and
WCAS CP II will purchase $10,000,000 of 10% Senior Subordinated Notes (the
"Notes") and a number of shares of the Common Stock, $.03 par value per share
("Common Stock"), of Aurora based on the number of outstanding shares of Common
Stock. In addition, the Company will agree to (i) enter into a revolver credit
facility with a bank or bank group with an initial availability of up to
$35,000,000, (ii) commence a tender offer to purchase up to 6,500,000 of the
outstanding shares of Common Stock for $2.875 per share, conditioned on, among
other things, tenders by the holders of not less than 2,000,000 of the
outstanding shares of Common Stock (the "Tender Offer"), (iii) terminate its
existing Senior Secured Credit Agreement, (iv) provide for the redemption of
its 9 1/4% Senior Subordinated Notes due 1996 and (v) adopt and implement a new
stock option plan. The purchase and sale of the Preferred Stock, the Notes and
the Common Stock pursuant to the Agreement taken together with the transactions
described in clauses (i) through (v) of the previous sentence being hereinafter
collectively called, the "Transaction." You have requested our opinion as to
whether the Transaction is fair, from a financial point of view, to the holders
of Common Stock (other than WCAS CP II and its affiliates).
<PAGE> 2
Board of Directors
Aurora Electronics, Inc.
February 21, 1996
Page 2
Alex. Brown & Sons Incorporated ("Alex. Brown"), as a customary part
of its investment banking business, is engaged in the valuation of businesses
and their securities in connection with mergers and acquisitions, negotiated
underwritings, private placements and valuations for estate, corporate and
other purposes. We have acted as financial advisor to Aurora in connection
with the Transaction and will receive a fee for our services, a portion of
which is contingent upon the consummation of the Transaction. Alex. Brown
regularly publishes research reports regarding the semiconductor and enabling
components industries and the businesses and securities of publicly owned
companies in these industries.
In connection with our opinion, we have reviewed certain publicly
available financial information concerning Aurora and certain internal
financial analyses and other information furnished to us by Aurora. We have
also held discussions with members of the senior management of Aurora regarding
the business and prospects of the Company. In addition, we have (i) reviewed
the reported price and trading activity for the Common Stock of Aurora, (ii)
compared certain financial and stock market information for Aurora with similar
information for certain companies whose securities are publicly traded, (iii)
reviewed the financial terms of certain business combinations and acquisitions
of less than 100% of target companies which we deemed comparable in whole or in
part, (iv) reviewed the terms of the Agreement in a draft dated February 20,
1996 and draft copies of certain related documents and (v) performed such other
studies and analyses and considered such other factors as we deemed
appropriate.
We have not independently verified the information described above and
for purposes of this opinion have assumed the accuracy, completeness and
fairness thereof. With respect to information relating to the prospects of
Aurora, we have assumed that such information reflects the best currently
available estimates and judgments of management of Aurora as to the likely
future financial performance of Aurora. In addition, we have not made an
independent evaluation or appraisal of the assets of Aurora (nor have we been
furnished with any such evaluation or appraisal), nor have we made any physical
inspection of the properties or assets of the Company. In arriving at our
opinion, we were not authorized to solicit, and did not solicit, interest from
any party with respect to the acquisition of the Company or any of its assets,
nor were we authorized to participate, and we did not participate in, any
negotiations with any parties in connection with the Transaction. In arriving
at our opinion, we also assumed that the terms of the Tender Offer and
Transaction will not deviate in any material respects from the terms set forth
in the draft documents that we reviewed. The valuation of the Aurora
securities to be outstanding after completion of the Tender Offer is subject to
uncertainties and contingencies, including, without limitation, the liquidity
of the market, if any, for such securities, prevailing interest rates, market
conditions and the condition and prospects of the Company, all of which are
difficult to predict. Our opinion is based on market, economic and other
conditions as they exist and can be evaluated as of the date of this letter.
We express no opinion as to the price at which Aurora Common Stock will trade
subsequent to the consummation of the Transaction.
<PAGE> 3
Board of Directors
Aurora Electronics, Inc.
February 21, 1996
Page 3
It is understood that this letter is for the information of the Board
of Directors of the Company and may not be used for any other purpose without
our prior written consent, except that this opinion may be included in its
entirety in any filing made by the Company with the Securities and Exchange
Commission with respect to the Tender Offer and the Transaction. In addition,
we express no opinion as to whether the stockholders of the Company should
tender their shares of Common Stock in the Tender Offer or how such
stockholders should vote at any stockholders' meeting held in connection with
the Transaction. We express no opinion as to the fairness or adequacy of any
consideration received in the Transaction by the Purchasers or WCAS CP II.
Based upon and subject to the foregoing, it is our opinion that, as of
the date of this letter, the Transaction is fair, from a financial point of
view, to the holders of Common Stock (other than WCAS CP II and its
affiliates).
Very truly yours,
ALEX. BROWN & SONS INCORPORATED
<PAGE> 1
PROJECT ZETA
FEBRUARY 21, 1996
[LOGO]
ALEX. BROWN
<PAGE> 2
PROJECT ZETA
The information contained in this memorandum was obtained from the management
of ZETA and other sources that we believe to be reliable, but has not been
independently verified.
This memorandum has been prepared for the use of the Board of Directors only.
It is confidential and may not be disclosed or provided to any third parties
without the written permission of Alex. Brown & Sons Incorporated.
This memorandum is prepared as of February 21, 1996 and reflects information
made available to us prior to such date. It does not include information
regarding all of the assessments made by Alex. Brown in arriving at its
conclusions.
<PAGE> 3
PROJECT ZETA
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TAB
---
<S> <C> <C>
I. Summary of the Proposed Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
II. Stock Price and Volume History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
o Price and Volume Activity
o Relative Stock Price Performance
III. Issues of Distress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
IV. Summary Financial Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
V. Review of Proposed Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
VI. Proposed Transaction Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
o Summary
o Finacial Data Regarding Certain Publicly Traded Companies
o Break-up Analysis
o Liquidation Analysis
o Premiums in Merger and Acquisition Transactions
o Financial Data Regarding Certain Change of Control Transactions
o Financial Information Reagarding Certain Merger and Acquisition Transactions
o Discounted Cash Flow Analysis
</TABLE>
<PAGE> 4
TAB 1
<PAGE> 5
PROJECT ZETA
SUMMARY OF THE PROPOSED TRANSACTION
- --------------------------------------------------------------------------------
o Public recapitalization by Welsh, Carson, Anderson & Stowe ("WCAS")
and a simultaneous self-tender by ZETA for $2.875 per share.
o The WCAS investment is contingent upon a minimum of 2 million of
ZETA's shares being tendered. The maximum number of shares that can
be tendered is 6.5 million.
o The Proposed WCAS investment will be:
o 10 million of 10% Subordinated Debt, and
o up to million of 7% Convertible Preferred, convertible at
$2.125 per share, based on the number of shares tendered.
o There will be a revolving credit facility of up to $35 million.
o Timing:
o Sign agreement with WCAS February 21, 1996.
o Tender anticipated to begin on February 22, 1996.
o Expected completion in late March 1996.
<PAGE> 6
PROJECT ZETA
Fully Diluted Pro Forma Ownership of Non-Tendered Shares
(Post Proposed Capitalization)
Page includes two pie charts depicting the pro forma ownership of the
non-tendering shares, WCAS, and other shares (including all share equivalents).
2MM Shares Tendered 6.5MM Shares Tendered
Non-Tendered Shares 24.9% 10.7%
WCAS 57.6% 71.8%
Other 17.5% 17.5%
<PAGE> 7
PROJECT ZETA
Fully Diluted Pro Forma Ownership of Non-Tendered Shares
(Post Proposed Capitalization)
Page includes two pie charts depicting the pro forma shares and share
equivalents owned by the non-tendering shares, WCAS, and other shares
(including all share equivalents).
2MM Shares Tendered 6.5MM Shares Tendered
Non-Tendered Shares 7,402 2,902
WCAS 17,081 19,431
Other 5,193 4,737
<PAGE> 8
TAB 2
<PAGE> 9
PROJECT ZETA
Daily Price and Volume
January 1, 1993 - February 16, 1996
Graph depicts daily closing price and total volume traded of ZETA. In
addition, the following is noted:
Average Daily Volume = 42,267
Annual Turnover = 1.355
<PAGE> 10
PROJECT ZETA
ZETA Stock Price Performance from February 15, 1995 to February 16, 1996
Graph depicts daily closing prices of ZETA and includes (i) a horizontal line
at the tender offer price level ($2.875) and (ii) arrows pointing to the
closing price on the following dates, such dates being annotated as set forth
below:
February 14, 1995 First quarter net $0.11/share vs. $0.10/share.
March 22, 1995 Shareholders approved increase in authorized
number of shares to 25 million.
May 15, 1995 Second quarter net $0.03/share vs. $0.11/share.
May 18, 1995 Plans to cut staff by 20%.
July 19, 1995 Announces contract to provide asset recovery
services to IBM.
August 7, 1995 Announces plans to refinance and hires Alex.
Brown.
August 15, 1995 Third quarter net $1.90 loss vs. $0.13.
Shutdown of Premier Division; $4.7MM
restructuring charge.
October 4, 1995 Century sets up Canadian support facilities.
November 26, 1995 Announced fiscal year $1.79 loss vs. $0.87
loss.
January 2, 1996 Announces delay of filing 10-K.
February 6, 1996 First quarter $0.01 vs. $0.11.
<PAGE> 11
PROJECT ZETA
Daily Price and Volume
February 15, 1995 - February 16, 1996
Graph depicts daily closing price and total volume traded of ZETA and includes
a horizontal line at the tender offer price level ($2.875). In addition, the
following is noted:
Average Daily Volume = 26,552
Annual Turnover = .851
<PAGE> 12
PROJECT ZETA
Daily Price and Volume
August 7, 1995 - February 16, 1996
Graph depicts daily closing price and total volume traded of ZETA and includes
a horizontal line at the tender offer price level ($2.875). In addition, the
following is noted:
Average Daily Volume = 26,058
Annual Turnover = .804
<PAGE> 13
BLUE SHEET
<PAGE> 14
PROJECT ZETA
ZETA vs. Distributor Index, Contract Manufacturer Index, and S&P 500
February 16, 1995 - February 16, 1996
Graph depicting ZETA against PC Service Source, the S&P 500, and indices of the
Distributors (CPLX, ARW, WYL, BELM, JACO) and Contract Manufacturers (JBIL,
MERX, ACTM, SANM, ALRN, GRTK, DIIG, BHE, FLEXF, REPT). Each line is indexed to
100 on 2/16/95. It is noted that the Distributor and Contract Manufacturing
Indices are weighted by market equity value.
<PAGE> 15
TAB 3
<PAGE> 16
PROJECT ZETA
CURRENT CAPITAL STRUCTURE POSITION
- --------------------------------------------------------------------------------
GENERAL
o ZETA is leveraged with 79.0% debt to total capitalization and 3.8x
debt to equity with over $50 million of total debt, including leases.
o The senior lenders have about $26.5 million of debt outstanding at the
operating level with liens on all the assets.
o ZETA is in compliance with senior debt covenants only after
negotiating a third bank amendment with the senior lenders.
o The third amendment to the bank agreement includes a requirement to
complete a recapitalization no later than June 30, 1996 with
substantial penalties and fees beginning on March 31, 1996.
o If the recapitalization is not completed by June 30, 1996, all future
payments from the operating companies to pay the subordinated debt and
other holding company obligations will be prohibited.
NEAR-TERM - (TWO TO FIVE MONTHS)
o Monthly fees and penalties of $50,000 are payable to the banks
beginning March 31, 1996 until the banks are repaid.
o The interest rate on the bank debt will increase by 2% on June 30,
1996 if a recapitalization is not completed.
o The holding company will default July 31, 1996 on its capital lease
obligation.
o The revolver will reach its maximum level in March 1996 and exceed its
limit in June 1996.
INTERMEDIATE-TERM - (EIGHT MONTHS OR LONGER)
o The 7% subordinated convertible promissory notes of approximately $1.8
million will default in October 1996.
o 9 1/4% senior subordinated notes of approximately $8.5 million will
default in November 1996.
<PAGE> 17
PROJECT ZETA
OPERATING IMPLICATIONS OF CURRENT CAPITAL POSITION
- --------------------------------------------------------------------------------
o ZETA's customers have generally reacted negatively to the Company's
public financial statements and are increasingly concerned about
balance sheet leverage.
o The Company has recently lost important business to competitors due to
customer concerns about ZETA's financial strength and stability.
o Several important strategic relationships are now on hold or are
dependent on the Company deleveraging its balance sheet.
o Suppliers are reducing credit availability and will likely require
cash on delivery in the upcoming months if no recapitalization is
consummated.
o This loss of trade credit, if it continues, will precipitate a
liquidity crisis since ZETA does not have adequate availability under
its revolver in March 1996.
<PAGE> 18
PROJECT ZETA
Current Corporate Structure
(December 31, 1995)
<TABLE>
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------
- ---------------------------- -------------------------- ----------------------------
|Leases (1) $2,816,000|------- | | |9 1/4% Notes $8,788,000|
- ---------------------------- | ZETA, Inc. | | |
- ---------------------------- | |-------------|7 3/4% Debs 10,306,000|
| Discontinued |------- | (Holding Company) | | |
| Operations | | | |7% Notes 1,766,000|
- ---------------------------- -------------------------- | -----------|
| |TOTAL $20,860,000|
| ----------------------------
|
--------------------------
| | ----------------------------
| ZETA Group | |Bank Debt: |
| |-------------|Term Loan $18,000,000|
| (Operating Level) | |Revolver 8,550,000|
| | | -----------|
-------------------------- |TOTAL $26,550,000|
| ----------------------------
|
-------------------------------------------
| |
----------- ------------
|Century &| | Asset |
| Repairs | | Recovery |
----------- | Services |
| (ARS) |
------------
</TABLE>
- ----------------
(1) $2.1MM is associated with discontinued operations.
<PAGE> 19
PROJECT ZETA
CURRENT CAPITAL STRUCTURE AND TERMS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST, AMORTIZATION & PENALTIES
BALANCE ------------------------------------
DECEMBER 1995 FY Q2 FY Q3 DEFAULT/CASH FLOW IMPACT
------------- -------------- --------------- ----------------------------------------------
<S> <C> <C> <C> <C>
Bank Debt:
Term Loan $18,000,000 $100,000 $150,000 o Cash flow sweep of excess cash flow
Revolver 8,550,000 200,000 50,000 annually each December 30.
-------- 50,000 o Covenants and material adverse
300,000 50,000 change clause.
-------- o Recap required by June 30; restriction
300,000 on sub debt payments thereafter.
9 1/4% Senior Subordinated 8,788,000 400,000 o Principal due November 14, 1996;
Notes Due 1996 (May 1996) interest of $400,000 on May 14, 1996.
7 3/4% Convertible 10,306,000 400,000 o Principal due April 15, 2001; sinking
Subordinated Debentures (April 1996) fund payments due $117 in 1999 and
Due 2001 $2,516 in 2000; interest of $400,000 due
on April 14, 1996; convertible at $11.66
per share.
7% Subordinated 1,766,000 62,000 883,000 o Principal due of $883,000 on October
Convertible Promissory (Oct. 1996) 2, 1996 and October 2, 1997; interest
Notes of $62,000 due March 31, 1996;
convertible at $11.20 per share.
Leases 2,816,000 192,975 192,975
-----------
Total Debt and Lease Financing $50,226,000
Total Interest, Amortization -------- -----------
& Penalties $554,975 $ 2,175,975
- -----------------------------------------------------------------------------------
As of December 31, 1995:
Cash and Marketable Securities $1,451,000
Tangible Equity (37,026,000)
Total Debt / Total Capitalization (including present value of leases) 79.0%
Senior / Subordinated Debt 0.93
- -----------------------------------------------------------------------------------
</TABLE>
<PAGE> 20
PROJECT ZETA
Current Debt Repayment Schedule
($ In Thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
1996 1997 1998 1999 2000 2001 TOTAL
---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Revolver Expires
Senior term debt (1) $5,333 $5,333 $5,333 $2,001 $18,000
7% subordinated convertible promissory notes 883 883 1,766
9-1/4% senior subordinated notes 8,550 8,550
7-3/4% convertible subordinated debentures 117 2,516 7,673 10,306
------- ------ ------ ------ ------ ------ -------
$14,766 $6,216 $5,333 $2,118 $2,516 $7,673 $38,622(2)
</TABLE>
[BAR CHART]
(1) Assumes level repayment and no cash flow sweep.
(2) Does not include leases.
<PAGE> 21
PROJECT ZETA
Near-term Timeline
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
No Recapitalization/Status Quo
- ------------------------------
o Pay bank fee
o Signing of Third o Pay bank fee of $100K of $150K
Amendment o Pay penalty of $200K o Pay penalty
o Repricing of warrants of $50K
to $2.18 o Pay penalty o Pay penalty o Interest rate
of $50K of $50K increases 2%
- ------------- ------------- ------------- ------------- ------------- ------------------------ -------------
January 12 February 29 March 31 April 30 May 30 June 30 July 31
Q1 1996 Q2 1996 Default on Chicago lease
($0 - $300 cash availability) ($0 cash availability,
subordinated debt
payments restricted;
revolver limit exceeded)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 22
TAB 4
<PAGE> 23
PROJECT ZETA
Historical Income Statement
(In thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
FISCAL YEAR ENDED SEPTEMBER 30, DECEMBER 31,
----------------------------------------- ---------------------
1993 1994 1995 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue:
Century $35,424 $43,004 $56,602 $14,644 $18,512
ARS 19,268 29,165 42,722 9,780 11,593
Total (1) $54,692 $72,169 $99,324 $24,424 $29,920(4)
Total - as Reported (2) 58,328 120,386 141,852 37,761 29,920
Gross Profits:
Century $14,581 $16,936 $17,778 $5,296 $5,665
ARS 1,897 7,442 9,947 2,350 2,313
Total (1) $16,478 $24,378 $27,725 $7,646 $7,992(4)
Total - as Reported (2) 11,274 26,350 34,582 9,991 7,992
Operating income (loss):
Century 4,136 4,812 2,756 750 983
ARS 530 5,404 6,762 1,678 1,442
--- ----- ----- ----- -----
Total (1) $4,666 $10,216 $9,518 $2,428 $2,425
Total - as Reported (2) 5,333 134 (8,304) 2,897 1,378
Total - (adds back one-time charges) (3) 5,333 4,238 (2,661) 2,897 1,378
</TABLE>
- -------------------
Note: Based on management numbers.
(1) Excludes businesses that ZETA management exited or restructured.
(2) As reported in ZETA's 10-K and 10-Q reports.
(3) Adds back restructuring charges and litigation expenses.
(4) Includes intercompany elimination which is not broken out in the Century
and ARS divisions.
<PAGE> 24
PROJECT ZETA
Historical Income Statement
(In thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
FISCAL YEAR ENDED SEPTEMBER 30, DECEMBER 31,
----------------------------------------- ---------------------
1993 1994 1995 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Growth Rates:
Century NA 21.4% 31.6% NA 26.4%
ARS NA 51.4% 46.5% NA 18.5%
Total (1) NA 32.0% 37.6% NA 22.5%(4)
Total - as Reported (2) NA 106.4% 17.8% NA -20.8%
Gross Margin:
Century 41.2% 39.4% 31.4% 36.2% 30.6%
ARS 9.8% 25.5% 23.3% 24.0% 20.0%
Total (1) 30.1% 33.8% 27.9% 31.3% 26.7%(4)
Total - as Reported (2) 19.3% 21.9% 24.4% 26.5% 26.7%
Operating Income Margin:
Century 11.7% 11.2% 4.9% 5.1% 5.3%
ARS 2.8% 18.5% 15.8% 17.2% 12.4%
Total (1) 8.5% 14.2% 9.6% 9.9% 8.1%
Total - as Reported (2) 9.1% 0.1% -5.9% 7.7% 4.6%
Total - (adds back one-time charges) (3) 9.1% 3.5% -1.9% 7.7% 4.6%
</TABLE>
- ------------------
(1) Excludes businesses that ZETA management exited or restructured.
(2) As reported in ZETA's 10-K and 10-Q reports.
(3) Adds back restructuring charges and litigation expenses.
(4) Includes intercompany elimination which is not broken out in the Century
and ARS divisions.
<PAGE> 25
TAB 5
<PAGE> 26
PROJECT ZETA
Review of the Proposed Transaction
I. THE SECURITIES
o Convertible Preferred Stock
o Up to $40 million convertible at 2.125 per share.
o 7% dividends - payable in cash or stock at Company's option at
conversion, redemption or liquidation.
o Subordinated Notes
o 10% semi-annual payments.
o Between 607,211 and 610,022 shares of common stock.
II. OTHER
o WCAS nominates four Board candidates out of a maximum of seven Board
members.
o 1% fee on preferred and subordinated debt investment and reasonable
out-of-pocket expenses paid to WCAS.
o A new option plan will be established for ZETA management.
<PAGE> 27
PROJECT ZETA
Review of the Proposed Transaction
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SOURCES PROPOSED USES (2)
- ---------------------------------------------------- ----------------------------------------------------------------------
SHARES TENDERED SHARES TENDERED
-------------------- -----------------------
2,000 6,500 2,000 6,500
------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Cash on Hand (12/31/95) $1,451 $1,451 Term Loan Repayment (3) $18,000 $18,000
Revolving Line of Credit (1) 2,000 10,000 Revolver Repayment (3) 8,550 8,550
Senior Subordinated Notes 10,000 10,000 9 1/4% Senior Subordinated Debt Repayment (3 8,788 8,788
Convertible Preferred Stock 35,000 40,000 Self-Tender 5,750 18,688
------- -------
Total Sources $48,451 $61,451 Chicago Lease Buyout 2,100 2,100
======= =======
Estimated Fees & Expenses 4,510 4,510
Other (4) 241 241
- --------------------------------------------------------
ASSUMPTIONS: Cash on Hand 512 575
Convertible Preferred Price Per Share $2.125 ------- -------
Tender Price Per Share $2.875 Total Uses $48,451 $61,451
- -------------------------------------------------------- ======= =======
</TABLE>
- -------------------
(1) Reducing revolver with a beginning capacity of $35MM, decreasing $1MM
per quarter for five years.
(2) Does not include payment under the outstanding class action settlement.
(3) Repayment of balance as of 12/31/95.
(4) Includes accrued interest on 9 1/4% Senior Subordinated Debt as of
12/31/95.
<PAGE> 28
TAB 6
<PAGE> 29
PROJECT ZETA
Summary Financial Data of Selected Publicly Traded Companies
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
ZETA(1) MEAN MEDIAN HIGH - LOW
-------- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
REVENUE: 0.5 x
Electronics Distributors 0.6 x 0.5 x 0.8 x - 0.3 x
Contract Manufacturers 1.2 1.0 2.5 - 0.3
EBITDA: 10.3 x
Electronics Distributors 7.6 x 7.1 x 10.2 x - 6.2 x
Contract Manufacturers 11.5 9.5 23.2 - 6.8
EBIT: 20.3 x
Electronics Distributors 8.4 x 7.8 x 11.3 x - 6.7 x
Contract Manufacturers 15.1 11.3 33.7 - 9.3
NET DEBT/MARKET CAP.: 289.1%(2)
Electronics Distributors 49.1% 43.5% 88.5% 16.8%
Contract Manufacturers 21.2% 3.9% 96.8% -11.4%
</TABLE>
- ------------------
(1) Based on December 31, 1995 financials, and a stock price of $1.69.
(2) Includes leases.
<PAGE> 30
- --------------------------------------------------------------------------------
Alex. Brown & Sons
Incorporated
PROJECT ZETA
Summary Financial Data of Selected Publicly Traded Electronics Manufacturers
($ in millions, Except Per Share Figures)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL COMPARISON
- ------------------------------------------------------------------------------------------------------------------------------------
52 WEEK
PRICE RANGE STOCK SHARES EQUITY
FYE/ ---------------- PRICE OUT MARKET TOTAL
COMPANY TICKER TRAILING DATE HIGH LOW 2/16/96 (000'S) CAP. DEBT
- -------------------------- ------ ------------- ------- ----- -------- ------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CERPLEX GROUP INC. CPLX Jan-93 / Oct-95 $10.75 - $4.50 $5.63 13,119 $73.8 $66.8
ARROW ELECTRONICS INC. ARW Dec-94 / Sep-95 $59.75 - $35.25 $41.30 50,603 $2,701.2 $148.4
WYLE ELECTRONICS WYL Dec-94 / Sep-95 $46.50 - $20.00 $31.13 12,373 $185.1 $76.4
BELL MICROPRODUCTS INC. BELM Dec-94 / Sep-95 $13.50 - $5.88 $6.38 8,278 $32.8 $44.3
JACO ELECTRONICS INC. JACO Jun-95 / Sep-95 $18.50 - $4.50 $11.79 3,792 $43.1 $28.5
PC SERVICE SOURCE INC. PCSS Dec-95 / Sep-94 $12.25 - $5.25 $9.88 3,897 $38.5 $9.2
ZETA Sep-95 / Dec-95 $5.00 - $1.50 $1.69 9,997 $16.9 $50.2
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL COMPARISON
- ------------------------------------------------------------------------------------------------------------------------------------
BOOK
ADJUSTED LATEST TWELVE MONTHS VALUE EPS
CASH AND MARKET ----------------------------------------- PER ----------------
COMPANY EQUIV. CAP. REV. OP. INC. EBITDA NET INC. SHARE LTM CY96(1)
- -------------------------- -------- -------- ------ -------- ------ -------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CERPLEX GROUP INC. $1.5 $139.1 $167.9 ($2.4) $7.8 ($5.4) $1.30 ($2.42) $0.77
ARROW ELECTRONICS INC. $77.6 $1,672.0 $5,614.3 $398.3 $434.8 $185.5 $20.11 $7.73 $4.80
WYLE ELECTRONICS $11.8 $449.7 $1,002.9 $52.4 $52.8 $31.1 $14.99 $2.38 $3.65
BELL MICROPRODUCTS INC. $1.8 $95.5 $320.4 $13.5 $10.9 $6.3 $7.59 $0.77 $1.00
JACO ELECTRONICS INC. $0.8 $71.2 $147.1 $6.3 $7.0 $2.5 $3.70 $0.99 $1.26
PC SERVICE SOURCE INC. $0.7 $46.9 $60.1 ($1.3) ($0.2) ($1.0) $2.96 ($0.23) NA
ZETA $1.5 $65.6 $134.0 $3.2 $6.4 ($2.8) $1.34 ($0.34) NA
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MARKET MULTIPLES
- ------------------------------------------------------------------------------------------------------------------------------------
3 YEAR CAGR NET LTM ADJ. MARKET CAP. TO LTM
-------------------------- DEBT / OPER. --------------------------
COMPANY REV. OP. INC. NET INC. MKT CAP MARGIN REV. OP. INC. EBITDA
- -------------------------- ------ ------ -------- ------- ------ ----- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CERPLEX GROUP INC. 43.6% 47.4% 982.5% 23.3% -1.4% 0.8 x NM NM
ARROW ELECTRONICS INC. 38.5% 35.7% 32.3% 22.4% 7.1% 0.5 x 6.7 x 6.2 x
WYLE ELECTRONICS 32.2% 10.0% 13.3% 16.8% 3.3% 0.4 x 8.5 x 7.7 x
BELL MICROPRODUCTS INC. 95.6% 178.1% 202.9% 81.0% 4.2% 0.3 x 7.1 x 6.4 x
JACO ELECTRONICS INC. 19.8% 26.7% 17.6% 65.5% 4.3% 0.3 x 11.1 x 10.2 x
PC SERVICE SOURCE INC. 107.7% 152.0% 194.8% 22.0% -2.5% 0.8 x NM NM
------------------------------------------------------------------------------------------------------------
Mean 56.4% 75.0% 240.6% 49.1% 2.8% 0.6 x 8.4 x 7.6 x
------------------------------------------------------------------------------------------------------------
Median 41.1% 41.5% 113.6% 43.5% 4.2% 0.5 x 7.8 x 7.1 x
------------------------------------------------------------------------------------------------------------
Adjusted Mean (2) 52.7% 65.4% 111.9% 47.3% 4.8% 0.5 x 7.8 x 7.1 x
------------------------------------------------------------------------------------------------------------
High 107.7% 178.3% 982.5% 88.5% 7.1% 0.8 x 11.3 x 10.2 x
------------------------------------------------------------------------------------------------------------
Low 19.8% 10.0% 13.3% 16.8% -2.5% 0.3 x 6.7 x 6.2 x
------------------------------------------------------------------------------------------------------------
ZETA 55.9% 92.3% NA 289.1% 2.4% 0.5 x 20.3 x 10.3 x
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MARKET MULTIPLES
- ------------------------------------------------------------------------------------------------------------------------------------
STOCK PRICE TO: LONG-TERM
------------------------------- EARNINGS CY96 P/E
LTM CY96 BOOK VAL. GROWTH TO GROWTH
COMPANY EPS EPS PER SHARE RATE RATE
- -------------------------- ------ ----- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CERPLEX GROUP INC. NM 7.3 x 4.7 x 20.5% 35.6%
ARROW ELECTRONICS INC. 11.7 x 9.1 x 2.2 x 17.2% 52.7%
WYLE ELECTRONICS 13.1 x 8.5 x 2.1 x 15.7% 54.3%
BELL MICROPRODUCTS INC. 8.3 x 6.4 x 0.8 x 25.0% 25.5%
JACO ELECTRONICS INC. 11.5 x 9.1 x 3.1 x 20.0% 45.3%
PC SERVICE SOURCE INC. NM NA 3.3 x NA NA
---------------------------------------------------------------------------------
Mean 11.1 x 8.1 x 2.7 x 19.7% 42.7%
---------------------------------------------------------------------------------
Median 11.6 x 8.5 x 2.6 x 20.0% 45.3%
---------------------------------------------------------------------------------
Adjusted Mean (2) 11.6 x 8.3 x 2.7 x 19.2% 44.5%
---------------------------------------------------------------------------------
High 13.1 x 9.1 x 4.7 x 25.0% 34.3%
---------------------------------------------------------------------------------
Low 8.3 x 6.4 x 0.8 x 15.7% 25.5%
---------------------------------------------------------------------------------
ZETA NM NA 1.3 x NA NA
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Notes
- --------------------------------------------------------------------------------
(1) Source: I/B/E/S mean estimates when available, otherwise Bloomberg
estimates.
(2) Excludes all negatives, and the high and low positive numbers.
NOTE: All numbers are adjusted to exclude discountinued operations,
extraordinary items, restructuring and other one-time charges, and
changes in accounting principles.
- --------------------------------------------------------------------------------
<PAGE> 31
- --------------------------------------------------------------------------------
Alex. Brown & Sons
Incorporated
PROJECT ZETA
Summary Financial Data of Selected Publicly Traded Contract Manufacturers
($ in millions, Except Per Share Figures)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL COMPARISON
- ------------------------------------------------------------------------------------------------------------------------------------
52 WEEK
PRICE RANGE STOCK SHARES EQUITY
FYE/ ---------------- PRICE OUT MARKET TOTAL
COMPANY TICKER TRAILING DATE HIGH LOW 2/16/96 (000'S) CAP. DEBT
- -------------------------- ------ ------------- ------- ----- -------- ------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JABIL CIRCUIT INC. JBIL Aug-95 / Nov-95 $23.00 - $4.75 $8.25 17,671 $145.8 $104.5
MERIX CORP. MERX May-95 / Nov-95 $39.25 - $20.63 $32.25 6,103 $196.8 $28.3
ACT MANUFACTURING INC. ACTM Dec-94 / Sep-95 $19.75 - $9.13 $10.50 8,663 $91.0 $0.4
SANMINA CORP. SANM Sep-95 / Sep-95 $57.75 - $27.75 $55.00 8,204 $451.2 $86.3
DOVATRON INTERNATIONAL DIIG Dec-94 / Sep-95 $38.00 - $17.50 $34.25 8,097 $277.3 $49.8
ALTRON INC. ALRN Dec-94 / Sep-95 $34.25 - $13.50 $28.50 9,958 $283.8 $7.8
GROUP TECHNOLOGIES CORP. GRTK Dec-94 / Oct-95 $8.00 - $1.88 $3.00 15,733 $47.2 $46.9
BENCHMARK ELECTRONICS INC. BHE Dec-94 / Sep-95 $31.88 - $20.25 $26.00 4,020 $104.5 $0.0
FLEXTRONICS INT'L LTD. FLEXF Mar-95 / Sep-95 $33.25 - $13.00 $33.00 12,798 $422.3 $23.1
REPTRON ELECTRONICS INC. REPT Dec-94 / Sep-95 $18.13 - $10.38 $14.88 6,048 $90.0 $51.7
ZETA Sep-95 / Dec-95 $5.00 - $1.50 $1.69 9,997 $16.9 $48.1
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL COMPARISON
- ------------------------------------------------------------------------------------------------------------------------------------
BOOK
ADJUSTED LATEST TWELVE MONTHS VALUE EPS
CASH AND MARKET ----------------------------------------- PER ----------------
COMPANY EQUIV. CAP. REV. OP. INC. EBITDA NET INC. SHARE LTM CY96
- -------------------------- -------- -------- ------ -------- ------ -------- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
JABIL CIRCUIT INC. $3.4 $246.9 $691.1 $23.2 $36.6 $10.7 $5.89 $0.66 $1.03
MERIX CORP. $21.7 $203.4 $183.2 $18.0 $21.7 $11.6 $9.58 $1.78 $2.42
ACT MANUFACTURING INC. $10.8 $80.6 $111.9 $8.6 $9.4 $5.0 $3.90 $0.66 $1.07
SANMINA CORP. $114.1 $423.4 $167.8 $27.1 $31.8 $17.0 $8.19 $2.02 $2.88
DOVATRON INTERNATIONAL $12.4 $314.7 $140.9 $14.7 $21.7 $8.2 $12.77 $1.01 $2.50
ALTRON INC. $34.3 $257.3 $131.3 $20.3 $25.1 $12.5 $7.57 $1.33 $2.16
GROUP TECHNOLOGIES CORP. $1.2 $92.9 $233.9 ($8.5) ($4.0) ($7.6) $2.33 ($0.50) $0.02
BENCHMARK ELECTRONICS INC. $5.8 $98.7 $94.9 $9.6 $11.8 $6.3 $11.20 $1.54 $1.65
FLEXTRONICS INT'L LTD. $3.9 $441.5 $321.4 $13.1 $19.0 $9.4 $6.91 $0.74 $1.66
REPTRON ELECTRONICS INC. $0.9 $140.8 $198.9 $12.9 $14.9 $6.5 $6.52 $1.06 $1.50
ZETA $1.5 $63.5 $134.0 $3.2 $6.4 ($2.8) $1.34 ($0.34) NA
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MARKET MULTIPLES
- ------------------------------------------------------------------------------------------------------------------------------------
3 YEAR CAGR NET LTM ADJ. MARKET CAP. TO LTM
-------------------------- DEBT / OPER. --------------------------
COMPANY REV. OP. INC. NET INC. MKT CAP MARGIN REV. OP. INC. EBITDA
- -------------------------- ------ ------ -------- ------- ------ ----- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JABIL CIRCUIT INC. 29.3% -0.9% -5.5% 69.4% 3.4% 0.4 x 10.7 x 6.8 x
MERIX CORP. 20.1% 42.7% 43.3% 3.4% 15.7% 1.8 x 11.3 x 9.4 x
ACT MANUFACTURING INC. 77.4% 99.5% 104.6% -11.4% 7.7% 0.7 x 9.3 x 8.6 x
SANMINA CORP. 37.7% 47.7% 82.4% -6.2% 16.1% 2.5 x 15.6 x 13.3 x
DOVATRON INTERNATIONAL 43.4% -13.1% -14.5% 13.5% 4.8% 1.0 x 21.4 x 14.5 x
ALTRON INC. 23.6% 137.1% 161.3% -9.3% 15.5% 2.0 x 12.6 x 10.3 x
GROUP TECHNOLOGIES CORP. 53.4% 33.0% 21.1% 96.8% -3.1% 0.3 x NM NM
BENCHMARK ELECTRONICS INC. 39.2% 39.9% 34.4% -5.6% 10.1% 1.0 x 10.3 x 8.3 x
FLEXTRONICS INT'L LTD. 53.5% 173.5% NA 4.5% 4.1% 1.4 x 33.7 x 23.2 x
REPTRON ELECTRONICS INC. 40.2% 82.1% 121.6% 56.5% 6.5% 0.7 x 10.9 x 9.5 x
------------------------------------------------------------------------------------------------------------
Mean 41.8% 64.1% 61.0% 21.2% 8.1% 1.2 x 15.1 x 11.5 x
------------------------------------------------------------------------------------------------------------
Median 39.7% 45.2% 43.3% 3.9% 7.1% 1.0 x 11.3 x 9.5 x
------------------------------------------------------------------------------------------------------------
Adjusted Mean #u(2) 40.0% 68.9% 67.9% 43.5% 9.2% 1.1 x 13.3 x 10.6 x
------------------------------------------------------------------------------------------------------------
High 77.4% 173.5% 161.3% 96.8% 16.1% 2.5 x 33.7 x 23.2 x
------------------------------------------------------------------------------------------------------------
Low 20.1% -13.1% -14.5% -11.4% -3.1% 0.3 x 9.3 x 6.8 x
------------------------------------------------------------------------------------------------------------
ZETA 55.9% 92.3% NA 289.1% 2.4% 0.5 x 20.3 x 10.3 x
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MARKET MULTIPLES
- ------------------------------------------------------------------------------------------------------------------------------------
LONG-TERM
STOCK PRICE TO: EARNINGS CY96 P/E
LTM CY96 BOOK VAL. GROWTH TO GROWTH
COMPANY EPS EPS PER SHARE RATE RATE
- -------------------------- ------ ----- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
JABIL CIRCUIT INC. 12.5 x 8.0 x 1.4 x 22.5% 35.5%
MERIX CORP. 18.1 x 13.4 x 3.4 x 25.0% 53.4%
ACT MANUFACTURING INC. 15.9 x 9.8 x 2.7 x 25.0% 39.3%
SANMINA CORP. 27.2 x 19.1 x 6.7 x 26.9% 71.1%
DOVATRON INTERNATIONAL 33.9 x 13.7 x 2.7 x 20.0% 68.5%
ALTRON INC. 21.4 x 13.2 x 3.8 x 20.3% 65.0%
GROUP TECHNOLOGIES CORP. NM NM 1.3 x 20.0% NM
BENCHMARK ELECTRONICS INC. 16.9 x 15.8 x 2.3 x 22.5% 70.0%
FLEXTRONICS INT'L LTD. 44.5 x 19.8 x 4.8 x 27.5% 72.2%
REPTRON ELECTRONICS INC. 14.0 x 9.9 x 2.3 x 20.0% 49.6%
---------------------------------------------------------------------------------
Mean 22.7 x 13.6 x 3.3 x 23.0% 58.3%
---------------------------------------------------------------------------------
Median 18.1 x 13.4 x 2.7 x 22.5% 65.0%
---------------------------------------------------------------------------------
Adjusted Mean #u(2) 21.1 x 13.5 x 3.1 x 22.8% 59.5%
---------------------------------------------------------------------------------
High 44.5 x 19.8 x 6.7 x 27.5% 72.2%
---------------------------------------------------------------------------------
Low 12.5 x 8.0 x 1.3 x 20.0% 35.5%
---------------------------------------------------------------------------------
ZETA NM NA 1.3 x NA NA
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Notes
- --------------------------------------------------------------------------------
(1) Source: I/B/E/S mean estimates when available, otherwise Bloomberg
estimates.
(2) Excludes all negatives, and the high and low positive numbers.
NOTE: All numbers are adjusted to exclude discountinued operations,
extraordinary items, restructuring and other one-time charges, and
changes in accounting principles.
- --------------------------------------------------------------------------------
<PAGE> 32
BLUE SHEET
<PAGE> 33
PROJECT ZETA
Break Up Analysis
(In thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
ANNUALIZED
CY95 Q4 (1) MULTIPLE RANGE (2) IMPLIED VALUE RANGE (3) (4) MIDPOINT
----------- ------------------ ---------------------------- ---------
<S> <C> <C> <C> <C>
Century and Repair
Revenues $74,048 0.4 x 0.5 x $29,619 - $37,024 $33,322
EBITDA 4,696 6.0 x 10.0 x 28,176 - 46,960 37,568
EBITA 3,932 7.0 x 11.0 x 27,524 - 43,252 35,388
Value Range / Midpoint 28,572 - 41,992 35,445
Asset Recovery Services
Revenues 46,372 0.3 x 0.5 x $13,912 - $23,186 $18,549
EBITDA 6,752 4.0 x 6.0 x 27,008 - 40,512 33,760
EBITA 5,768 5.0 x 7.0 x 28,840 - 40,376 34,608
Value Range / Midpoint 21,376 - 31,849 26,578
- ------------------------------------------------------------------------------------------------------------------------
Total Implied Value $49,947 $73,841 $62,023
- ------------------------------------------------------------------------------------------------------------------------
Less: Bank Debt (26,550) (26,550) (26,550)
Implied Value to Holding Company Securities $23,397 $47,291 $35,473
Holding Company Debt (21,575) (21,575) (21,575)
------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------
Implied Value to Equity $1,822 $25,716 $13,898
====== ======= =======
Implied Value Per Share (5) $0.18 $2.57 $1.39
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
NOTE: Due to bank lien on assets, sales process could be protracted.
(1) Based upon actual fiscal year 1996 Q1, excluding discontinued operations.
(2) Does not assume a discount for a distressed sale.
(3) Implied value before any restructuring charges, sale costs and discounts
due to time value of money.
(4) Does not include impact on taxes associated with a gain on sale; existing
NOL's and capital losses are asssumed to shelter gains.
(5) Assumes 9.997MM shares outstanding.
<PAGE> 34
PROJECT ZETA
Liquidation Analysis
(In thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
BALANCE
SHEET LIQUIDATION LIQUIDATION
12/31/95 FACTOR RANGE VALUE RANGE
---------- -------------- -------------
<S> <C> <C> <C>
Assets
Cash $1,451 1.00 - 1.00 $1,451 - $1,451
Gross Trade Receivables 12,184 0.70 - 0.80 8,529 - 9,747
Inventories 4,964 0.40 - 0.50 1,986 - 2,482
Other Current Assets 1,001 0.00 - 0.40 0 - 400
PP&E 5,523 0.10 - 0.40 552 - 2,209
Intangible 50,381 0.00 - 0.00 0 - 0
-------- -------- --------
Total Liquidating Assets $75,504 $12,518 - $16,290
-------- -------- --------
Liabilities
Bank Debt (26,550) (26,550) - (26,550)
-------- -------- --------
Equity (Deficit) Before Holding
Company Debt and Liquidation
Costs $48,954 ($14,032) - ($10,260)
Holding Company Debt (21,575) (21,575) - (21,575)
-------- -------- --------
Equity (Deficit) Before Liquidation
Costs 27,379 (35,607) - (31,835)
Database (1) 2,000 - 10,000
-------- --------
- -------------------------------------------------------------------------------------------------------------------------
Equity (Deficit) Before Liquidation Costs (33,607) - (21,835)
Per Share (2) ($3.36) - ($2.18)
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------------
(1) Based on managment estimate of range of potential values.
(2) Based on 9.997MM shares outstanding.
<PAGE> 35
BLUE SHEET
<PAGE> 36
PROJECT ZETA
Post Recapitalization Balance Sheet Summary
(In thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
POST-RECAPITALIZATION
SHARES TENDERED
AS OF ----------------------------
12/31/95 2,000 6,500
-------- -------- -------
<S> <C> <C> <C>
Senior Debt $26,550 $4,000 $12,000
Total Debt and Leases (1) 50,225 25,033 33,041
Total Equity 13,355 38,890 30,944
Tangible Equity (37,026) (11,782) (19,728)
Total Debt / Total Cap. (1) 79.0% 39.2% 51.6%
Total Debt / Equity (1) 3.76 x 0.64 x 1.07 x
EBITDA / Interest 1.17 x 2.96 x 2.25 x
</TABLE>
- ---------------
(1) Total Debt includes Chicago lease.
<PAGE> 37
PROJECT ZETA
Post Recapitalization Implied Valuation Summary
($ In thousands, except per share amounts)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
- ----------------------------
Shares Tendered = 2,000
- ----------------------------
CONTRACT MANUFACTURING DISTRIBUTORS
AS OF ---------------------------- -----------------------------
12/31/95 LOW HIGH MEDIAN LOW HIGH MEDIAN
-------- --- ---- ------ --- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Enterprise Value as a Multiple of:
- ----------------------------------
LTM Revenue 0.3 x 2.5 x 1.0 x 0.3 x 0.8 x 0.5 x
LTM EBITDA 6.8 x 23.2 x 9.5 x 6.2 x 10.2 x 7.1 x
LTM EBIT 9.3 x 33.7 x 11.3 x 6.7 x 11.3 x 7.8 x
Equity Market Value as a Multiple of:
- -------------------------------------
CY 1996 EPS 8.0 x 19.8 x 13.4 x 6.4 x 9.1 x 8.5 x
- ------------------------------------------------------------------------------------------------------------------------------------
Value of ZETA (per share)
to Non-Tendering Shares
- -------------------------
LTM Revenue $134,011 $0.55 $10.49 $3.71 $0.55 $2.81 $1.46
LTM EBITDA 6,368 $0.66 $4.18 $1.24 $0.53 $1.39 $0.72
LTM EBIT 3,227 $0.21 $2.86 $0.43 ($0.07) $0.43 $0.05
CY 1996 EPS 5,677 $1.53 $3.79 $2.56 $1.22 $1.74 $1.63
<CAPTION>
MERGERS & ACQUISITIONS DCF
------------------------------ ---------------
LOW HIGH MEDIAN LOW HIGH
--- ---- ------ --- ----
<S> <C> <C> <C> <C> <C>
Enterprise Value as a Multiple of:
- ----------------------------------
LTM Revenue 0.2 x 4.0 x 0.6 x
LTM EBITDA NA NA NA
LTM EBIT 9.3 x 12.1 x 10.3 x
Equity Market Value as a Multiple of:
- -------------------------------------
CY 1996 EPS NA NA NA
- --------------------------------------------------------------------------------------------------------------
Value of ZETA (per share) $2.78 $5.33
to Non-Tendering Shares
- -------------------------
LTM Revenue $0.10 $17.26 $1.91
LTM EBITDA NA NA NA
LTM EBIT $0.21 $0.51 $0.32
CY 1996 EPS NA NA NA
</TABLE>
<PAGE> 38
PROJECT ZETA
Post Recapitalization Implied Valuation Summary
($ In thousands, except per share amounts)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
- ----------------------------
Shares Tendered = 6,500
- ----------------------------
CONTRACT MANUFACTURING DISTRIBUTORS
AS OF ---------------------------- -----------------------------
12/31/95 LOW HIGH MEDIAN LOW HIGH MEDIAN
-------- --- ---- ------ --- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Enterprise Value as a Multiple of:
- ----------------------------------
LTM Revenue 0.3 x 2.5 x 1.0 x 0.3 x 0.8 x 0.5 x
LTM EBITDA 6.8 x 23.2 x 9.5 x 6.2 x 10.2 x 7.1 x
LTM EBIT 9.3 x 33.7 x 11.3 x 6.7 x 11.3 x 7.8 x
Equity Market Value as a Multiple of:
- -------------------------------------
CY 1996 EPS 8.0 x 19.8 x 13.4 x 6.4 x 9.1 x 8.5 x
- ------------------------------------------------------------------------------------------------------------------------------------
Value of ZETA (per share)
to Non-Tendering Shares
- -------------------------
LTM Revenue $134,011 $0.31 $11.20 $3.78 $0.31 $2.79 $1.30
LTM EBITDA 6,368 $0.43 $4.29 $1.06 $0.29 $1.23 $0.50
LTM EBIT 3,227 ($0.06) $2.85 $0.18 ($0.37) $0.18 ($0.24)
CY 1996 EPS 5,201 $1.54 $3.80 $2.57 $1.23 $1.75 $1.63
<CAPTION>
MERGERS & ACQUISITIONS DCF
------------------------------ ---------------
LOW HIGH MEDIAN LOW HIGH
--- ---- ------ --- ----
<S> <C> <C> <C> <C> <C>
Enterprise Value as a Multiple of:
- ----------------------------------
LTM Revenue 0.2 x 4.0 x 0.6 x
LTM EBITDA NA NA NA
LTM EBIT 9.3 x 12.1 x 10.3 x
Equity Market Value as a Multiple of:
- -------------------------------------
CY 1996 EPS NA NA NA
- -----------------------------------------------------------------------------------------------------------------
Value of ZETA (per share) $2.83 $5.67
to Non-Tendering Shares
- -------------------------
LTM Revenue ($0.18) $18.63 $1.80
LTM EBITDA NA NA NA
LTM EBIT ($0.06) $0.27 $0.06
CY 1996 EPS NA NA NA
</TABLE>
<PAGE> 39
PROJECT ZETA
Per Share Blended Value to Tender Pool Shareholders
(Shares in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Blended Value per share
- -----------------------
AMOUNT TENDERED
--------------------------------------------------------------------------------------------------
SHARES 2,000 2,500 3,000 3,500 4,000 4,500 5,000 5,500 6,000 6,500
--------------------------------------------------------------------------------------------------
PERCENT 21.3% 26.6% 31.9% 37.2% 42.5% 47.9% 53.2% 58.5% 63.8% 69.1%
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$1.00 $1.40 $1.50 $1.60 $1.70 $1.80 $1.90 $2.00 $2.10 $2.20 $2.30
1.25 1.60 1.68 1.77 1.85 1.94 2.03 2.11 2.20 2.29 2.37
1.50 1.79 1.87 1.94 2.01 2.08 2.16 2.23 2.30 2.38 2.45
1.75 1.99 2.05 2.11 2.17 2.23 2.29 2.35 2.41 2.47 2.53
2.00 2.19 2.23 2.28 2.33 2.37 2.42 2.47 2.51 2.56 2.60
2.25 2.38 2.42 2.45 2.48 2.52 2.55 2.58 2.62 2.65 2.68
2.50 2.58 2.60 2.62 2.64 2.66 2.68 2.70 2.72 2.74 2.76
2.75 2.78 2.78 2.79 2.80 2.80 2.81 2.82 2.82 2.83 2.84
Stub Value Per Share 2.88 2.88 2.88 2.88 2.88 2.88 2.88 2.88 2.88 2.88 2.88
3.00 2.97 2.97 2.96 2.95 2.95 2.94 2.93 2.93 2.92 2.91
3.25 3.17 3.15 3.13 3.11 3.09 3.07 3.05 3.03 3.01 2.99
3.50 3.37 3.33 3.30 3.27 3.23 3.20 3.17 3.13 3.10 3.07
3.75 3.56 3.52 3.47 3.42 3.38 3.33 3.28 3.24 3.19 3.15
4.00 3.76 3.70 3.64 3.58 3.52 3.46 3.40 3.34 3.28 3.22
4.25 3.96 3.88 3.81 3.74 3.67 3.59 3.52 3.45 3.37 3.30
4.50 4.15 4.07 3.98 3.90 3.81 3.72 3.64 3.55 3.46 3.38
4.75 4.35 4.25 4.15 4.05 3.95 3.85 3.75 3.65 3.55 3.45
5.00 4.55 4.43 4.32 4.21 4.10 3.98 3.87 3.76 3.64 3.53
<CAPTION>
Premium Over Current Stock Price
- --------------------------------
AMOUNT TENDERED
--------------------------------------------------------------------------------------------------
SHARES 2,000 2,500 3,000 3,500 4,000 4,500 5,000 5,500 6,000 6,500
--------------------------------------------------------------------------------------------------
PERCENT 21.3% 26.6% 31.9% 37.2% 42.5% 47.9% 53.2% 58.5% 63.8% 69.1%
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$1.00 -17.1% -11.2% -5.3% 0.6% 6.5% 12.4% 18.3% 24.3% 30.2% 36.1%
1.25 -5.4% -0.3% 4.8% 9.9% 15.0% 20.2% 25.3% 30.4% 35.5% 40.6%
1.50 6.2% 10.6% 14.9% 19.2% 23.6% 27.9% 32.2% 36.6% 40.9% 45.2%
1.75 17.9% 21.4% 25.0% 28.5% 32.1% 35.6% 39.2% 42.7% 46.2% 49.8%
2.00 29.5% 32.3% 35.1% 37.8% 40.6% 43.3% 46.1% 48.9% 51.6% 54.4%
2.25 41.2% 43.2% 45.2% 47.1% 49.1% 51.1% 53.0% 55.0% 57.0% 58.9%
2.50 52.9% 54.1% 55.2% 56.4% 57.6% 58.8% 60.0% 61.1% 62.3% 63.5%
2.75 64.5% 64.9% 65.3% 65.7% 66.1% 66.5% 66.9% 67.3% 67.7% 68.1%
Stub Value Per Share 2.88 70.4% 70.4% 70.4% 70.4% 70.4% 70.4% 70.4% 70.4% 70.4% 70.4%
3.00 76.2% 75.8% 75.4% 75.0% 74.6% 74.2% 73.8% 73.4% 73.1% 72.7%
3.25 87.9% 86.7% 85.5% 84.3% 83.1% 82.0% 80.8% 79.6% 78.4% 77.2%
3.50 99.5% 97.6% 95.6% 93.6% 91.7% 89.7% 87.7% 85.7% 83.8% 81.8%
3.75 111.2% 108.4% 105.7% 102.9% 100.2% 97.4% 94.6% 91.9% 89.1% 86.4%
4.00 122.9% 119.3% 115.8% 112.2% 108.7% 105.1% 101.6% 98.0% 94.5% 90.9%
4.25 134.5% 130.2% 125.9% 121.5% 117.2% 112.9% 108.5% 104.2% 99.9% 95.5%
4.50 146.2% 141.1% 135.9% 130.8% 125.7% 120.6% 115.5% 110.3% 105.2% 100.1%
4.75 157.8% 151.9% 146.0% 140.1% 134.2% 128.3% 122.4% 116.5% 110.6% 104.7%
5.00 169.5% 162.8% 156.1% 149.4% 142.7% 136.0% 129.3% 122.6% 115.9% 109.2%
</TABLE>
<PAGE> 40
PROJECT ZETA
Per Share Value of Non-Tendering Shares
(Shares in thousands)
<TABLE>
<CAPTION>
Stub Value Per Share
- --------------------
AMOUNT TENDERED
--------------------------------------------------------------------------------------------------
SHARES 2,000 2,500 3,000 3,500 4,000 4,500 5,000 5,500 6,000 6,500
--------------------------------------------------------------------------------------------------
PERCENT 21.3% 26.6% 31.9% 37.2% 42.5% 47.9% 53.2% 58.5% 63.8% 69.1%
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$2.00 $1.76 $1.68 $1.59 $1.48 $1.35 $1.20 $1.01 $0.77 $0.46 $0.04
2.25 2.08 2.02 1.96 1.88 1.79 1.68 1.54 1.37 1.15 0.85
2.50 2.40 2.36 2.32 2.28 2.22 2.16 2.07 1.97 1.84 1.66
2.75 2.72 2.70 2.69 2.68 2.66 2.64 2.61 2.57 2.53 2.47
3.00 3.03 3.05 3.06 3.07 3.09 3.11 3.14 3.18 3.22 3.28
3.25 3.35 3.39 3.43 3.47 3.53 3.59 3.68 3.78 3.91 4.09
3.50 3.67 3.73 3.79 3.87 3.96 4.07 4.21 4.38 4.60 4.90
3.75 3.99 4.07 4.16 4.27 4.40 4.55 4.74 4.98 5.29 5.71
Blended Value Per Share 4.00 4.30 4.41 4.53 4.67 4.83 5.03 5.28 5.59 5.98 6.52
4.25 4.62 4.75 4.89 5.07 5.27 5.51 5.81 6.19 6.67 7.33
4.50 4.94 5.09 5.26 5.46 5.70 5.99 6.35 6.79 7.37 8.14
4.75 5.26 5.43 5.63 5.86 6.14 6.47 6.88 7.39 8.06 8.95
5.00 5.57 5.77 6.00 6.26 6.57 6.95 7.41 8.00 8.75 9.76
5.25 5.89 6.11 6.36 6.66 7.01 7.43 7.95 8.60 9.44 10.57
5.50 6.21 6.45 6.73 7.06 7.44 7.91 8.48 9.20 10.13 11.38
5.75 6.53 6.79 7.10 7.45 7.88 8.39 9.02 9.80 10.82 12.19
6.00 6.84 7.13 7.46 7.85 8.31 8.87 9.55 10.40 11.51 13.00
</TABLE>
<PAGE> 41
PROJECT ZETA
Average Premium Over Target Stock Price
Graphically depicts the annual merger and acquisition stock price premium of
offer over the price one day before the announcement date, and four weeks
before the announcement date for 1990 through 1994 and the year to date through
the end of the second quarter of 1995.
<TABLE>
<CAPTION>
YEAR PREMIUM ONE DAY BEFORE ANNOUNCE PREMIUM FOUR WEEKS BEFORE ANNOUNCE
<S> <C> <C>
1990 36.4% 45.0%
1991 37.8% 53.3%
1992 39.9% 47.4%
1993 34.2% 42.0%
1994 36.0% 44.2%
Q2 1995 34.6% 44.6%
</TABLE>
Source: IDD Mergers & Acquisitions, May 1995 and September 1995.
<PAGE> 42
BLUE SHEET
<PAGE> 43
PROJECT ZETA
Premium Paid in Change of Control Transactions
Involving Less Than 100% of Stock
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
VALUE OF PERCENT OF PREMIUM ONE PREMIUM FOUR
DATE TRANSACTION SHARES OFFER DAY BEFORE WEEKS BEFORE
ANNOUNCED ACQUIROR / TARGET ($ MIL) PURCHASED PRICE ANNOUNCEMENT ANNOUNCEMENT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
01/05/95 Minnesota Power & Light Co. / $165.30 80.0% $17.00 19.3% 38.8%
ADESA Corp.
12/22/94 ZENECA Group PLC / 194.40 50.0% 37.75 29.1% 69.7%
Salick Health Care Inc.
07/21/94 Roaster's Corp. / 10.50 56.0% 6.00 -5.9% 14.3%
Clucker's Wood Roasted Chicken
05/05/94 Fresenius AG / 22.70 53.0% 6.50 67.7% 52.9%
Gull Laboratories
11/01/93 Abaco Casa del Bolsa / 27.30 51.0% 10.50 61.5% 90.9%
Rodman & Renshaw Capital
10/08/93 Hoechst Celanese Corp. / 546.00 51.0% 55.00 10.0% 28.7%
Copley Pharmaceutical
06/03/93 Rhone-Poulenc / 1,706.40 50.1% 79.00 58.0% 74.0%
Rorer Group
02/02/90 Roche / NA 50.0% 36.00 66.0% 66.0%
Genentech
==============================================================
Mean 38.2% 54.4%
--------------------------------------------------------------
Median 43.6% 59.5%
--------------------------------------------------------------
High 67.7% 90.9%
--------------------------------------------------------------
Low -5.9% 14.3%
==============================================================
------------------------------------------------------------------------------------------------------------------
Proposed Transaction 21% - 68% $2.88 70.4% 64.3%
------------------------------------------------------------------------------------------------------------------
WCAS Pro Forma Ownership 58% - 72%
-------------------------------------------------------------
</TABLE>
<PAGE> 44
BLUE SHEET
<PAGE> 45
PROJECT ZETA
Summary of Selected Mergers & Acquisitions Transactions
(In millions)
<TABLE>
<CAPTION>
TARGET SELECTED FINACIALS
------------------------------------
AQUIROR/ OPERATING NET BOOK TOTAL
DATE TARGET REVENUE INCOME INCOME VALUE CONSIDERATION
- ------ ------------------------------------------- ------- --------- ------ ----- --------------
<S> <C> <C> <C> <C> <C> <C>
Contract Manufacturers
May-95 Sanmina Corporation/ $56.0 NA NA NA $5.0 to $10.0 (c)
Assembly Solutions Inc.
Apr-95 Electronic International/ NA NA NA NA $23.6
Assembly and Automation Corp.
Mar-95 Group Technologies/(a) $76.0 $4.3 $2.5 $17.9 $40.0
Smartflex Systems
Oct-94 Flextronix International LTD/ $9.4 ($0.7) ($1.3) ($2.5) $37.4
nChip, Inc.
Jan-95 Sanmina Corporation/ $33.2 NA NA NA $8.0
San Jose Division of Computronix Corp. (b)
Jun-94 Altron Corporation/ $9.6 NA NA NA $5.9
Astrio Corporation
Distributors
Jan-96 Farnell Electronics / $1,400.0 NA NA NA $2,800.0
Premier Industrial
Nov-95 Richey Cypress Electronics $109.0 NA NA NA $60.0
Deerco, Inc.
Jun-95 All American Semiconductor $40.3 NA NA NA $13.7
Added Value Electronic
May-95 Bell Microproducts Inc./ $34.2 $1.2 $0.8 $5.0 $11.9
Vantage Components
Nov-94 Arrow Electronics Inc./ $691.7 $35.5 $16.5 $223.3 $429.9
Anthem Electronics Inc.
Jun-94 Arrow Electronics Inc./ $450.0 NA NA NA $142.0
Gates / FA Distributing
<CAPTION>
TOTAL CONSIDERATION MULTIPLES
-------------------------------------------
AQUIROR/ OPERATING NET BOOK
DATE TARGET REVENUE INCOME INCOME VALUE
- ------ --------------------------------------- ------- --------- ------ -----
<S> <C> <C> <C> <C>
Contract Manufacturers
May-95 Sanmina Corporation/ 1.3 x NA NA NA
Assembly Solutions Inc.
Apr-95 Electronic International/ NA NA NA NA
Assembly and Automation Corp.
Mar-95 Group Technologies/(a) 0.5 x 9.3 x 15.8 x 2.2 x
Smartflex Systems
Oct-94 Flextronix International LTD/ 4.0 x NM NM NM
nChip, Inc.
Jan-95 Sanmina Corporation/ 0.2 x NA NA NA
San Jose Division of Computronix Corp.
Jun-94 Altron Corporation/ 0.6 x NA NA NA
Astrio Corporation
Distributors
Jan-96 Farnell Electronics / 2.0 x NA NA NA
Premier Industrial
Nov-95 Richey Cypress Electronics 0.6 x NA NA NA
Deerco, Inc.
Jun-95 All American Semiconductor 0.3 x NA NA NA
Added Value Electronic
May-95 Bell Microproducts Inc./ 0.3 x 10.3 x 15.4 x 2.4 x
Vantage Components
Nov-94 Arrow Electronics Inc./ 0.6 x 12.1 x 26.0 x 1.9 x
Anthem Electronics Inc.
Jun-94 Arrow Electronics Inc./ 0.3 x NA NA NA
Gates / FA Distributing
------------------------------------------------------------------------
Mean 1.0 x 10.6 x 19.1 x 2.2 x
------------------------------------------------------------------------
Median 0.6 x 10.3 x 15.8 x 2.2 x
------------------------------------------------------------------------
Adjusted Average 0.7 x 10.6 x 19.1 x 2.2 x
------------------------------------------------------------------------
High 4.0 x 12.1 x 26.0 x 2.4 x
------------------------------------------------------------------------
Low 0.2 x 9.3 x 15.4 x 1.9 x
------------------------------------------------------------------------
</TABLE>
- ------------------
(a) Group Technologies terminated the transaction in April 1995 when First
Union backed away from its pledge to provide 100% financing. Smartflex
completed an IPO on July 31, 1995 at a post-deal
(b) The six month financials ended June 1994 were annualized for multiple
calculations, as Comptronix and the San Jose division had 30% and 46% lower
annualized revenues versus the full year 1993
(c) Rodman & Renshaw estimates. A midpoint of $7.5 million was used for the
calculation of the multiple.
<PAGE> 46
BLUE SHEET
<PAGE> 47
PROJECT ZETA
Discounted Cash Flow Valuation Analysis
(In thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
- -----------------------
Shares Tendered 2,000
- -----------------------
CALENDAR 1996
-----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
EBIT $2,124 $2,698 $2,590 $2,853 $10,265
Cash Taxes (637) (809) (777) (856) (3,080)
EBIAT 1,487 1,889 1,813 1,997 7,186
Depreciation 386 400 416 435 1,637
Amortization 395 395 395 395 1,580
Changes in Working Capital (1,048) (1,011) 22 (688) (2,725)
Capital Expenditures (250) (300) (350) (400) (1,300)
Theoretical Unlevered Free Cash Flow 970 1,373 2,296 1,739 6,378
Present Value of Free Cash Flow
- ------------------------------- -----------
Total
-----
Discounted @ 16.5% $47,367 933 1,272 2,048 1,493 5,474
Discounted @ 19.5% $43,996 928 1,256 2,009 1,455 5,337
Discounted @ 22.5% $41,000 922 1,240 1,972 1,420 5,206
-----------
<CAPTION>
CALENDAR CALENDAR CALENDAR CALENDAR
1997 1998 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
EBIT $14,807 $19,421 $24,798 $31,485
Cash Taxes (4,442) (5,826) (7,439) (9,446)
EBIAT 10,365 13,595 17,359 22,040
Depreciation 2,005 2,229 2,579 3,030
Amortization 1,580 1,580 1,580 1,548
Changes in Working Capital (1,242) (2,415) (2,821) (3,608)
Capital Expenditures (1,500) (1,500) (1,500) (1,500)
Theoretical Unlevered Free Cash Flow 11,208 13,489 17,197 21,510
Present Value of Free Cash Flow
- -------------------------------
Discounted @ 16.5% 8,258 9,336 10,023
Discounted @ 19.5% 7,904 8,433 8,827
Discounted @ 22.5% 7,338 7,637 7,797
<CAPTION>
Terminal Value Using Calendar 2000 EBITDA
- -----------------------------------------
<S> <C> <C> <C> <C> <C>
TEV/EBITDA 5.0 6.0 7.0 8.0
---------------------------------------------------------------------------------------
Calendar 2000 EBITDA $36,063 Future Value: $180,315 $216,378 $252,441 $288,504
---------------------------------------------------------------------------------------
TEV/EBITDA Multiple
--------------------------------------------
5.0 6.0 7.0 8.0
16.5% 84,024 100,829 117,633 134,438
Discount Rate 19.5% 73,993 88,792 103,591 118,389
22.5% 65,366 78,439 91,512 104,585
<CAPTION>
VALUATION TOTAL ENTERPRISE VALUE NET TOTAL EQUITY VALUE
- --------- ----------------------------------------- LESS: ------------------------------------------
TEV/EBITDA MULTIPLE: 5.0 6.0 7.0 8.0 DEBT 5.0 6.0 7.0 8.0
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
16.5% $131,391 $148,196 $165,000 $181,805 $23,771 $107,620 $124,425 $141,229 $158,034
Discount Rate 19.5% 117,990 132,788 147,587 162,386 23,771 94,218 109,017 123,816 138,614
22.5% 106,366 119,439 132,512 145,586 23,771 82,595 95,668 108,741 121,814
</TABLE>
NOTE: Based on management projections.
<PAGE> 48
PROJECT ZETA
Discounted Cash Flow Valuation Analysis
(In thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
- -----------------------
Shares Tendered 6,500
- -----------------------
CALENDAR 1996
-----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
EBIT $2,124 $2,698 $2,590 $2,853 $10,265
Cash Taxes (637) (809) (777) (856) (3,080)
EBIAT 1,487 1,889 1,813 1,997 7,186
Depreciation 386 400 416 435 1,637
Amortization 395 395 395 395 1,580
Changes in Working Capital (1,048) (1,011) 22 (688) (2,725)
Capital Expenditures (250) (300) (350) (400) (1,300)
Theoretical Unlevered Free Cash Flow 970 1,373 2,296 1,739 6,378
Present Value of Free Cash Flow
- ------------------------------- -----------
Total
-----
Discounted @ 16.0% $47,970 934 1,274 2,054 1,499 5,498
Discounted @ 19.0% $44,531 929 1,258 2,015 1,461 5,359
Discounted @ 22.0% $41,476 923 1,243 1,978 1,425 5,227
-----------
<CAPTION>
CALENDAR CALENDAR CALENDAR CALENDAR
1997 1998 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
EBIT $14,807 $19,421 $24,798 $31,485
Cash Taxes (4,442) (5,826) (7,439) (9,446)
EBIAT 10,365 13,595 17,359 22,040
Depreciation 2,005 2,229 2,579 3,030
Amortization 1,580 1,580 1,580 1,548
Changes in Working Capital (1,242) (2,415) (2,821) (3,608)
Capital Expenditures (1,500) (1,500) (1,500) (1,500)
Theoretical Unlevered Free Cash Flow 11,208 13,489 17,197 21,510
Present Value of Free Cash Flow
- -------------------------------
Discounted @ 16.0% 8,329 8,642 9,498 10,241
Discounted @ 19.0% 7,915 8,004 8,575 9,014
Discounted @ 22.0% 7,530 7,428 7,763 7,958
<CAPTION>
Terminal Value Using Calendar 2000 EBITDA
- -----------------------------------------
<S> <C> <C> <C> <C> <C>
TEV/EBITDA 5.0 6.0 7.0 8.0
---------------------------------------------------------------------------------------
Calendar 2000 EBITDA $36,063 Future Value: $180,315 $216,378 $252,441 $288,504
---------------------------------------------------------------------------------------
TEV/EBITDA Multiple
--------------------------------------------
5.0 6.0 7.0 8.0
16.0% 85,850 103,020 120,190 137,361
Discount Rate 19.0% 75,561 90,673 105,785 120,897
22.0% 66,716 80,060 93,403 106,746
<CAPTION>
Valuation Total Enterprise Value Net Total Equity Value
- --------- ----------------------------------------- Less: ------------------------------------------
TEV/EBITDA Multiple: 5.0 6.0 7.0 8.0 Debt 5.0 6.0 7.0 8.0
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
16.0% $133,820 $150,990 $168,160 $185,331 $31,717 $102,103 $119,273 $136,443 $153,613
Discount Rate 19.0% 120,092 135,204 150,316 165,428 31,717 88,375 103,487 118,599 133,711
22.0% 108,192 121,536 134,879 148,222 31,717 76,475 89,819 103,162 116,505
</TABLE>
NOTE: Based on management projections.
<PAGE> 1
AURORA ELECTRONICS, INC.
OFFER TO PURCHASE FOR CASH UP TO
6,500,000 SHARES OF ITS COMMON STOCK
AT
$2.875 PER SHARE
---------------------
THIS OFFER AND THE PRORATION PERIOD WILL EXPIRE ON MARCH 22, 1996 AT 5:00 P.M.
NEW YORK CITY TIME, UNLESS EXTENDED BY THE COMPANY. TENDERING STOCKHOLDERS
HAVE THE RIGHT TO WITHDRAW SHARES TENDERED AT ANY TIME PRIOR TO THE
EXPIRATION OF THE OFFER AND THEY MAY WITHDRAW SHARES AFTER
APRIL 19, 1996 UNLESS ACCEPTED BY THE COMPANY PRIOR TO
THAT DATE.
---------------------
THE OFFER IS SUBJECT TO CERTAIN CONDITIONS, INCLUDING THE MINIMUM TENDER
CONDITION AND THE CONSUMMATION OF THE RECAPITALIZATION AND THE TRANSACTIONS
ASSOCIATED THEREWITH. SEE "THE OFFER -- CERTAIN CONDITIONS OF THE OFFER."
---------------------
Aurora Electronics, Inc. (the "Company") hereby offers to purchase from its
stockholders (the "Stockholders") up to 6,500,000 shares (the "Shares") of its
common stock, $0.03 par value (the "Common Stock"), at $2.875 per Share net to
the seller in cash (the "Purchase Price"), upon the terms and subject to the
conditions set forth in this Offer to Purchase and in the related Letter of
Transmittal (which together constitute the "Offer"), including a condition that
at least 2,000,000 Shares be tendered and not withdrawn (the "Minimum Tender
Condition") and a condition that the Recapitalization (as defined below) and the
transactions associated therewith are consummated. See "The Offer -- Certain
Conditions of the Offer." Tendering Stockholders will not be obligated to pay
any brokerage commissions, solicitation fees or, except as described herein or
in the Letter of Transmittal, transfer taxes with respect to the purchase of
Shares by the Company pursuant to the Offer.
The Offer is being made as part of a comprehensive plan to recapitalize the
Company (the "Recapitalization," and together, the "Offer and
Recapitalization"). The Company and its subsidiary, Aurora Electronics Group,
Inc. ("AEG"), have entered into a commitment letter, dated February 21, 1996
(the "Commitment Letter"), with Chemical Bank, N.A. (the "Bank") under which the
Bank has committed to provide up to $35,000,000 of senior credit facilities to
AEG (the "Senior Credit Facilities"). In addition, the Company has entered into
a Securities Purchase Agreement, dated February 21, 1996 (the "Securities
Purchase Agreement"), with Welsh, Carson, Anderson & Stowe VII, L.P. ("WCAS
VII"), WCAS Capital Partners II, L.P. ("WCAS CP II") and certain other
investors, including two directors of the Company (collectively, the
"Purchasers"), pursuant to which (i) the Purchasers (other than WCAS CP II) have
agreed to purchase between an aggregate of 350,000 and 400,000 shares of the
Company's convertible preferred stock, $0.01 par value (the "Preferred Stock")
at a purchase price of $100 per share, and (ii) WCAS CP II has agreed to
purchase a $10,000,000 10% Senior Subordinated Note due September 2001 (the
"Note") of the Company and between approximately 607,000 and 610,000 shares of
Common Stock for an aggregate purchase price of $10,000,000. See "The Offer and
Recapitalization -- Securities Purchase Agreement." The proceeds from the sale
of such Preferred Stock, Note and Common Stock will be used (a) to provide
financing for the Offer and redeem all the Company's 9 1/4% Senior Subordinated
Notes due November 1996 (the "9 1/4% Notes") and (b) together with borrowings
under the Senior Credit Facilities, to repay existing bank debt and for general
corporate purposes, including working capital and transaction expenses. The
Offer, the transactions contemplated by the Securities Purchase Agreement, the
bank financing contemplated by the Bank Commitment Letter, the repayment of the
Company's existing bank debt and the 9 1/4% Notes and the adoption and
implementation by the Company of the New Option Plan (as hereinafter defined),
taken together, are collectively called the "Transaction."
---------------------
IMPORTANT
Any Stockholder desiring to tender all or any portion of his or her Shares
should either (a) complete and sign the enclosed Letter of Transmittal or a
facsimile copy thereof in accordance with the instructions in the Letter of
Transmittal and forward it, the certificates for such Shares and any other
required documents to the Depositary at its address appearing on the back cover
of this Offer to Purchase or follow the procedure for book-entry delivery set
forth in "The Offer -- Procedure for Tendering Shares -- Book Entry Delivery"
prior to 5:00 p.m. (New York City time) on March 22, 1996 (the "Expiration
Date"), which date may be extended by the Company in its sole discretion, or (b)
request such stockholder's broker, dealer, commercial bank, trust company or
other nominee to effect the transaction by the Expiration Date (as defined
below). A Stockholder having Shares registered in the name of a broker, dealer,
commercial bank, trust company or other nominee should contact such entity if
such Stockholder desires to tender such Shares. Stockholders who desire to
tender those Shares and whose certificates representing such Shares are not
immediately available may tender Shares by following the procedures for
guaranteed delivery set forth in "The Offer -- Procedure for Tendering
Shares -- Guaranteed Delivery."
Questions and requests for assistance may be directed to the Dealer Manager
or the Information Agent at the telephone numbers set forth on the back cover of
this Offer to Purchase. Requests for additional copies of this Offer to
Purchase, the Letter of Transmittal or the Notice of Guaranteed Delivery may
also be directed to the Dealer-Manager or the Information Agent.
The Dealer Manager for the Offer is:
ALEX. BROWN & SONS
INCORPORATED
THE DATE OF THIS OFFER TO PURCHASE IS FEBRUARY 23, 1996
<PAGE> 2
---------------------
THE BOARD OF DIRECTORS OF THE COMPANY HAS RECEIVED AN OPINION DATED
FEBRUARY 21, 1995 FROM ALEX. BROWN & SONS INCORPORATED, WHICH ACTED AS FINANCIAL
ADVISOR TO THE BOARD OF DIRECTORS ("ALEX. BROWN" OR THE "FINANCIAL ADVISOR"),
THAT, AS OF SUCH DATE, THE TRANSACTION IS FAIR, FROM A FINANCIAL POINT OF VIEW,
TO THE HOLDERS OF COMMON STOCK (OTHER THAN WCAS CP II AND ITS AFFILIATES).
STOCKHOLDERS ARE URGED TO READ IN ITS ENTIRETY THE OPINION OF ALEX. BROWN
ATTACHED AS ANNEX A TO THIS OFFER TO PURCHASE.
THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY DETERMINED THAT THE
TRANSACTION IS FAIR TO, AND IN THE BEST INTERESTS OF, THE STOCKHOLDERS, HAS
APPROVED THE MAKING OF THE OFFER AND THE TRANSACTIONS ASSOCIATED THEREWITH AND
RECOMMENDS THAT THE PUBLIC STOCKHOLDERS TENDER A NUMBER OF SHARES SUFFICIENT TO
SATISFY THE MINIMUM TENDER CONDITION (2,000,000 SHARES TOTAL, OR APPROXIMATELY
24% OF AN INDIVIDUAL STOCKHOLDER'S SHARES BASED ON CURRENTLY ISSUED AND
OUTSTANDING SHARES) AND UP TO THE MAXIMUM TENDER (6,500,000 SHARES TOTAL, OR
APPROXIMATELY 78% OF AN INDIVIDUAL STOCKHOLDER'S SHARES BASED ON CURRENTLY
ISSUED AND OUTSTANDING SHARES) (THE "MAXIMUM TENDER").
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS ON BEHALF OF THE COMPANY IN CONNECTION WITH THE OFFER OTHER THAN
THOSE CONTAINED HEREIN OR IN THE LETTER OF TRANSMITTAL. IF GIVEN OR MADE, SUCH
INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY.
---------------------
If a sufficient number of Stockholders tender their Shares pursuant to the
Offer, it is possible that the Company's Common Stock could be delisted from the
American Stock Exchange (the "AMEX"). Although management does not expect
delisting by the AMEX to occur, if it does, the Company expects that the Common
Stock would continue to trade in the over-the-counter market. See "The
Offer -- Listing on the AMEX." The Company does not currently intend to file
with the Securities and Exchange Commission (the "Commission") a notice of the
termination of the registration of the Company's Common Stock under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Accordingly,
the Company will still be required to prepare and file quarterly and annual
reports with the Commission and continue to be subject to certain provisions of
the Exchange Act, such as the short swing profit recovery provisions and the
requirement of furnishing a proxy statement in connection with a Stockholders'
meeting and the related requirement of furnishing an annual report to
Stockholders.
The Company has entered into an agreement with the American Stock Transfer
& Trust Company to act as the depositary (the "Depositary") for Shares tendered
by Stockholders pursuant to the Offer, and has retained D.F. King & Co., Inc. as
the information agent (the "Information Agent"). The Company will pay all fees
and expenses of the Depositary and Information Agent incurred in the Offer. The
Offer is made only pursuant to this Offer to Purchase, including the materials
annexed hereto, and the related Letter of Transmittal.
The Common Stock is listed and principally traded on the AMEX. On February
21, 1996, the last trading day before the Company announced the Offer, the
closing per Share sales price as reported on the AMEX Composite Tape was $1.75.
The Company urges Stockholders to obtain current market quotations for the
Shares.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
SECTION NUMBER
- ----------------------------------------------------------------------------------- ------
<S> <C>
INTRODUCTION....................................................................... 1
TENDER OFFER CONSIDERATIONS FOR STOCKHOLDERS....................................... 2
SPECIAL FACTORS.................................................................... 5
Background of the Offer and Recapitalization..................................... 5
Determination of the Board; Fairness of the Offer and Recapitalization........... 6
Opinion of Alex. Brown & Sons Incorporated....................................... 9
THE OFFER AND RECAPITALIZATION..................................................... 14
Background....................................................................... 14
Source and Amount of Funds....................................................... 15
Senior Credit Facilities......................................................... 15
Securities Purchase Agreement.................................................... 16
Preferred Stock............................................................... 16
The Note...................................................................... 17
Other Terms................................................................... 17
New Stock Option Plan............................................................ 19
Conflicts of Interest............................................................ 20
CERTAIN INFORMATION ABOUT THE COMPANY.............................................. 21
Background....................................................................... 21
Certain Factors Affecting the Company's Business and Operations.................. 22
Additional Information........................................................... 24
Summary Financial Information.................................................... 25
Certain Projections.............................................................. 25
Pro Forma Consolidated Financial Information..................................... 28
Notes to Pro Forma Consolidated Financial Information............................ 30
Price Range of Shares; Dividends................................................. 38
THE OFFER.......................................................................... 38
Number of Shares................................................................. 38
Procedure for Tendering Shares................................................... 40
Proper Tender of Shares....................................................... 40
Signature Guarantees.......................................................... 40
Method of Delivery............................................................ 41
Book-Entry Delivery........................................................... 41
Guaranteed Delivery........................................................... 41
Determination of Validity; Rejection of Shares; Waiver of Defects; No
Obligation to Give Notice of Defects......................................... 41
Conditional Tenders Will Not be Accepted...................................... 42
Withdrawal Rights................................................................ 42
Purchase of Shares and Payment of Purchase Price................................. 42
Certain Conditions of the Offer.................................................. 43
Listing on the AMEX.............................................................. 44
Certain Legal Matters; Regulatory and Foreign Approvals.......................... 45
Certain Federal Income Tax Consequences.......................................... 45
Extension of the Offer; Termination; Amendments.................................. 47
Estimated Fees and Expenses...................................................... 48
Miscellaneous.................................................................... 48
ANNEX
Opinion of Alex. Brown & Sons Incorporated....................................... A-1
</TABLE>
i
<PAGE> 4
To the Holders of Common Stock of Aurora Electronics, Inc.:
INTRODUCTION
Aurora Electronics, Inc. (the "Company") hereby offers to purchase from its
Stockholders up to 6,500,000 Shares at $2.875 per Share net to the sellers in
cash, upon the terms and subject to the conditions set forth in this Offer to
Purchase and in the related Letter of Transmittal (which together constitute the
"Offer"), including a condition that at least 2,000,000 Shares be tendered and
not withdrawn (the "Minimum Tender Condition"), and a condition that the
Recapitalization and the transactions associated therewith are consummated, and
subject to the other terms and conditions set forth in this Offer to Purchase
and in the related Letter of Transmittal. See "The Offer -- Certain Conditions
of the Offer."
The Company will accept for purchase all Shares which are properly tendered
pursuant to the Offer prior to the Expiration Date, subject to proration if more
than 6,500,000 Shares (the "Maximum Tender") are tendered. See "The
Offer -- Number of Shares." The term "Expiration Date" means 5:00 p.m. (New York
City time) on March 22, 1996, unless the Company extends the period of time
during which the Offer is open, in which event the term "Expiration Date" will
refer to the latest time and date to which the Offer has been extended.
Tendering Stockholders will not be obligated to pay brokerage commissions,
solicitation fees or, subject to the Instructions in the Letter of Transmittal,
stock transfer taxes on the Company's purchase of Shares. In addition, the
Company will pay all fees and expenses in connection with the Offer. See "The
Offer -- Estimated Fees and Expenses."
THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY DETERMINED THAT THE
TRANSACTION IS FAIR TO, AND IN THE BEST INTERESTS OF, THE STOCKHOLDERS, HAS
APPROVED THE MAKING OF THE OFFER AND THE TRANSACTIONS ASSOCIATED THEREWITH AND
RECOMMENDS THAT THE COMPANY'S STOCKHOLDERS TENDER A NUMBER OF SHARES SUFFICIENT
TO SATISFY THE MINIMUM TENDER CONDITION (2,000,000 SHARES TOTAL, OR
APPROXIMATELY 24% OF AN INDIVIDUAL STOCKHOLDER'S SHARES BASED ON CURRENTLY
ISSUED AND OUTSTANDING SHARES) AND UP TO THE MAXIMUM TENDER (6,500,000 SHARES
TOTAL, OR APPROXIMATELY 78% OF AN INDIVIDUAL STOCKHOLDER'S SHARES BASED ON
CURRENTLY ISSUED AND OUTSTANDING SHARES). SEE "SPECIAL FACTORS -- DETERMINATION
OF THE BOARD; FAIRNESS OF THE OFFER AND RECAPITALIZATION."
ALEX. BROWN & SONS INCORPORATED, WHICH ACTED AS FINANCIAL ADVISOR TO THE
BOARD OF DIRECTORS, HAS DELIVERED AN OPINION DATED FEBRUARY 21, 1996 TO THE
BOARD OF DIRECTORS THAT, AS OF SUCH DATE, THE TRANSACTION IS FAIR, FROM A
FINANCIAL POINT OF VIEW, TO THE HOLDERS OF COMMON STOCK (OTHER THAN WCAS CP II
AND ITS AFFILIATES). FOR INFORMATION ON, AMONG OTHER THINGS, THE ASSUMPTIONS
MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY ALEX.
BROWN, SEE "SPECIAL FACTORS -- OPINION OF ALEX. BROWN & SONS INCORPORATED."
STOCKHOLDERS ARE URGED TO READ IN ITS ENTIRETY THE OPINION OF ALEX. BROWN
ATTACHED AS ANNEX A TO THIS OFFER TO PURCHASE.
As of February 21, 1996, the Company had issued and outstanding 8,298,293
Shares held of record by 789 persons. In addition, an aggregate of 3,266,577
Shares were issuable upon exercise of stock options and warrants and pursuant to
contractual rights, of which 2,113,524 shares were exercisable or issuable at
prices below the Purchase Price. As of February 21, 1996, the Company's
directors and executive officers as a group beneficially own 870,740 Shares, or
9.6%, which includes 783,906 Shares issuable upon exercise of stock options,
warrants and convertible debentures. The Common Stock is listed and principally
traded on the American Stock Exchange (the "AMEX") under the symbol "AUR." On
February 21, 1996, the last trading day before the Company announced the Offer,
the closing per Share sales price as reported on the AMEX Composite Tape was
$1.75. The Company urges Stockholders to obtain current market quotations for
the Shares.
1
<PAGE> 5
TENDER OFFER CONSIDERATIONS FOR STOCKHOLDERS
Stockholders should carefully consider the following considerations, in
addition to the other information contained in this Offer to Purchase, before
tendering any Shares to the Company.
A. Market Price of the Shares. Since January 1, 1995, the Company's high
and low per Share sales prices as reported on the AMEX Composite Tape were
$5 1/8 and $1 9/16, respectively, as shown in the following table.
<TABLE>
<CAPTION>
HIGH LOW VOLUME
------- ------- ---------
<S> <C> <C> <C>
Calendar 1995:
January........................................... $ 5.125 $ 4.375 442,500
February.......................................... 5.000 4.125 440,700
March............................................. 4.313 3.375 511,100
April............................................. 3.938 3.563 360,400
May............................................... 3.625 2.875 793,100
June.............................................. 3.875 3.125 397,800
July.............................................. 4.688 3.000 788,500
August............................................ 3.750 2.938 479,900
September......................................... 3.875 3.125 335,800
October........................................... 3.250 2.250 438,800
November.......................................... 2.563 1.875 719,800
December.......................................... 2.375 1.750 1,004,800
Calendar 1996:
January........................................... $ 2.375 $ 1.563 400,900
February (through February 21).................... 1.875 1.625 290,900
</TABLE>
The Offer allows Common Stockholders to receive a Purchase Price which is
higher than any price at which the Company's Common Stock has traded for at
least four months prior to the announcement of the Offer. The Purchase Price
represents (a) a premium of 64.3% over the closing sales price of the Shares on
the AMEX on February 21, 1996, the last trading day prior to the public
announcement of the Offer, and (b) a premium of 65.5% over the average closing
sales price of the shares on the AMEX during the four-week period ended February
21, 1996. In addition, the historically thin trading market for the Shares may
restrict the ability of any Public Stockholder to rapidly liquidate any
significant number of Shares, and none of the other alternatives considered by
the Company's Board of Directors (the "Board") offered all the Stockholders an
opportunity to sell a majority of their Shares at a premium price. Stockholders
who sell their Shares pursuant to the Offer will not participate in any future
appreciation in the price of the Common Stock. The Company urges Stockholders to
obtain current market quotations for the Shares of Common Stock.
B. Prospects for the Company:
If the Recapitalization is Not Consummated: The Board has determined that
(i) the ongoing amortization payments of the Company's senior term debt, the
restrictions and conditions imposed on the Company by the Third Amendment, dated
to be effective September 30, 1995 (the "Third Amendment"), to the Senior
Secured Credit Agreement, dated as of May 1994, among the Company, Aurora
Electronics Group, Inc., a wholly-owned subsidiary of the Company ("AEG") and
Banque Paribas in its capacity as Agent on behalf of itself, Banque Indosuez,
Indosuez Capital Funding II, Limited, and Union Bank (the "Senior Secured Credit
Agreement"), (ii) the impending maturity in November 1996 of the Company's
9 1/4% Senior Subordinated Notes (the "9 1/4% Notes"), and (iii) the overall
level of the Company's debt service requirements are making it increasingly
difficult for the Company to provide competitive services to its customers,
execute its strategic plan and capitalize on potential growth opportunities.
After failing to comply with certain covenants in the Senior Secured Credit
Agreement for the quarters ending June 30, 1995 and September 30, 1995, the
Company renegotiated certain terms and conditions and entered into the Third
Amendment. Under
2
<PAGE> 6
the terms of the Third Amendment, the Company agreed to consummate a
recapitalization before June 30, 1996, such recapitalization to include
repayment of the senior term loan and the revolving line of credit under the
Senior Secured Credit Agreement, as well as repayment of the 9 1/4% Notes.
Pursuant to the Third Amendment, in the event the recapitalization does not
occur by June 30, 1996, certain conditions will restrict all future payments due
on all of the Company's subordinated debt and will prohibit all future payments
due on the non-cancelable building lease associated with discontinued
operations. These events could cause a default under the subordinated debt and
building lease. The Company's leverage and debt service requirements are
significant and could affect the Company's ability to grow and its levels of
profitability. Furthermore, the Board and management believe that if the
Recapitalization or other refinancing is not consummated, the Company's
continued leverage and lack of liquidity would adversely affect its
relationships with its customers and suppliers in a material fashion.
If the Recapitalization is Consummated: Management believes that if the
Recapitalization is consummated, the improved liquidity of the business and the
less leveraged capital structure will position the Company such that there will
be a higher likelihood of success in pursuing its strategic objectives and
capitalizing on potential growth opportunities. If the Recapitalization is
completed, management intends to pursue acquisitions of related businesses,
which may be funded with the Senior Credit Facilities if approved by the Bank.
Stockholders who sell their Shares pursuant to the Offer will be unable to
participate in any appreciation in the price of the Common Stock which might
result from any such success. See "Certain Information about the
Company -- Summary Financial Information" and "Certain Information about the
Company -- Certain Projections."
C. The Recapitalization; Senior Status of Preferred Stock. The Offer is
being made as part of a comprehensive plan to recapitalize the Company through
the issuance of debt and equity securities and to refinance certain indebtedness
of the Company and AEG. Stockholders who sell their Shares pursuant to the Offer
will no longer be subject to the risks of an investment in the Company nor will
they be able to participate in any future appreciation in the price of the
Common Stock. The Preferred Stock to be issued as part of the Recapitalization
will rank prior to the Common Stock in any dissolution or liquidation. The
Preferred Stock will accrue dividends at 7% per annum, which accrued dividends
until paid will also rank prior to the Common Stock.
D. Change of Voting Control. On an "as-converted" basis, the holders of the
Preferred Stock will hold a majority of the pro forma shares outstanding,
regardless of whether the Minimum Tender or the Maximum Tender is consummated.
As the holders of the Preferred Stock, WCAS VII and its affiliates will be
entitled to vote on all matters put before the Common Stockholders and, for
purposes of such a vote, each share of Preferred Stock shall be considered on an
"as-converted" basis. In addition, a vote of the holders of a majority of the
outstanding Preferred Stock will be required for (i) creation of a class or
series of preferred stock ranking senior or pari passu to the Preferred Stock,
(ii) amendment of the charter or by-laws of the Company, or (iii) merger or
consolidation of the Company, or sale or lease or other disposition of all or
substantially all the assets of the Company. By virtue of the voting rights of
the Preferred Stock, WCAS VII will be in a position to control the outcome of
substantially all action requiring stockholder approval, including the selection
of a majority of the entire Board of Directors. Because substantially all of the
investment by WCAS VII will be represented, at least for the foreseeable future,
by Preferred Stock, which will rank senior to the Common Stock, WCAS VII and
WCAS CP II may have differing interests from the other holders of the Common
Stock.
E. Expansion of the Board of Directors. As of the closing date, the
Company's five member Board will be expanded by the addition of two designees of
WCAS VII. See "The Offer and Recapitalization -- Purchase Agreement -- Other
Terms." In addition, the Company has agreed that the Board will have no more
than seven directors, and that WCAS VII will have the right to designate two
more of the seven directors. Accordingly, a majority of the Board may consist of
designees of WCAS VII.
3
<PAGE> 7
F. Leverage; Debt Service Requirements; Liquidity. As of December 31, 1995,
the Company had total debt of $48,125,000 and total stockholders' equity of
$13,355,000. In addition, due to the classification of the 9 1/4% Notes as
current liabilities, the Company had a working capital deficit of ($9,224,000)
as of December 31, 1995. The Company's leverage and debt service requirements
are significant and could affect the Company's ability to grow and its levels of
profitability. As a result of its failure to comply with certain financial
covenants in the Senior Secured Credit Agreement, the Company entered into the
Third Amendment. This Third Amendment includes waivers and adjustments to the
financial covenants, a material adverse effect clause and the Company's
agreement to recapitalize prior to June 30, 1996. If the Company does not
recapitalize prior to June 30, 1996, certain conditions will restrict all future
payments due on all of the Company's subordinated debt and will prohibit all
future payments due on the non-cancelable building lease associated with
discontinued operations. These events could cause a default under the
subordinated debt and building lease. Management believes that consummating the
Recapitalization is essential to the Company's financial stability and to
ensuring an adequate level of liquidity in the future.
G. Book Value. As of December 31, 1995, the book value of the Company's
Common Stock was $1.34 per Share, or $13,355,000, and the net tangible book
value of the Company's Common Stock was $(3.51) per Share, or $(35,055,000). If
the Maximum Tender or Minimum Tender occurs, and the Recapitalization is
completed, the book value per Share, assuming the Offer and Recapitalization had
been completed on December 31, 1995 and including the Preferred Stock on an
"as-converted" basis, would be $1.18 and $1.27 per Share, respectively, and the
net tangible book value per Share would be $(2.62) and $(1.73), respectively.
H. Smaller Public Float; Listing on the American Stock Exchange. The
Company's purchase of Shares pursuant to the Offer will further reduce the
number of Shares publicly held and will likely reduce the number of round lot
Stockholders of record. Assuming the Maximum Tender and the issuance of certain
shares under contractual obligations, there will be 2,902,206 shares in the
public float. If a sufficient number of Stockholders tender their Shares
pursuant to the Offer, the Company's Common Stock might be subject to delisting
by the AMEX, and the Company would have the right to cease to be subject to the
regulations of the Exchange Act. See "The Offer -- Listing on the AMEX."
I. Management Stock Option Plan and Employment Agreements; Conflicts of
Interest. In considering the recommendation of the Board with respect to the
Offer and Recapitalization, stockholders should be aware that certain officers
and directors, in recommending that stockholders tender a number of shares
sufficient to satisfy the Minimum Tender Condition and up to the Maximum Tender,
have direct or indirect interests, which are separate from their interests as
Company stockholders and which are not identical to those of unaffiliated
stockholders of the Company. Prior to the Offer and Recapitalization,
management, employees and directors had vested and unvested options and warrants
exercisable into shares representing 7.8% and 3.4% of the pro forma currently
outstanding shares, respectively. After the Offer and Recapitalization, and
pursuant to the New Option Plan, management, employees and directors will have
vested options, unvested options and performance-based, unvested options
exercisable into 6.0%, 5.0% and 6.5% of the pro forma shares outstanding,
respectively, in the event of both the Maximum Tender and the Minimum Tender.
See "The Offer and Recapitalization -- New Option Plan." In addition, two of the
Company's directors are investing in the Preferred Stock and the Company's
senior executives will be entering into new employment agreements in connection
with the Offer and Recapitalization and will receive bonuses from the Company in
respect of 1995 performance payable upon consummation of the Recapitalization.
See "The Offer and Recapitalization -- Conflicts of Interest."
J. Decrease in Availability of Net Operating Loss Carryforwards to Reduce
Future Income Tax Liabilities. As a result of the issuance of the Preferred
Stock in the Recapitalization, the Company will experience an "ownership change"
within the meaning of Section 382 of the Internal Revenue Code of 1986, as
amended (the "Code"), which will substantially decrease the Company's ability to
utilize its Federal income tax net operating loss carryforwards to shelter
future taxable income. Section 382 of the Code generally provides that following
the "ownership change," a corporation's
4
<PAGE> 8
(the "Loss Corporation") ability to use net operating loss carryforwards will be
subject to an annual limitation equal to the product of (i) the fair market
value of the Loss Corporation's stock at the time of the ownership change and
(ii) the long-term tax-exempt rate published by the Internal Revenue Service at
the time of the ownership change (currently 5.46%).
SPECIAL FACTORS
BACKGROUND OF THE OFFER AND RECAPITALIZATION
During June and July 1995, the Board determined that the ongoing
amortization payments of the Company's senior term debt, the restrictions and
conditions imposed on the Company by the Senior Secured Credit Agreement, the
impending maturity of the 9 1/4% Notes, and the overall level of the Company's
debt service requirements were making it increasingly difficult for the Company
to provide competitive services, execute its strategic plan, and capitalize on
potential growth opportunities. In making that determination, the Board took
into consideration that certain of the Company's operations were not meeting
their financial objectives and were not generating sufficient cash flow in light
of the Company's current capital structure. As a result, the Board directed
management to retain a financial advisor in order to develop strategic
alternatives for the Company with respect to the Company's capitalization.
On August 7, 1995, the Company announced that it had retained Alex. Brown &
Sons Incorporated as its financial advisor ("Alex. Brown" or the "Financial
Advisor") to assist in refinancing the Company's debt and rationalizing the
Company's capital structure. As part of its engagement, the Financial Advisor
was directed to assist the Company in developing various alternatives for
generating capital and developing a capital structure appropriate for achieving
the Company's strategic goals.
On August 22, 1995, management presented various strategic alternatives for
consideration by the Board, including a written presentation relating thereto
prepared by the Financial Advisor. As a result of the information presented to
the Board, it was determined that the Company should proceed with a private
placement of subordinated debt securities with warrants to acquire Common Stock
to refinance the Company's bank debt and the 9 1/4% Notes, and to provide
additional working capital.
Following development of a private placement memorandum and a marketing
plan with the Company, the Financial Advisor in conjunction with IndoSuez
Capital, acting as co-placement agents, contacted approximately fifty-five
potential institutional investors over the period from October 1995 to November
1995 with respect to the proposed sale by AEG of $35,000,000 of Senior
Subordinated Notes together with warrants to acquire Common Stock.
In the course of the Company's marketing activities and meetings with
potential investors, the Company and the Financial Advisor were asked on
multiple occasions to consider alternative financing structures which involved a
more extensive recapitalization of the Company, including the issuance of equity
or equity-linked securities in conjunction with subordinated debt securities.
The Board determined that it was in the best interests of Stockholders to
broaden the scope of its possible alternatives to include discussions of a more
extensive recapitalization, as well as continuing to market the subordinated
debt private placement. Pursuant to the Board's instructions, management
contacted, among others, Welsh, Carson, Anderson & Stowe ("WCAS"), and began
discussions with respect to a recapitalization of the Company. WCAS is a private
equity firm with aggregate capital of approximately $3.5 billion. WCAS's
investments are primarily in the information services and health care
industries. Upon the closing of the Offer and the Recapitalization, Richard H.
Stowe and Thomas E. McInerney, general partners of WCAS, will be added to the
Board. See "The Offer and Recapitalization -- Securities Purchase
Agreement -- Other Terms."
5
<PAGE> 9
During November and December 1995, the Company continued discussions with
potential investors regarding both the subordinated debt private placement and a
more extensive recapitalization of the Company. At its regular November meeting,
the Board was updated by management and the Financial Advisor as to the status
of the financing efforts. By the end of December 1995, the Company had narrowed
the scope of its discussions to two investor groups, including WCAS. Both of
these investor groups were focused on a broader recapitalization of the Company
involving both subordinated debt and equity-linked securities, the terms of
which were preliminary in nature at that time. In addition, both transactions
involved a change of control. In view of the Company's operating environment as
well as the positions taken by the Company's existing lenders in connection with
the Third Amendment, management and the Board placed an increasing emphasis on
the timing and the risks of non-consummation associated with any proposed
transaction. In early January 1996, the Company determined that the other
potential investor group would be unlikely to be able to provide an adequate
level of certainty and timeliness in closing a transaction. As a result, the
Company continued discussions with WCAS while attempting to determine whether
any competing financing bids could be developed.
In mid-January 1996, the Company received a competing financing bid from a
new investor group involving the original subordinated debt financing structure,
which did not contemplate a change in control. Throughout January 1996, the
Company continued negotiations with WCAS while also negotiating with this new
investor group.
The Board held two special meetings in January to review the status of the
negotiations with respect to the financing. At the second meeting, on January
23, 1996, management and the Financial Advisor advised the Board that
negotiations with WCAS and the new investor group had reached a point where the
terms and conditions of the transactions were substantially fixed and that both
WCAS and the new investor group might require an agreement of exclusivity in
order to proceed. A discussion then followed regarding the relative merits and
risks of the two transactions, including the following: (a) likelihood of
completion; (b) pro forma capitalization; (c) returns to Stockholders based on
the different capitalizations implicit in the two transactions each of which
encompassed identical operating projections; (d) effect of the different capital
structures on the likelihood of the Company's future success; (e) the cost of
capital; (f) equity dilution; (g) earnings per share dilution; (h) financial
covenants and other restrictions; (i) status of investor due diligence and
detailed negotiations; (j) management equity incentives; (k) each investor
group's relative investment experience and track-record in the Company's
industry; and (l) the other terms and conditions of each transaction.
Based upon these factors, the Board determined at the January 23, 1996
meeting, that each transaction offered significant benefits and would be more
preferable to the continuation of the status quo. The Board directed management
to continue discussions with both parties and, if management concluded that one
transaction was superior to the other, to proceed with further negotiations with
such party with a view towards presenting definitive agreements to the Board for
approval. Over the next few days, both groups clearly indicated they required
exclusivity arrangements. Management, after consultation with the individual
Board members concerning the items referred to in the last sentence of the
preceding paragraph, determined that the Company should enter into exclusive
discussions with WCAS and proceed with final negotiations leading up to the
Offer and Recapitalization.
DETERMINATION OF THE BOARD; FAIRNESS OF THE OFFER AND RECAPITALIZATION
At its meeting held on February 16, 1996, subject to the satisfactory final
resolution of the terms of the transactions, the Board unanimously approved the
Offer and Recapitalization and the transactions associated therewith, and
concluded that the Transaction is fair to, and in the best interests of, the
Stockholders. WCAS had proposed during the last stages of the negotiations that
the conversion price of the Preferred Stock and the per share price in the Offer
should be $0.25 and $1.00, respectively, over the price of the Common Stock on
the last trading day prior to the first
6
<PAGE> 10
public announcement of the transactions. That formula would have resulted in a
conversion price of $1.9375 and an Offer price of $2.6875 based on the February
16, 1996 closing price. The Board authorized Mr. Cowart at the February 16 Board
Meeting to propose a conversion price of $2.125 and an Offer price of $2.875,
which proposal was accepted by WCAS.
In arriving at its determination that the Offer and Recapitalization and
the transactions associated therewith are fair, the Board considered numerous
factors, including those described under "Special Factors -- Background of the
Offer and Recapitalization" and the following:
1. Premium to Stockholders over Market Price of the Shares. Since
January 1, 1995, the Company's Common Stock traded at a high of $5 1/8 and
a low of $1 9/16 as shown in the following table.
<TABLE>
<CAPTION>
HIGH LOW VOLUME
------ ------ ---------
<S> <C> <C> <C>
Calendar 1995:
January........................................... $5.125 $4.375 442,500
February.......................................... 5.000 4.125 440,700
March............................................. 4.313 3.375 511,100
April............................................. 3.938 3.563 360,400
May............................................... 3.625 2.875 793,100
June.............................................. 3.875 3.125 397,800
July.............................................. 4.688 3.000 788,500
August............................................ 3.750 2.938 479,900
September......................................... 3.875 3.125 335,800
October........................................... 3.250 2.250 438,800
November.......................................... 2.563 1.875 719,800
December.......................................... 2.375 1.750 1,004,800
Calendar 1996:
January........................................... $2.375 $1.563 400,900
February (through February 21).................... 1.875 1.625 290,900
</TABLE>
The Offer allows Stockholders to receive a Purchase Price which is
higher than any price at which the Company's Common Stock has traded for at
least four months prior to the announcement of the Offer. The Purchase
Price represents (a) a premium of 64.3% over the closing sales price of the
Common Stock on the AMEX on February 21, 1996, the last trading day prior
to the announcement of the Offer and (b) a premium of 65.5% over the
average closing sales price of the Common Stock on the AMEX during the
four-week period ended February 21, 1996. In addition, the Board noted that
the historically thin trading market for the Common Stock may restrict the
ability of any public Stockholder to rapidly liquidate any significant
number of Shares, and none of the other alternatives considered by the
Board offered all the Stockholders an opportunity to sell a majority of
their Shares at a premium price. The Board also noted that Stockholders who
sell their Shares pursuant to the Offer will not participate in any future
appreciation in the price of the Common Stock. The Company urges
Stockholders to obtain current market quotations for the Common Stock.
2. Leverage; Debt Service Requirements; Liquidity. As of December 31,
1995, the Company had total debt of $48,125,000 and total Stockholders'
equity of $13,355,000. In addition, due to the classification of the 9 1/4%
Notes as current liabilities, the Company had a working capital deficit of
($9,224,000) as of December 31, 1995. The Company's leverage and debt
service requirements are significant and could affect the Company's ability
to grow and its levels of profitability. As a result of its failure to
comply with certain financial covenants in its senior bank lending
agreement, the Company entered into the Third Amendment effective September
30, 1995. The Third Amendment includes waivers and adjustments to the
financial covenants, a material adverse effect clause and the Company's
agreement to consummate a recapitalization
7
<PAGE> 11
prior to June 30, 1996. If the Company does not recapitalize prior to June
30, 1996, certain conditions will restrict all future payments due on all
of the Company's subordinated debt and will prohibit all future payments
due on the non-cancelable building lease associated with discontinued
operations. These events could cause a default under the subordinated debt
and building lease. Management believes that consummating the
Recapitalization is essential to ensuring an adequate level of liquidity in
the future.
3. Book Value. As of December 31, 1995, the book value of the
Company's Common Stock was $1.34 per Share, or $13,355,000, and the net
tangible book value of the Company's Common Stock was $(3.51) per Share, or
$(35,055,000). If the Maximum Tender or Minimum Tender occurs, and the
Recapitalization is completed, the book value per Share, assuming the Offer
and Recapitalization had been completed on December 31, 1995 and including
the Preferred Stock on an "as-converted" basis, would be $1.18 and $1.27
per Share, respectively, and the net tangible book value per Share would be
$(2.62) or $(1.73), respectively.
4. Value of Securities Issued in the Recapitalization: Management,
with the assistance of the Financial Advisor, reviewed with the Board the
terms and conditions of the securities to be issued by the Company in the
Recapitalization, and the Board determined that each of the securities
separately, and when taken together as a single financing, was at least as
favorable as any other financing alternatives available to the Company.
5. Potential Alternatives: The Board determined that the Offer and
Recapitalization represented the best alternative available to the Company.
Alternatives considered included:
(i) Continuation of the status quo. This alternative was deemed
unacceptable because the terms of the Third Amendment require the
Company to complete, prior to June 30, 1996, a recapitalization
including repayment of the senior term loan and the redemption of the
9 1/4% Notes. Pursuant to the Third Amendment, in the event that a
recapitalization does not occur by June 30, 1996, certain conditions
will restrict all future payments due on all of the Company's
subordinated debt and will prohibit all future payments due on the non-
cancelable building lease associated with discontinued operations. These
events could cause a default under the subordinated debt and building
lease. Continuation of the status quo was also deemed unacceptable
because the Board and management believe that the Company cannot take
advantage of current expansion opportunities without a more permanent
capital structure and that the Company's current highly leveraged
position might in the future adversely affect its relationships with its
customers and suppliers.
(ii) A partial recapitalization involving primarily the issuance of
subordinated debt. This alternative was deemed to be better than
continuation of the status quo because it would fulfill the Company's
agreement pursuant to the Third Amendment to recapitalize and resolve
liquidity issues with respect to the redemption of the 9 1/4% Notes.
However, the Company would remain highly leveraged and be potentially
restricted, as a result, with respect to growth and future
profitability.
(iii) A sale of a division of the Company, or a sale of the
Company. This alternative was deemed to be unlikely because the
Company's recent financial performance has been poor and the Company has
only recently completed a major corporate restructuring. In addition,
subsequent to the announcement by the Company on August 7, 1995 that the
Financial Advisor had been retained to explore various alternatives to
recapitalize the Company, there were no firm expressions of interest in
acquiring either of the Company's major divisions, or acquiring or
combining with the Company. In that connection, the Board took into
consideration the $1,000,000 termination fee payable to WCAS in the
event of an alternative transaction. See "The Offer and
Recapitalization -- Securities Purchase Agreement -- Termination;
Termination Fee and Expenses."
8
<PAGE> 12
(iv) Liquidation of the Company. The Board concluded that
liquidation of the Company would result in little, if any, value for
Common Stockholders, given the Company's highly leveraged financial
condition and its negative tangible book value.
6. Fairness Opinion: The Board also considered that on February 16,
1996, the Financial Advisor advised the Board that, subject to the
satisfactory final resolution of the terms of the transactions, it was
prepared to deliver its fairness opinion and on February 21, 1996, the
Financial Advisor delivered its written opinion that, as of such date, the
Transaction is fair, from a financial point of view, to the holders of
Common Stock (other than WCAS CP II and its affiliates). For information
on, among other things, the assumptions made, matters considered and
limitations on the review undertaken by Alex. Brown, see "Special
Factors -- Opinion of Alex. Brown & Sons Incorporated." The Board took into
account that this opinion followed consultations between the Financial
Advisor and various members of management, a thorough review and discussion
of factors the Financial Advisor deemed relevant, and the Financial
Advisor's experience of having been involved in the marketing of the
subordinated debt private placement and party to negotiations with WCAS and
other potential investor groups.
Except for giving significant weight to (a) the analysis of the
alternatives available to the Company and the requirements of the Third
Amendment and the 9 1/4% Notes and (b) the financial advice and the fairness
opinion of the Financial Advisor, the Board did not give any greater weight to
any of the factors considered than to any other factors.
In view of the engagement of the Financial Advisor by the Board as an
independent financial advisor with respect to the fairness, from a financial
point of view, of the Transaction to the holders of Common Stock (other than
WCAS CP II and its affiliates), the Board did not consider it necessary to
retain an unaffiliated representative to act solely on behalf of the Common
Stockholders for the purpose of negotiating the terms of the Offer. In making
their determination, the Board noted that four of the five directors were
considering investing in the Preferred Stock and/or would be entering into new
employment agreements and receiving bonuses. See "The Offer and
Recapitalization -- Conflicts of Interest." Accordingly, the Board conditioned
its determination on the prior approval of the fifth director, William H.
Watkins, Jr. In connection with this determination, Mr. Watkins reviewed the
terms of the Preferred Stock with the Financial Advisor during the February 16,
1996 Board meeting.
OPINION OF ALEX. BROWN & SONS INCORPORATED
The Company retained Alex. Brown on August 7, 1995 to act as the Company's
financial advisor in connection with refinancing its debt and rationalizing the
Company's capital structure. Pursuant to a subsequent amendment to Alex. Brown's
engagement letter, the scope of the engagement was later expanded to include
consideration of the Offer and rendering an opinion to the Board as to the
fairness, from a financial point of view, of the Transaction to the holders of
Common Stock (other than WCAS CP II and its affiliates).
At the February 16, 1996 meeting of the Board, representatives of Alex.
Brown made a presentation with respect to the Offer and Recapitalization and
advised the Board that, subject to the satisfactory final resolution of the
terms of the transactions, Alex. Brown was prepared to deliver its fairness
opinion. On February 21, 1996, Alex. Brown delivered in writing its opinion
that, as of such date, and subject to the assumptions made, matters considered
and limitations set forth in such opinion and summarized below, the Transaction
is fair, from a financial point of view, to the holders of Common Stock (other
than WCAS CP II and its affiliates). In arriving at its opinion, Alex. Brown was
not authorized to solicit, and did not solicit, interest from any party with
respect to the acquisition of the Company or any of its assets nor was Alex.
Brown authorized to negotiate, and did not negotiate, with any parties in
connection with the transactions. No other limitations were imposed by the Board
upon Alex. Brown with respect to the investigations made or procedures followed
by it in rendering its opinion.
9
<PAGE> 13
The full text of Alex. Brown's written opinion dated February 21, 1996 (the
"Alex. Brown Opinion"), which sets forth, among other things, assumptions made,
matters considered and limitations on the review undertaken, is attached hereto
as Annex A and is incorporated herein by reference. Stockholders are urged to
read the Alex. Brown Opinion in its entirety. The Alex. Brown Opinion is
directed to the Board, addresses only the fairness, from a financial point of
view, of the Transaction to the holders of Common Stock (other than WCAS CP II
and its affiliates), and does not constitute a recommendation to the
Stockholders as to whether such Stockholders should tender their shares of
Common Stock in the Offer or how Stockholders should vote at any stockholders'
meeting held in connection with the Recapitalization. The Alex. Brown Opinion
was rendered to the Board for its consideration in determining whether to
approve the Offer and the Recapitalization. The discussion of the Alex. Brown
Opinion in this Offer to Purchase is qualified in its entirety by reference to
the full text of the Alex. Brown Opinion.
In connection with the Alex. Brown Opinion, Alex. Brown (i) reviewed
certain publicly available financial information and other information
concerning the Company, (ii) reviewed certain internal financial analyses and
other information furnished to it by the Company, (iii) held discussions with
members of the senior management of the Company regarding the businesses and
prospects of the Company, (iv) reviewed the reported prices and trading activity
for the Common Stock of the Company, (v) compared certain financial and stock
market information for the Company with similar information for certain other
companies whose securities are publicly traded, (vi) reviewed the financial
terms of certain business combinations and acquisitions of less than 100% of
target companies which it deemed comparable in whole or in part, (vii) reviewed
the terms of drafts dated February 20, 1996 of the Securities Purchase Agreement
and certain related documents, and (viii) performed such other studies and
analyses and considered such other factors as Alex. Brown deemed appropriate.
In conducting its review and arriving at its opinion, Alex. Brown assumed
and relied upon, without independent verification, the accuracy, completeness
and fairness of the information furnished to or otherwise reviewed by or
discussed with it for purposes of rendering its opinion. With respect to the
information relating to the prospects of the Company provided to Alex. Brown by
the Company, Alex. Brown assumed that such information reflected the best
currently available judgments and estimates of the management of the Company as
to the likely future financial performance of the Company. Alex. Brown did not
make an independent evaluation or appraisal of the assets of the Company (nor
has Alex. Brown been furnished with any such appraisals), nor did it make any
physical inspection of the properties or assets of the Company. In arriving at
its opinion, Alex. Brown was not authorized to solicit, and did not solicit,
interest from any party with respect to the acquisition of the Company or any of
its assets, nor was Alex. Brown authorized to negotiate, and Alex. Brown did not
negotiate, with any parties in connection with the transactions. Alex. Brown
noted that the valuation of the Company securities to be outstanding after
completion of the Offer is subject to uncertainties and contingencies,
including, without limitation, the liquidity of the market, if any, for such
securities, prevailing interest rates, market conditions and the condition and
prospects of the Company, all of which are difficult to predict. Alex. Brown
expressed no opinion as to the price at which the Common Stock will trade
subsequent to consummation of the Offer and Recapitalization. In addition, Alex.
Brown expressed no opinion as to the adequacy or fairness of any consideration
to be received in the Transaction by the Purchasers. The Alex. Brown Opinion is
based on market, economic and other conditions as they existed and could be
evaluated as of the date of the opinion letter.
The following is a summary of the analyses performed and factors considered
by Alex. Brown in connection with rendering the Alex. Brown Opinion.
Historical Stock Price Performance. Alex. Brown reviewed and analyzed the
daily closing per share market prices and trading volume for the Common Stock,
from January 1, 1993 to February 16, 1996, from February 15, 1995 to February
16, 1996, and from August 7, 1995 to February 16, 1996. Alex. Brown also
reviewed the daily closing per share market prices of the Common Stock and
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<PAGE> 14
compared the movement of such daily closing prices over the period from February
15, 1995 to February 16, 1996 with the movement of (i) Standard & Poor's 500,
(ii) an index of publicly traded electronics distributors (Arrow Electronics,
Inc., Bell Microproducts, Inc., Cerplex Group, Inc., Jaco Electronics, Inc., and
Wyle Electronics,) (collectively, the "Distributor Companies"), (iii) an index
of publicly traded contract manufacturing companies (ACT Manufacturing, Inc.,
Altron Inc., Benchmark Electronics, Inc., Dovatron International, Flextronics
International Limited, Group Technologies Corp., Jabil Circuit, Inc., Merix
Corp., Reptron Electronics, Inc., and Sanmina Corp.) (collectively, the
"Contract Manufacturing Companies"), and (iv) PC Service Source, Inc. Common
Stock. Alex. Brown noted that, on a relative basis, Aurora underperformed all of
these indices and the PC Service Source, Inc., Common Stock over such period.
This information was presented to give the Board background information
regarding the stock prices of the Company over the periods indicated.
Analysis of Certain Other Publicly Traded Companies. Alex. Brown compared
certain financial information (based on the commonly used valuation measurements
described below) relating to the Company to certain corresponding information
from the Distributor Companies and the Contract Manufacturing Companies. Such
financial information included, among other things, (i) common equity market
valuation; (ii) capitalization ratios; (iii) operating performance; (iv) ratios
of common equity market value as adjusted for debt and cash ("Adjusted Value")
to revenues, earnings before interest expense and income taxes ("EBIT"), and
earnings before interest expenses, income taxes, depreciation and amortization
("EBITDA"), each for the latest twelve months ("LTM"), as derived from publicly
available information; and (v) ratios of common equity market prices per share
("Equity Value") to earnings per share ("EPS"). Alex. Brown noted that, on a LTM
basis, the multiple of Adjusted Value to revenues was 0.5x for the Company,
compared to a range of 0.3x to 0.8x, with a mean of 0.6x and a median of 0.5x,
for the Distributor Companies, and a range of 0.3x to 2.5x, with a mean of 1.2x
and a median of 1.0x for the Contract Manufacturing Companies; the multiple of
Adjusted Value to EBIT was 20.3x for the Company, compared to a range of 6.7x to
11.3x, with a mean of 8.4x and a median of 7.8x, for the Distributor Companies,
and a range of 9.3x to 33.7x, with a mean of 15.1x and a median of 11.3x for the
Contract Manufacturing Companies; and the multiple of Adjusted Value to EBITDA
was 10.3x for the Company; compared to a range of 6.2x to 10.2x, with a mean of
7.6x and a median of 7.1x for the Distributor Companies, and a range of 6.8x to
23.2x, with a mean of 11.5x and a median of 9.5x for the Contract Manufacturing
Companies. Alex. Brown further noted that the ratio of net debt (total debt,
including leases, less cash and equivalents) to market capitalization was 289.1%
for the Company, compared to a range of 16.8% to 88.5%, with a mean of 49.1% and
a median of 43.5% for the Distributor Companies, and a range of (11.4%) to
96.8%, with a mean of 21.2% and a median of 3.9% for the Contract Manufacturing
Companies. Alex. Brown indicated to the Board that (i) comparisons of the
Company's EBIT and EBITDA multiples were relatively less meaningful given the
Company's depressed earnings and cash flow and (ii) the Company's revenue
multiples generally were in the low end of the ranges for the Distributor
Companies and the Contract Manufacturing Companies.
Break-up Analysis. Alex. Brown reviewed and analyzed the Century and ARS
divisions of the Company to determine the range of values for a hypothetical
sale of the Company by business segment. The segment valuations were based on
the comparable company analysis for each segment described above and (i) were
based on annualized results derived from fiscal year 1996 first quarter results
provided by the Company's management, (ii) did not take into account any
discount related to distress and (iii) assumed that the Company's net operating
losses and tax credits would be available and sufficient to shelter any gains in
the hypothetical sales. Alex. Brown advised the Board that each of (i), (ii) and
(iii) in the immediately preceding sentence, as well as the likely requirement
to obtain the consent of the Company's secured lenders to these asset sales,
would make the range of values determined by this analysis less likely to be
obtained in an actual sale of the Company by business segment. This analysis
yielded a range of implied value per the Company common share of $0.18 to $2.57.
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<PAGE> 15
Liquidation Analysis. Alex. Brown performed a liquidation analysis of the
Company to determine the range of values for a hypothetical liquidation of the
Company's assets. Different categories of assets were valued based on a range of
discounts to book value in a liquidation setting. This analysis yielded a range
of implied value per common share of the Company of ($3.36) to ($2.18).
Analysis of Selected Mergers and Acquisitions. Alex. Brown reviewed the
financial terms, to the extent publicly available, of 12 proposed, pending or
completed mergers and acquisitions since June 1994 in the following areas: six
electronics distributor transactions and six contract manufacturing transactions
(together, the "Selected Transactions"). Alex. Brown calculated various
financial multiples based on certain publicly available information for each of
the Selected Transactions and compared them to corresponding financial multiples
of the Company. The six transactions reviewed, in reverse chronological order of
public announcement, were: (i) Premier Industrial by Farnell Electronics
(announced January 1996), (ii) Deerco, Inc. by Richey Cypress Electronics
(announced November 1995), (iii) Added Value Electronics by All American
Semiconductor (announced June 1995), (iv) Vantage Components by Bell
Microproducts (announced May 1995), (v) Anthem Electronics by Arrow Electronics
(announced November 1994) and (vi) Gates/F.A. Distributing by Arrow Electronics
(announced June 1994). The six contract manufacturing transactions, in reverse
chronological order of public announcement, were (i) Assembly Solutions, Inc. by
Sanmina Corporation (announced May 1995), (ii) Assembly and Automation Corp. by
Electronic International (announced April 1995) (iii) Group Technologies'
subsequently terminated proposal to acquire Smarflex Systems (announced March
1995), (iv) nChip, Inc. by Flextronix International (announced October 1994),
(v) the San Jose division of Computronix Corp. by Sanmina Corporation (announced
January 1995) and (vi) Astrio Corporation by Altron Corporation (announced June
1994). Alex. Brown noted that the multiple of total consideration to LTM
revenues for the Selected Transactions was a range of 0.2x to 4.0x, with a mean
of 1.0x and a median of 0.6x, and the multiple of total consideration to LTM
operating income for the Selected Transactions was a range of 9.3x to 12.1x,
with a mean of 10.6x and a median of 10.3x. Alex. Brown further noted that the
multiple of total consideration to LTM net income for the Selected Transactions
was a range of 15.4x to 26.0x, with a mean of 19.1x and a median of 15.8x, and
the multiple of total consideration to book value for the Selected Transactions
ranged from 1.9x to 2.4x, with a mean of 2.2x and a median of 2.2x.
Alex. Brown also presented information published by IDD Mergers &
Acquisitions regarding the average premium over target stock prices one day and
one month before transactions announced from 1990 through the second quarter of
1995. These average one day and one month premiums were: (i) 36.4% and 45.0%,
respectively, for 1990, (ii) 37.8% and 53.3%, respectively, for 1991, (iii)
39.9% and 47.4%, respectively, for 1992, (iv) 34.2% and 42.0%, respectively, for
1993, (v) 36.0% and 44.2%, respectively, for 1994 and (vi) 34.6% and 44.6%,
respectively, for the first half of 1995.
Premium Analysis. Alex. Brown reviewed the premiums over market value,
based on certain publicly available information, in eight change of control
transactions involving less than 100% of the target's outstanding stock (the
"Partial Acquisitions"). The Partial Acquisitions, in reverse chronological
order of public announcements were (i) Minnesota Power & Light's proposed
acquisition of 80% of ADESA Corp. (announced January 1995), (ii) ZENECA Group
PLC's acquisition of 50% of Salick Health Care, Inc. (announced December 1994),
(iii) Roaster's Corp.'s acquisition of 56% of Clucker's Wood Roasted Chicken
(announced July 1994), (iv) Fresenius AG's acquisition of 53% of Gull
Laboratories (announced May 1994), (v) Abaco Casa del Bolsa's acquisition of 51%
of Rodman & Renshaw Capital (announced November 1993), (vi) Hoechst Celanese
Corp.'s acquisition of 51% of Copley Pharmaceutical (announced October 1993),
and (viii) Roche's acquisition of 50% of Genentech (announced February 1990).
Alex. Brown noted that the Partial Acquisitions were effected at a range of
premiums to the target's per share market price four weeks prior to announcement
and to the target's per share market price one day prior to announcement of
14.3% to 90.9%, with a mean of 54.5% and a median of 59.5%, and -5.9% to 67.7%,
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<PAGE> 16
with a mean of 38.2% and a median of 43.6%, respectively, versus transaction
premiums of 53.3% and 64.3%, respectively, for the Offer. All multiples for the
Partial Acquisitions were based on public information available at the time of
announcement of such transaction.
Discounted Cash Flow Analysis. Alex. Brown performed a discounted cash flow
analysis for the Company assuming consummation of the transactions at different
levels of Offer participation. The discounted cash flow approach values a
business based on the current value of the future cash flow that the business
will generate. To establish a current value under this approach, future cash
flow must be estimated and an appropriate discount rate determined. Alex. Brown
used estimates of projected financial performance for the Company (assuming
consummation of the Recapitalization) for the year 1996 through 2000 prepared by
management. For a discussion of management's financial projections, see "Certain
Information about the Company -- Summary Financial Information" and "Certain
Information about the Company -- Certain Projections." Alex. Brown aggregated
the present value of the cash flows through 2000 with the present value of a
range of terminal values. Alex. Brown discounted these cash flows at ranges of
discount rates ranging from 16.5% to 22.5%, in the Minimum Tender, and 16.0% to
22.0%, in the Maximum Tender. The terminal value was computed based on projected
EBITDA in calendar year 2000 and a range of terminal multiples of 5.0x to 8.0x.
Alex. Brown arrived at such discount rates based on its judgment of the weighted
average cost of capital of publicly traded Distributor Companies and Contract
Manufacturing Companies, and arrived at such terminal values based on its review
of the trading characteristics of the common stock of the Contract Manufacturing
Companies and the Distributor Companies. This analysis indicated ranges of
implied values of $2.78 to $5.33 and $2.83 to $5.67 per non-tendered Company
common share in the Minimum Tender and the Maximum Tender, respectively.
Post-Recapitalization Analysis. Alex. Brown utilized the valuation
methodologies described above under "-- Analysis of Certain Other Publicly
Traded Companies," "Analysis of Selected Mergers and Acquisitions" and
"-- Discounted Cash Flow Analysis," and the pro forma post-Recapitalization
balance sheet information of the Company to indicate ranges of implied value per
non-tendered Company common shares in the Minimum Tender and Maximum Tender.
Based on this analysis, Alex. Brown then calculated the range of per Company
common share blended value to tendering stockholders as a function of per share
values of non-tendered shares ranging from $1.00 to $5.00 in different Offer
participation scenarios. For example, in the Minimum Tender, the per share
blended values ranged from $1.40 to $4.55, and in the Maximum Tender, the per
share blended values ranged from $2.30 to $3.53.
No company used in the analysis of other publicly traded companies nor any
transaction used in the analysis of selected mergers and acquisition or premium
analysis summarized above is identical to the Company and Offer and
Recapitalization. Accordingly, such analyses must take into account differences
in the financial and operating characteristics of the selected companies and the
companies in the Selected Transactions and the Partial Acquisitions and the
other factors that would affect the public trading value and acquisition value
of the Selected Companies and the Selected Transactions and Partial
Acquisitions, respectively.
While the foregoing summary describes all analyses and factors that Alex.
Brown deemed material in its presentation to the Board, it is not a
comprehensive description of all analyses and factors considered by Alex. Brown.
The preparation of a fairness opinion is a complex process involving various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of these methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to summary
description. Alex. Brown believes that its analyses must be considered as a
whole and that selecting portions of its analyses and of the factors considered
by it, without considering all analyses and factors, would create an incomplete
view of the evaluation process underlying the Alex. Brown Opinion. In performing
its analyses, Alex. Brown considered general economic, market and financial
conditions and other matters, many of which are beyond the control of the
Company. The analyses performed by Alex. Brown are not necessarily indicative of
actual values or future results, which may be significantly more or less
favorable than
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<PAGE> 17
those suggested by such analyses. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty. Additionally, analyses relating
to the value of a business do not purport to be appraisals or to reflect the
prices at which the business actually may be sold.
Pursuant to a letter agreement dated August 7, 1995 between the Company and
Alex. Brown, as amended on February 15, 1996, if the Offer and Recapitalization
is consummated, the Company has agreed to pay Alex. Brown a fee ("Financial
Advisory Fee") of $575,000 for acting as its financial advisor in connection
with the Transactions, a fee of $100,000 for acting as Dealer Manager for the
Offer and a fee of $125,000, equal to 1.25% of the $10,000,000 of Subordinated
Notes to be issued in the Offer and Recapitalization. The Company has also
previously paid Alex. Brown a retainer of $100,000, which will not be credited
against any Financial Advisory Fee, and has agreed to pay Alex. Brown $250,000
for rendering the Alex. Brown Opinion, which will not be credited against any
Financial Advisory Fee. In addition, the Company has agreed to reimburse Alex.
Brown for its reasonable out-of-pocket expenses incurred in connection with
rendering financial advisory services, including fees and disbursements of its
legal counsel, the Company has agreed to indemnify Alex. Brown and its
directors, officers, agents, employees and controlling persons, for certain
costs, expenses, losses, claims, damages, and liabilities related to or arising
out of its rendering of services under its engagement as financial advisor.
The Board retained Alex. Brown to act as its advisor based upon Alex.
Brown's qualifications, reputation, experience and expertise. Alex. Brown is an
internationally recognized investment banking firm and, as a customary part of
its investment banking business, is engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, private placements and valuations for corporate and other
purposes. Alex. Brown may trade the equity securities of the Company for its own
account and for the account of its customers and, accordingly, may at any time
hold a long or short position in such securities. Alex. Brown regularly
publishes research reports regarding the semiconductor and enabling component
industries and the business and securities of publicly traded companies in the
semiconductor and enabling component industries.
A copy of the discussion materials presented by Alex. Brown to the Board in
connection with the delivery of the Alex. Brown Opinion has been filed as an
exhibit to the Transaction Statement on Schedule 13E-3 (the "Schedule 13E-3")
filed with the Commission with respect to the Offer and may be inspected and
copied, and obtained by mail, from the Commission as set forth in "Certain
Information About the Company -- Additional Information," and will be made
available for inspection and copying at the principal executive offices of the
Company at 2030 Main Street, Suite 1120, Irvine, California 92714 during regular
hours by any interested stockholder of the Company or his or her representative
who has been so designated in writing.
THE OFFER AND RECAPITALIZATION
BACKGROUND
The Company is offering to purchase from its Stockholders up to 6,500,000
Shares of its Common Stock at $2.875 per Share net to the seller in cash, upon
the terms and subject to the conditions set forth in the Offer, including a
condition that at least 2,000,000 Shares be tendered and not withdrawn, and a
condition that the Recapitalization and the transactions associated therewith be
consummated.
The Offer is being made as part of a comprehensive plan to recapitalize the
Company through the issuance of debt and equity securities and to refinance
certain indebtedness of the Company and AEG. The Company and AEG have entered
into a commitment letter dated February 21, 1996 (the "Commitment Letter") with
Chemical Bank, N.A. (the "Bank") under which the Bank has committed to provide
AEG up to $35,000,000 of senior credit facilities (the "Senior Credit
Facilities"). In addition, the Company has entered into the Securities Purchase
Agreement with
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<PAGE> 18
WCAS VII, WCAS CP II and certain other investors, including two directors of the
Company, pursuant to which (i) WCAS VII and the other investors (except WCAS CP
II) have agreed to purchase between an aggregate of 350,000 and 400,000 shares
of the Company's Preferred Stock at a purchase price of $100 per share and (ii)
WCAS CP II has agreed to purchase the $10,000,000 10% Senior Subordinated Note
due September 2001 of the Company and between approximately 607,000 and 610,000
shares of Common Stock, for an aggregate purchase price of $10,000,000. See "The
Offer and Recapitalization -- Purchase Agreement -- The Note." The proceeds from
the sale of such Preferred Stock, Note and Common Stock would be used (a) to
provide financing for the Offer and redeem the 9 1/4% Notes and (b) together
with borrowings under the Senior Credit Facilities, to repay existing bank debt
and for general corporate purposes, including working capital and transaction
expenses. The Recapitalization would close simultaneously with the Offer.
SOURCE AND AMOUNT OF FUNDS
If the Maximum Tender is completed and 6,500,000 Shares are purchased
pursuant to the Offer, the Company estimates that approximately $58,767,000 will
be required to purchase Shares pursuant to the Offer, to repay the existing
senior debt, to redeem the 9 1/4% Notes and to pay the related fees and
expenses. If the Minimum Tender Condition is fulfilled and 2,000,000 of the
Shares are purchased pursuant to the Offer, the Company estimates that
approximately $45,829,000 will be required for these purposes.
The Company plans to obtain funds required for the Offer from the proceeds
of the securities being sold in the Recapitalization. The table below outlines
the sources and uses of funds for both the Maximum Tender and the Minimum
Tender:
<TABLE>
<CAPTION>
MAXIMUM MINIMUM
TENDER TENDER
------- -------
(IN THOUSANDS)
<S> <C> <C>
Sources:
Senior Credit Facilities.................................... $8,767 $ 829
The Note.................................................... 10,000 10,000
The Preferred Stock......................................... 40,000 35,000
------- -------
Total sources....................................... $58,767 $45,829
======= =======
Uses:
Purchase of Shares.......................................... $18,688 $5,750
Repayment of bank term debt................................. 18,000 18,000
Repayment of revolving credit line.......................... 8,550 8,550
Redemption of 9 1/4% Notes.................................. 9,029 9,029
Fees and expenses........................................... 4,500 4,500
------- -------
Total uses.......................................... $58,767 $45,829
======= =======
</TABLE>
SENIOR CREDIT FACILITIES
The Company has received a commitment letter from the Bank for the Senior
Credit Facilities which provides for up to $35,000,000 of borrowings, of which
up to $20,000,000 may be used to partially repay the existing senior credit
facilities and for approved future acquisitions, and up to $15,000,000 will be
available for working capital purposes subject to a customary borrowing base
formula. AEG will be the borrower under the Senior Credit Facilities, which will
be secured by all of the assets and stock of AEG and all current and future
subsidiaries of the Company and will be guaranteed by the Company and such
subsidiaries.
The Senior Credit Facilities will have a term of five years. The
availability of the $20,000,000 line will reduce $1,000,000 each quarter,
commencing June 30, 1996, with the remainder due and payable at maturity. The
Senior Credit Facilities will also provide for mandatory prepayments in the
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<PAGE> 19
event of asset sales, new stock or debt financings and extraordinary receipts.
The interest rate will be based on LIBOR plus 2.75% or the Bank's Base Rate plus
1.25%, with interest rate adjustments based on the ratio of total funded senior
debt to the Company's earnings before interest, taxes, amortization and
depreciation. LIBOR is equal to the one, two, three or six month London
Interbank Offer Rate adjusted at all times for statutory reserves. The Base Rate
is equal to the higher of (a) Bank's Prime Rate, or (b) the Federal Funds
Effective Rate plus 1/2 of 1%. The Company intends to repay the borrowings
incurred as a result of the Offer and Recapitalization through internally
generated cash flow.
The Commitment Letter is subject to various conditions, including
negotiation and execution of definitive loan documentation satisfactory to the
Bank, completion of the Offer and Recapitalization on or prior to April 30,
1996, repayment of AEG's existing bank debt and the call for redemption of the
9 1/4% Notes, satisfactory completion of legal and environmental due diligence,
receipt of and satisfaction with all documentation relating to the Offer and the
Recapitalization and no material adverse change in the Company or AEG, as well
as other customary conditions. It is anticipated that the definitive loan
documentation will include terms, conditions, representations and warranties,
covenants, indemnities and events of default and other provisions customary for
such facilities and transactions of this type. The Senior Credit Facilities will
provide for various financial covenants, which may include a fixed charge
coverage test, a leverage test, an interest coverage test, and capital
expenditure limitations. If the Bank's continuing review of materials regarding
the Offer and the Recapitalization discloses, or the Bank otherwise discovers,
information not previously disclosed to it which the Bank reasonably believes
has or could have a material adverse effect on the Offer and the
Recapitalization or on the Company or AEG, the Bank may, in its sole discretion,
suggest alternative financing amounts or structures or decline to participate in
the new bank financing. It is a condition to the closing under the Securities
Purchase Agreement that the Senior Credit Facilities be in effect and a minimum
of $15,000,000 be available thereunder.
SECURITIES PURCHASE AGREEMENT
Under the terms of the Securities Purchase Agreement, WCAS VII and certain
other investors have agreed to purchase between 350,000 and 400,000 shares of
the Company's Preferred Stock, and WCAS CP II has agreed to purchase the Note
and between 607,000 and 610,000 shares of Common Stock. A summary of the terms
and conditions under which the Preferred Stock and Note will be issued is as
follows:
Preferred Stock: The Preferred Stock is comprised of between 350,000 and
400,000 shares of Convertible Preferred Stock, par value $0.01 per share, issued
at $100 per share. The Preferred Stock has a liquidation preference of $100 per
share plus accrued and unpaid dividends, and ranks senior to the Common Stock
and all other preferred stock of the Company. The Preferred Stock has a dividend
of 7% per share per annum. Dividends will accrue and be payable in cash upon
conversion, liquidation or redemption of the Preferred Stock. Each share of
Preferred Stock is convertible into the Company's Common Stock at a conversion
price of $2.125 per share (the "Conversion Price"). The number of shares of
Common Stock into which the Preferred Stock is convertible and the Conversion
Price are subject to adjustment from time to time upon the occurrence of certain
changes with respect to the Common Stock, including (i) for certain stock splits
and combinations and stock dividends and (ii) on a weighted average formula
basis in the event of certain issuances of Common Stock (or securities
convertible or exchangeable for Common Stock), excluding shares issued pursuant
to employee stock options and previously issued convertible securities, at a
price per share less than the conversion price in effect at the time. The
Company may require the holders of the Preferred Stock to convert into Common
Stock upon the underwritten sale by the Company and/or selling stockholders of
at least $20,000,000 of equity or convertible securities at a sale price or
having a conversion price greater than two times the Conversion Price. The
Preferred Stock is subject to mandatory redemption by the Company on September
30, 2006. The Company must offer to redeem all outstanding shares of the
Preferred Stock on or prior to effecting a sale of all or
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<PAGE> 20
substantially all of the assets or a merger or other transaction involving a 50%
or more ownership change. The price at which such redemption would be effected
would be equal to $100 per share, plus accrued and unpaid dividends to the
redemption date.
The holders of the Preferred Stock are entitled to vote on all matters put
before the Common Stockholders and, for purposes of such a vote, each share of
Preferred Stock shall be considered on an "as-converted" basis. On an
"as-converted" basis, the holders of the Preferred Stock will hold a majority of
the pro forma shares outstanding, regardless of the outcome of the Offer. A vote
of the holders of a majority of the outstanding Preferred Stock is required for
(i) creation of a class or series of preferred stock ranking senior or pari
passu to the Preferred Stock, (ii) amendment of the charter or by-laws of the
Company, or (iii) merger or consolidation of the Company, sale of more than 50%
of the voting equity, or sale or lease or other disposition of all or
substantially all the assets of the Company. The holders of the Preferred Stock
(and shares of Common Stock issued on conversion thereof) would be entitled to
two "demand," two Form S-3 and unlimited "piggyback" registrations of such stock
at the Company's expense.
The Note: WCAS CP II will purchase the Note and between approximately
607,000 and 610,000 shares of Common Stock, for an aggregate purchase price of
$10,000,000. The Note is structurally subordinate in right of payment to all
bank debt of AEG, but would rank senior to all outstanding subordinated
indebtedness, including without limitation the Company's existing 7 3/4%
Convertible Subordinated Debentures and the 7% Subordinated Convertible
Promissory Notes. The Note bears interest at a rate of 10% per annum, payable
semi-annually in arrears in cash. The Note matures on September 30, 2001. If a
Change of Control (as defined in the Note) occurs, (i) the Company would be
required to repay its bank debt or obtain consents of the holders of the bank
debt to the purchase of the Note pursuant to this provision, in either event
within 30 days of such Change of Control, and (ii) thereafter, the Company would
be required to make an offer to the holder or holders of the Notes to purchase
the Notes at 101% of the principal amount thereof plus accrued and unpaid
interest, if any, to the date of the purchase. The Note is redeemable at any
time at the option of the Company, in whole or in part, upon 30 days' notice at
par value plus accrued interest plus a prepayment premium equal to 5% of the
amount prepaid if such prepayment occurs prior to September 30, 1998, or 2.5% of
the amount prepaid if such prepayment occurs on or before September 30, 1999.
After September 30, 1999, the Note may be prepaid at the unpaid principal amount
thereof plus accrued and unpaid interest. The Note contains certain restrictive
covenants, including covenants restricting change-in-control transactions,
limiting indebtedness, restricting certain payments and limiting the incurrence
of liens.
The Purchaser of the Note will also receive shares of Common Stock equal in
number to the product of each of (a) the ratio of the Note issue amount to the
Preferred Stock issue amount, (b) 12.5%, and (c) the sum of (X) the total number
of shares into which the Preferred Stock is convertible and (Y) the total number
of shares received by the holder of the Note pursuant to this calculation.
Assuming the Minimum Tender and the Maximum Tender, the holder of the Note would
receive approximately 610,000 and 607,000 shares of Common Stock, respectively.
The holder of the Common Stock issuable in connection with the Note are, along
with the holders of the Preferred Stock, entitled to two "demand," two Form S-3
and unlimited "piggy back" registrations of such stock at the Company's expense.
Other Terms: The following is a summary of certain provisions of the
Securities Purchase Agreement:
Exclusivity. Prior to the closing date, and subject to any mutual
agreement to terminate the Securities Purchase Agreement, neither the
Company nor any of its officers, directors, agents or representatives may,
directly or indirectly, solicit or initiate any discussions, submissions of
proposals, or offers or negotiations or, subject to the fiduciary
obligations of the Board under applicable law, other obligations of
applicable law or the rules of the AMEX (in each case as advised by counsel
in writing specifying such obligations), participate in any negotiations or
17
<PAGE> 21
discussions with, or provide any information or data or otherwise cooperate
in any way with any person, other than WCAS, concerning any merger,
consolidation, sale of substantial assets, sale of shares of capital stock
or other equity securities, recapitalization, debt restructuring or similar
transaction involving the Company or any of its subsidiaries.
Certain Covenants of the Company. The Company covenants and agrees,
among other things, prior to the closing date, that (i) the Company's
business will be conducted in the ordinary course consistent with past
practice; (ii) the Company will commence the Offer prior to February 28,
1996; (iii) the Company will use its best efforts to enter into the Senior
Credit Facilities, terminate the Company's existing bank senior credit
facility and provide for the redemption of all of the outstanding 9 1/4%
Notes; (iv) the Company will use the proceeds from the Senior Credit
Facilities and the issuance of the securities under the Securities Purchase
Agreement to repay the Company's existing bank senior credit facility,
repay all of the outstanding 9 1/4% Notes and purchase Shares pursuant to
the Offer; (v) the Company will approve and implement the New Option Plan;
and (vi) the Company will file a Certificate of Designations with the
Secretary of State of Delaware to authorize the Preferred Stock.
Certain Covenants of WCAS. WCAS covenants and agrees, for a period of
one year following the closing date, that (a) it will not cause the Company
to effect a "freeze-out merger," a "reverse split" or similar transaction
having the primary intended purpose of forcing the elimination of all
minority interest in the Company, unless an independent committee of
directors approves such transaction and the Company obtains a fairness
opinion from a nationally recognized investment banking firm that the
consideration offered to the public shareholders in such transaction is
fair from a financial point of view. In addition, WCAS covenants and agrees
not to file an application or take actions with the primary intended
purpose of causing no shares to be listed on a national securities exchange
or the NASDAQ NMS or suspending the Company's filing obligations under the
Exchange Act, unless the Offer itself or another transaction would compel
such delisting or suspension by law or rule. Finally, WCAS also covenants
and agrees to vote to approve the New Option Plan and an amendment to the
Company's certificate of incorporation to increase the number of authorized
shares of common stock to accommodate the number of shares issuable upon
conversion of the Preferred Stock.
Conditions Precedent to the Obligations of WCAS. The obligations of
WCAS and the other purchasers under the Securities Purchase Agreement are
subject to the satisfaction of certain conditions, including, but not
limited to, (i) the tender by the Company's stockholders of a sufficient
number of shares to satisfy the Minimum Tender Condition; (ii) the
execution by the Company and the Bank of the Senior Credit Facilities;
(iii) the satisfaction by the Company of its outstanding obligations under
the Existing Credit Facility and the provision by the Company for the
redemption of the 9 1/4% Notes; (iv) the accuracy of the Company's
representations and warranties and the performance by the Company of all
agreements and conditions required to be performed prior to the closing
date; (v) the execution by the Company of the Registration Rights
Agreement; (vi) the approval by the Company of the New Option Plan; and
(vii) the expiration or termination of all applicable waiting periods under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
Change in Composition of the Company's Board of Directors. As of the
closing of the Offer and Recapitalization, the Company is required pursuant
to the Securities Purchase Agreement to nominate up to four candidates for
the Company's Board selected by WCAS VII, and the number of directors on
the Board will be restricted to no more than seven directors. WCAS VII has
advised the Company that they initially intend to designate only Richard H.
Stowe and Thomas E. McInerney, general partners of WCAS, as directors of
the Company.
Indemnification. The Company and WCAS have agreed to indemnify, defend
and hold harmless each other against all damages suffered by the
indemnified party as a result of a breach of a representation, warranty or
covenant under the Securities Purchase Agreement. The
18
<PAGE> 22
Company's indemnification obligations are subject to a $1,000,000 threshold
(that is, the Company is not so obligated unless damages exceed $1,000,000)
and are capped at the aggregate purchase proceeds paid by the Purchasers
for the Preferred Stock and the Note. The representations and warranties of
the Company (except for the representations and warranties related to tax
matters, which survive for applicable statutory periods) survive until
February 7, 1997.
Fees. At the closing of the Offer and Recapitalization, a fee equal to
1% of the aggregate liquidation value of the Preferred Stock and principal
amount of the Note will be payable in cash to WCAS. In addition, the
Company has agreed to pay the reasonable fees and expenses of WCAS's legal
counsel and accountants, as well as reasonable out-of-pocket expenses,
incurred in connection with the Offer and the Recapitalization.
Termination; Termination Fee and Expenses. The Securities Purchase
Agreement may be terminated prior to the closing date by (i) mutual consent
of WCAS and the Company; (ii) by either WCAS or the Company if the
transactions contemplated by the Securities Purchase Agreement have not
been consummated by June 30, 1996; (iii) by either party if the other party
breaches, in any material respect, any of the representations and
warranties contained in the Securities Purchase Agreement or if the other
party breaches, in any material respect, any of the covenants contained in
the Securities Purchase Agreement; (iv) by WCAS if the Board withdraws or
modifies its approval of the Offer after receiving an alternative offer; or
(v) by the Company if such termination is necessary to allow the Company to
enter into an alternative transaction that the Board has determined in good
faith to be more favorable to the Stockholders. If the events in clause
(iv) or (v) occur, the Company has agreed to pay WCAS a termination fee of
$1,000,000 and to pay the reasonable fees and expenses of WCAS's legal
counsel and accountants, as well as reasonable out-of-pocket expenses,
incurred in connection with the Offer and Recapitalization.
THE FOREGOING DESCRIPTIONS OF THE SECURITIES PURCHASE AGREEMENT, THE
PREFERRED STOCK, THE NOTE AND THE REGISTRATION RIGHTS APPLICABLE THERETO ARE
SUMMARIES ONLY OF THE DOCUMENTS THAT FULLY DESCRIBE THE TERMS THEREOF, DO NOT
PURPORT TO BE COMPLETE, AND ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE
SECURITIES PURCHASE AGREEMENT AND THE FORMS OF THE CERTIFICATE OF DESIGNATIONS
AND PREFERENCES OF THE PREFERRED STOCK, THE NOTE AND A REGISTRATION RIGHTS
AGREEMENT, ALL OF WHICH ARE FILED AS EXHIBITS TO THE SCHEDULE 13E-3 AND THE
SCHEDULE 13E-4 AND ARE INCORPORATED HEREIN BY REFERENCE.
NEW STOCK OPTION PLAN
As of the closing date, a new stock option plan (the "New Option Plan")
will be established pursuant to which the Company will offer to exchange a
number of options issued under the New Option Plan (to be determined based on
the number of Shares of Common Stock outstanding after consummation of the
Offer) in exchange for all options outstanding under the Company's current stock
option plans and warrants outstanding pursuant to various warrant agreements.
The total number of options available under the New Option Plan (the "Option
Pool") will be equal to 17.5% of the pro forma shares outstanding at closing.
Assuming the Minimum Tender and the Maximum Tender, the Option Pool will consist
of 5,193,303 and 4,737,270 shares of Common Stock, respectively. The Option Pool
will be divided into three tranches, as follows:
Tranche A Options: Tranche A will be comprised of options equal to
34.3% of the Option Pool (6% of the 17.5% pro forma ownership). Tranche A
Options will vest immediately at Closing, with the exception of Tranche A1
Options described below. 50% of the Tranche A Options issued to each of Jim
C. Cowart, David A. Lahar and John P. Grazer (the "Tranche A1 Options")
will vest ratably on the first day of each month for the 24 months
following the first anniversary of the closing date. If a Tranche A1
Optionholder leaves voluntarily or is terminated for cause prior to the
third anniversary of the closing date, such person's unvested Tranche A1
19
<PAGE> 23
Options will be forfeited. If such Tranche A1 Optionholder's employment
terminates for any other reason, all of such Optionholder's Tranche A1
Options will vest upon termination.
Tranche B Options: Tranche B will be comprised of options equal to
28.6% of the Option Pool (5% of the 17.5% pro forma ownership). Tranche B
Options will vest at the rate of 25% each year over a four-year period
commencing on the closing date, as long as the optionholder remains an
employee of the Company.
Tranche C Options: Tranche C options will be comprised of options
equal to 37.1% of the Option Pool (6.5% of the 17.5% pro forma ownership).
Tranche C Options will vest at the rate of 25% each year over a four-year
period commencing on the sixth anniversary of the date of grant, but are
subject to accelerated vesting according to annual performance-based
targets based on the Company's actual and projected earnings before
interest, taxes, depreciation and amortization less capital expenditures.
The vesting of no more than 25% of the Tranche C Options may accelerate in
any given annual period.
Options issued as of the closing date will be issued with exercise prices
set equal to the Conversion Price of the Preferred Stock. Any options in the
Option Pool reserved for grant and granted at some later date will have an
exercise price not less than the fair market value of the Common Stock at the
date of the grant.
The Company's employees and directors currently have options and warrants
to purchase 1,267,740 shares of Common Stock, all at prices in excess of the
Conversion Price of the Preferred Stock. To the extent that employees do not
accept the Company's offer to exchange their current options for options issued
under the New Option Plan, the Option Pool will be reduced as follows: (a)
Tranche A Options will be reduced by the number of vested options held by
employees not accepting the Company's offer to exchange; and (b) Tranche B
Options will be reduced by the number of unvested options held by employees not
accepting the Company's offer to exchange. The table below contains certain
information with respect to options and warrants currently held by employees and
directors, as well as a calculation of employee and director ownership pro forma
for the Offer and Recapitalization and as though such options and warrants were
exchanged for options under the New Option Plan and exercised:
<TABLE>
<CAPTION>
PRO FORMA FOR THE OFFER AND RECAPITALIZATION
-------------------------------------------------
AS OF DECEMBER 31, 1995 MAXIMUM TENDER MINIMUM TENDER
----------------------- ----------------------- -----------------------
NUMBER OF PRO FORMA PRO FORMA PRO FORMA
OPTIONS PERCENTAGE PERCENTAGE PERCENTAGE
AND OF SHARES NUMBER OF OF SHARES NUMBER OF OF SHARES
WARRANTS OUTSTANDING OPTIONS OUTSTANDING OPTIONS OUTSTANDING
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Vested................... 879,560 7.8% 1,624,207 6.0% 1,780,561 6.0%
Unvested................. 388,180 3.4 1,353,506 5.0 1,483,801 5.0
Performance-based,
unvested............... -- -- 1,759,557 6.5 1,928,941 6.5
--------- ---- --------- ---- --------- ----
Total.......... 1,267,740 11.3% 4,737,270 17.5% 5,193,303 17.5%
========= ==== ========= ==== ========= ====
</TABLE>
CONFLICTS OF INTEREST
In considering the recommendation of the Board with respect to the Offer
and Recapitalization, stockholders should be aware that certain officers and
directors, in recommending that stockholders tender a number of shares
sufficient to satisfy the Minimum Tender Condition and up to the Maximum Tender,
have direct or indirect interests, apart from their interests as Company
stockholders and which are not identical to those of unaffiliated stockholders
of the Company. Such direct or indirect interests of certain officers and
directors include participation in the New Option Plan, the execution of new
employment agreements, bonuses for certain officers and investing in the
Preferred Stock. Prior to the Offer and Recapitalization, management, employees
and directors have
20
<PAGE> 24
vested and unvested options and warrants exercisable into shares representing
7.8% and 3.4%, respectively, of the pro forma currently outstanding shares.
After the Offer and Recapitalization, and pursuant to the New Option Plan,
management, employees and directors will have vested options, unvested options
and performance-based, unvested options exercisable into 6.0%, 5.0% and 6.5%,
respectively, of the pro forma shares outstanding. See "The Offer and
Recapitalization -- New Option Plan." In addition, the Company's senior
executives will be entering into new employment agreements in connection with
the Offer and Recapitalization. The Compensation Committee of the Board of
Directors had previously authorized bonuses of approximately $112,000, $114,000
and $105,000 for Messrs. Cowart, Lahar and Grazer, respectively, in respect of
1995 performance payable in the event that commitments for a satisfactory
refinancing were obtained. The execution of the Securities Purchase Agreement
and the Commitment Letter entitles Messrs. Cowart, Lahar and Grazer to receive
such bonuses. The directors and executive officers of the Company own
approximately 90,000 shares of Common Stock (excluding options, warrants and
other convertible securities). Messrs. Cowart and Cash, each of whom is a
director of the Company, have each agreed to purchase approximately 2,000 shares
of Preferred Stock for cash on the same terms as WCAS CP II. None of the
directors currently intends to tender any shares of Common Stock in the Offer.
Mr. Grazer, an executive officer of the Company, also does not intend to tender
any shares of Common Stock.
CERTAIN INFORMATION ABOUT THE COMPANY
BACKGROUND
The Company provides spare parts distribution and electronics recycling
services to major personal computer manufacturers and field service
organizations. The Company operates worldwide, with facilities in the United
States, Canada, the United Kingdom and the Netherlands.
According to industry sources, the worldwide personal computer installed
base has grown to approximately 132 million units. This large installed base
requires a wide range of support, maintenance, upgrade and recycling services.
Computer manufacturers and field service organizations are seeking outsourcing
solutions to meet these support, maintenance, upgrade and recycling
requirements, preferably from a single source. The Company is one of the few in
the industry offering its customers a wide range of these critical aftermarket
services through integrated outsourcing programs provided on a worldwide basis.
In the third quarter of fiscal 1995, the Company initiated and
substantially completed a corporate reorganization focusing the Company on the
businesses which were determined to have the highest growth potential -- spare
parts distribution and electronics recycling and asset recovery -- and
eliminated unprofitable or non-strategic business activities. The Company now
operates through two divisions:
- Through its Century Division ("Century"), the Company is a leading
provider of spare parts distribution and related services for the computer
maintenance market. Century distributes new and refurbished computer spare
parts, primarily to the field service departments of major computer
original equipment manufacturers, third-party maintenance organizations
and multivendor service organizations, computer resellers and dealers, and
the internal service organizations of large corporations. Century's spare
parts inventories include products from over 500 personal computer and
subsystems manufacturers. Century also provides a broad range of related
support services, such as spare parts inventory management and logistics
programs, warranty and return materials management programs, repair and
advance exchange services, and asset recovery programs (system and
subsystem recycling and remarketing). Major customers include AT&T,
Compucom, Data General, DEC, DecisionOne, EDS, Entex Information Services,
Hewlett-Packard, IBM, and Inacom. Management believes that the Company is
one of the largest independent spare parts distributors in the industry.
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<PAGE> 25
- Through its Asset Recovery Services Division ("ARS"), the Company has
become the world's largest supplier of integrated circuit ("IC") recycling
and recovery services. ARS provides major computer manufacturers with an
environmentally sound, technologically secure and economically beneficial
approach to recovering value from and disposing of their excess, obsolete
or defective electronic products. While technology applications are known
for rapidly changing product designs, the ICs used in these designs
typically have long useful lives and can be recycled into different
applications for a worldwide customer base. Major customers for the
Company's IC recycling services include Apple Computer, Compaq Computer,
Dell Computer, Hewlett-Packard, IBM, and Storage Technology. The Company's
IC recycling and recovery services involve the removal, reconditioning,
testing and remarketing of commonly used ICs, such as memory devices and
various standard microprocessors, which are found on excess, obsolete or
defective printed circuit boards. Reconditioned ICs are sold to a variety
of manufacturers and distributors worldwide. Management believes that ARS
is the largest supplier of these services in the world.
CERTAIN FACTORS AFFECTING THE COMPANY'S BUSINESS AND OPERATIONS
Stockholders should carefully consider the following factors which affect
the Company's business and operations, in addition to the other information
contained in this Offer to Purchase, including the Company's recent filings with
the Commission annexed hereto, before tendering any Shares to the Company.
1. Management of Growth. The Company is experiencing rapid internal growth,
which places significant demands on its operational and personnel resources. If
the Company is unable to manage the Company's growth effectively, the Company's
business could be materially and adversely affected.
2. Leverage; Debt Service Requirements; Liquidity. As of December 31, 1995,
the Company had total debt of $48,125,000 and total Stockholders' equity of
$13,355,000. In addition, due to the classification of the 9 1/4% Notes as
current liabilities, the Company had a working capital deficit of ($9,224,000)
as of December 31, 1995. The Company's leverage and debt service requirements
are significant and could affect the Company's ability to grow and its levels of
profitability. As a result of its failure to comply with certain financial
covenants in its senior bank lending agreement, the Company entered into the
Third Amendment. The Third Amendment includes waivers and adjustments to the
financial covenants, a material adverse effect clause and the Company's
agreement to recapitalize prior to June 30, 1996. If the Company does not
recapitalize prior to June 30, 1996, certain conditions will restrict all future
payments due on all of the Company's subordinated debt and will prohibit all
future payments due on the non-cancelable building lease associated with
discontinued operations. These events could cause a default under the
subordinated debt and building lease. Management believes that consummating the
Recapitalization is important to ensure an adequate level of liquidity in the
future. The Company intends to repay the borrowings incurred as a result of the
Offer and Recapitalization through internally generated cash flow.
3. Market in Early Stages of Development. The Company believes that the
market for its electronics recycling and asset recovery and independent spare
parts distribution services is in the early stages of development and that
awareness among certain potential customers of the availability of these
services may be relatively low. Once customers are made aware of the
availability of and benefits provided by these aftermarket support services,
however, the Company's experience is that customers are generally receptive to
making these services an important element of their manufacturing, post-sales
support and environmental strategies. While the Company believes that it offers
a mutually beneficial solution to large customers' and field service
organizations' spare parts, recycling and asset recovery requirements, and has
therefore targeted these entities as its primary potential customers, there is
no assurance that these entities will choose to make use of these services,
continue to outsource their spare parts, recycling and asset recovery needs, or
choose not to become direct competitors of the Company. In management's opinion,
the barriers to entry in the
22
<PAGE> 26
spare parts distribution and electronics recycling and asset recovery businesses
are related principally to customer relationships, reputation, business know-how
and experience, requiring a sophisticated understanding of environmental
regulations, customer security concerns, management information systems,
databases related to parts identification and cross-referencing, materials
procurement and similar issues. Conversely, the capital investment required to
engage in the spare parts distribution or electronics recycling and asset
recovery businesses would not be likely to impede a large customer or other
experienced industry participant from entering the industry. Moreover, while the
Company has a substantial base of technical know-how, there are no patents or
technological barriers that would prevent others from competing. Consequently,
as the market for the Company's services develops, additional competitors may
enter the market and competition may intensify. Some of the Company's potential
competitors have significantly greater development, marketing and capital
resources than the Company.
4. Historical Operating Losses in Former Business Segments. In fiscal 1994
and 1995, the Company reported operating income before amortization of $4.7
million and $0.8 million, respectively, and net losses of $6.5 million and $15.0
million, respectively. These losses were primarily related to the Company's
former businesses in the memory upgrade and depot repair services industries,
which the Company exited primarily in the third quarter of fiscal 1995. The
Company's core businesses have historically generated substantial operating
earnings. For the first quarter of fiscal 1996, the Company reported operating
income before amortization of $1.7 million and net income of $0.1 million. There
can be no assurance, however, that the level of performance of the Company's
core businesses will continue, or cash flow will be in amounts sufficient to
support the Company's current capital structure without additional financing.
5. Dependence on the Computer Industry. The Company's business is dependent
upon the continued growth, viability and financial stability of its customers
and potential customers in the computer industry. The computer industry has been
characterized by rapid technological change, compressed product life cycles, and
pricing and margin pressures. While these factors could be beneficial to the
Company's business, such factors affecting segments of the computer industry in
general, and the Company's customers in particular, could have an adverse effect
on the Company's business.
6. Inventory Obsolescence. The market for personal computers and subsystems
is characterized by rapidly changing technology and frequent new product
introductions. Innovations and improvements in computer and subsystem design,
engineering and production may shorten the useful lives of existing systems and
associated spare parts. Such rapid changes and improvements in technology,
coupled with the need to maintain sufficient inventory levels of spare parts to
ensure ready availability, subject the Company to risk of inventory
obsolescence. The Company has successfully reduced its exposure to such
inventory obsolescence by maintaining rapid inventory turnover. There can be no
assurance that the Company's efforts in this area will continue to be
successful.
7. Lack of Long-Term Supply Contracts. The Company's success is dependent
on its ability to continue to sell spare parts to its customers and to attract a
reliable stream of recyclable material from its customers. Generally, the
Company distributes spare parts to, and receives its recyclable material from,
customers pursuant to non-exclusive contracts that do not contain guaranteed or
minimum quantities and are subject to cancellation on short notice at the
customer's discretion. There is no assurance that the Company's customers will
continue to do business with the Company. The termination of a material contract
or any substantial decrease in demand for spare parts or of the supply of
recyclable material from significant customers could result in a significant
decrease in the Company's sales.
8. Cyclicality and Price Fluctuation in the IC Industry. The Company's
Asset Recovery Services Division derives its revenue from the sale of integrated
circuits ("ICs"). The IC industry has been characterized in the past by periods
of cyclicality in which prices of commodity ICs, such as DRAMS, SRAMs, EPROMs
and microprocessors, have fluctuated. In periods of IC oversupply, prices have
23
<PAGE> 27
declined. Similarly, one generation of commodity ICs can decline in price as the
next generation comes to market. Significant declines in unit volume demand or
unit pricing could have an adverse effect on the Company's business.
9. Dependence on Key Personnel. The success of the Company is dependent, in
part, upon key management personnel. The loss of the services of any of the
Company's key management personnel could have a material adverse effect on the
Company. Expansion of the Company's business may require additional managers and
employees with industry experience. Competition for skilled management personnel
in the industry is intense. The terms and conditions of the Recapitalization
contemplate the execution of employment agreements and noncompetition agreements
by certain executives.
ADDITIONAL INFORMATION
The Company is subject to the informational reporting requirements of the
Exchange Act and in accordance therewith files reports, proxy statements and
other information with the Commission. Additionally, information concerning the
Company is set forth in the Company's Annual Report on Form 10-K for the year
ended September 30, 1995 and the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1995. The Company has filed a Rule 13e-3 Transaction
Statement on Schedule 13E-3 (the "Schedule 13E-3") with the Commission. The
Company has also filed a Schedule 13E-4 with the Commission. Schedule 13E-3 and
Schedule 13E-4 include certain additional information relating to the Offer. The
reports, proxy statements and other information filed by the Company can be
inspected and copied at the public reference facilities maintained by the
Company with the Commission at Judiciary Plaza, Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission at 7
World Trade Center, New York, New York 10048 and Room 3190, Northwest Atrium
Center, 500 West Madison, Suite 1400, Chicago, Illinois 60661. Copies of such
material also can be obtained at prescribed rates from the Public Reference
Section of the Commission, Washington, D.C. 20549. In addition, material filed
by the Company can be inspected at the offices of the AMEX, 86 Trinity Place,
New York, New York 10006. The Company's Schedule 13E-3 and Schedule 13E-4 are
not available at the Commission's regional offices but were available for
inspection and copying at the office of the Commission in Washington, D.C., as
set forth above.
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<PAGE> 28
SUMMARY FINANCIAL INFORMATION
Set forth below is summary financial information for the Company for the
years ended September 30, 1995 and 1994, and for the quarters ended December 31,
1995 and 1994, derived from the Company's historical financial statements, which
are included in the Company's recent filings with the Commission annexed hereto.
See "Additional Information."
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED QUARTERS ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------- -------------------
1994 1995 1994 1995
-------- -------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Income statement data:
Net revenues.................................. $120,386 $141,852 $ 37,761 $29,920
Gross profit.................................. 26,350 34,582 9,991 7,992
Operating income (loss)....................... 134 (8,304) 2,897 1,378
Net income (loss)............................. (6,518) (15,030) 877 104
Earnings (loss) per share of common stock..... $ (0.87) $ (1.79) $ 0.11 $ 0.01
Balance sheet data at end of period:
Working capital............................... $ 9,013 $ 196 $ 8,912 $(9,224)
Total assets.................................. 102,927 80,716 101,051 79,193
Total liabilities............................. 76,024 68,378 73,271 65,838
Stockholders' equity.......................... 26,903 12,338 27,780 13,355
Book value per share.......................... $ 3.59 $ 1.47 $ 3.45 $ 1.34
</TABLE>
CERTAIN PROJECTIONS
In the course of discussions with potential investors, including WCAS, and
in connection with the Financial Advisor's analysis of the fairness of the Offer
and the Recapitalization, a projection of the Company's future operating
performance for the five calendar years ending December 31, 2000 and its balance
sheets as of those dates was prepared by the Company's management and furnished
to potential investors, including WCAS, and the Financial Advisor. The
projections assume that the Offer and Recapitalization occurred as of January 1,
1996.
THESE PROJECTIONS WERE PREPARED ASSUMING THAT A FINANCING OR
RECAPITALIZATION HAD OCCURRED SUCH THAT THE EXISTING BANK LENDING FACILITY WAS
REPLACED WITH A NEW SENIOR LENDING FACILITY AND THAT THE 9 1/4% NOTES HAD BEEN
REDEEMED. ABSENT SUCH AN ASSUMPTION AND THE FINANCIAL FLEXIBILITY SUCH A
FINANCING OR RECAPITALIZATION SHOULD PROVIDE, THE COMPANY'S OPERATIONS WOULD BE
MORE CURTAILED AND THE PROJECTIONS WOULD HAVE BEEN MATERIALLY DIFFERENT.
The Company does not as a matter of course publicly disclose projections as
to future revenues or earnings and the projections set forth below are included
in this Offer to Purchase only because such information was provided to WCAS and
the Financial Advisor. The projections were not prepared with a view to
compliance with the guidelines established by the American Institute of
Certified Public Accountants regarding Projections. None of the Company, the
Financial Advisor, or the Board assumes any responsibility for the accuracy of
such information. While presented with numerical specificity, these projections
are based upon a variety of assumptions relating to the business of the Company,
which, although considered reasonable by the Company's management, may not be
realized and are subject to significant uncertainties and contingencies, many of
which are beyond the Company's control. Accordingly, it is expected that there
will be differences between actual and projected results, and actual results may
vary materially from those shown.
25
<PAGE> 29
Set forth below is a summary of the projections. The projections give
effect to the Offer and Recapitalization under both the Maximum Tender and the
Minimum Tender.
MAXIMUM TENDER
PROJECTED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,(1)
--------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net revenues.......................... $137,887 $173,362 $218,088 $269,325 $332,715
Gross profit.......................... 38,692 47,112 57,376 68,584 82,576
Operating expenses.................... 26,847 30,726 36,375 42,206 49,543
-------- -------- -------- -------- --------
Operating income before
amortization........................ 11,845 16,387 21,000 26,377 33,033
Amortization.......................... 1,432 1,432 1,432 1,432 1,401
Interest expense, net................. 3,177 2,624 1,956 1,340 1,134
-------- -------- -------- -------- --------
Pre-tax income........................ 7,237 12,330 17,613 23,605 30,498
Income taxes(2)..................... 2,171 3,699 5,284 7,082 9,149
-------- -------- -------- -------- --------
Net income............................ 5,066 8,631 12,329 16,524 21,349
Preferred dividends................... 2,800 2,800 2,800 2,800 2,800
-------- -------- -------- -------- --------
Net income available to Common........ $ 2,266 $ 5,831 $ 9,529 $ 13,724 $ 18,549
======== ======== ======== ======== ========
Earnings per share:
Primary(3).......................... $ 0.47 $ 0.97 $ 1.38 $ 1.75 $ 2.30
Fully-diluted....................... 0.21 0.35 0.48 0.62 0.79
Shares outstanding:
Primary(3).......................... 4,807 6,020 6,927 7,827 8,073
Fully-diluted....................... 23,595 24,843 25,751 26,651 27,794
</TABLE>
PROJECTED BALANCE SHEET DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,(1)
-----------------------------------------------------
1996 1997 1998 1999 2000
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Current assets........................... $24,387 $29,170 $46,938 $ 69,469 $ 73,953
Total assets............................. 78,552 81,838 98,634 120,344 124,087
Total liabilities........................ 49,896 47,351 54,618 62,604 37,397
Stockholders' equity(4).................. 28,656 34,487 44,016 57,740 86,690
</TABLE>
- ---------------
(1) The Company's fiscal year ends September 30.
(2) Assumes 30% effective income tax rate for all periods.
(3) Assumes the Preferred Stock is not a common stock equivalent.
(4) Includes Preferred Stock and assumes conversion of the Company's 7 3/4%
Convertible Subordinated Debentures during the year ending December 31,
2000.
26
<PAGE> 30
MINIMUM TENDER
PROJECTED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,(1)
--------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net revenues........................ $137,887 $173,362 $218,088 $269,325 $332,715
Gross profit........................ 38,692 47,112 57,376 68,584 82,576
Operating expenses.................. 26,847 30,726 36,375 42,206 49,543
-------- -------- -------- -------- --------
Operating income before
amortization...................... 11,845 16,387 21,000 26,377 33,033
Amortization........................ 1,432 1,432 1,432 1,432 1,401
Interest expense, net............... 2,443 2,048 1,497 865 599
-------- -------- -------- -------- --------
Pre-tax income...................... 7,970 12,907 18,071 24,080 31,034
Income taxes(2)................... 2,391 3,872 5,421 7,224 9,310
-------- -------- -------- -------- --------
Net income.......................... 5,579 9,035 12,650 16,856 21,724
Preferred dividends................. 2,450 2,450 2,450 2,450 2,450
-------- -------- -------- -------- --------
Net income available to Common...... $ 3,129 $ 6,585 $ 10,200 $ 14,406 $ 19,274
======== ======== ======== ======== ========
Earnings per share:
Primary(3)........................ $ 0.33 $ 0.62 $ 0.88 $ 1.14 $ 1.50
Fully-diluted..................... 0.22 0.33 0.45 0.58 0.74
Shares outstanding:
Primary(3)........................ 9,375 10,637 11,622 12,611 12,892
Fully-diluted..................... 25,823 27,107 28,093 29,082 30,259
</TABLE>
PROJECTED BALANCE SHEET DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,(1)
------------------------------------------------------
1996 1997 1998 1999 2000
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Current assets........................ $26,058 $38,006 $ 56,086 $ 78,941 $ 85,540
Total assets.......................... 80,183 90,645 107,762 129,805 135,674
Total liabilities..................... 42,772 46,649 53,566 61,203 37,397
Stockholders' equity(4)............... 37,411 43,996 54,196 68,602 98,277
</TABLE>
- ---------------
(1) The Company's fiscal year ends September 30.
(2) Assumes 30% effective income tax rate for all periods.
(3) Assumes the Preferred Stock is not a common stock equivalent.
(4) Includes Preferred Stock and assumes conversion of the Company's 7 3/4%
Convertible Subordinated Debentures during the year ending December 31,
2000.
27
<PAGE> 31
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial statements (the
"Pro Forma Consolidated Financial Statements") are shown for illustrative
purposes only. They are based on the Company's unaudited Consolidated Balance
Sheets as of December 31, 1995, the Consolidated Statement of Operations for the
year ended September 30, 1995, and the unaudited Consolidated Statement of
Operations for the three months ended December 31, 1995, each adjusted as of the
date of such Balance Sheet or as of the beginning of the period covered by such
Statement of Operations for:
(a) the Maximum Tender and the Minimum Tender;
(b) the effects of the Recapitalization;
(c) the payment of the expenses of the Offer and Recapitalization
estimated to be $4,500,000 for financing fees, financial advisor, legal,
accounting and other fees and expenses.
The Pro Forma Consolidated Financial Statements do not purport to be
indicative of the results that would have been obtained had such transactions
been completed as of the assumed dates and for the period presented or that may
be obtained in the future.
28
<PAGE> 32
AURORA ELECTRONICS, INC.
PRO FORMA CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MAXIMUM TENDER MINIMUM TENDER
AS OF ------------------------- ------------------------
DECEMBER 31, PRO FORMA PRO PRO FORMA PRO
1995 ADJUSTMENTS FORMA ADJUSTMENTS FORMA
------------ ----------- -------- ----------- -------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents....... $ 1,451 $ -- $ 1,451 $ -- $ 1,451
Trade receivables, net.......... 12,184 -- 12,184 -- 12,184
Inventories..................... 4,964 -- 4,964 -- 4,964
Deferred income taxes........... 1,487 (1,487)(a) -- (1,487)(a) --
Other current assets............ 1,001 -- 1,001 -- 1,001
-------- --------- -------- --------- -------
Total current
assets.............. 21,087 (1,487) 19,600 (1,487) 19,600
Property, plant and equipment,
net........................... 5,523 -- 5,523 -- 5,523
Deferred income taxes........... 2,202 (2,202)(a) -- (2,202)(a) --
Intangible and other assets..... 50,381 291(b) 50,672 291(b) 50,672
-------- --------- -------- --------- -------
TOTAL ASSETS.......... $ 79,193 $ (3,398) $ 75,795 $ (3,398) $75,795
======== ========= ======== ========= =======
Current portion of long-term
debt.......................... $ 6,075 $ (4,750)(c) $ 1,325 $ (4,750)(f) $ 1,325
9 1/4% Notes.................... 8,788 (8,788)(c) -- (8,788)(f) --
Accounts payable................ 9,428 -- 9,428 -- 9,428
Accrued compensation............ 1,773 -- 1,773 -- 1,773
Accrued interest................ 478 (241)(d) 237 (241)(d) 237
Current portion of reserve for
discontinued operations....... 1,569 -- 1,569 -- 1,569
Other current liabilities....... 2,200 -- 2,200 -- 2,200
-------- --------- -------- --------- -------
Total current
liabilities......... 30,311 (13,779) 16,532 (13,779) 16,532
Reserve for discontinued
operations.................... 2,265 -- 2,265 -- 2,265
Long-term debt.................. 33,262 (3,853)(c) 29,409 (11,795)(f) 21,467
Commitments and contingencies
Preferred Stock................. -- 40,000 40,000 35,000 35,000
Common stockholders' equity..... 13,355 (25,766)(e) (12,411) (12,824)(g) 531
-------- --------- -------- --------- -------
TOTAL LIABILITIES AND
EQUITY.............. $ 79,193 $ (3,398) $ 75,795 $ (3,398) $75,795
======== ========= ======== ========= =======
</TABLE>
29
<PAGE> 33
AURORA ELECTRONICS, INC.
NOTES TO THE PRO FORMA CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995
(IN THOUSANDS)
(UNAUDITED)
(a) Management has adjusted the deferred tax asset due to the likelihood that it
will not be realized as a result of the limitation in the utilization of
the Company's net operating loss carryforwards caused by the change of
ownership.
(b) Reflects the write-off of deferred financing costs ($1,209) previously
capitalized, offset by the capitalization of the financing costs ($1,500)
associated with the Offer and Recapitalization.
(c) Reflects the following changes in short-term and long-term debt resulting
from the Maximum Tender Offer and Recapitalization:
<TABLE>
<S> <C>
Repayment of current portion of existing senior term debt........ $ (4,750)
Redemption of 9 1/4% Notes....................................... (8,788)
Repayment of long-term portion of existing senior term debt...... (13,250)
Repayment of revolving line of credit............................ (8,550)
Issuance of the Note at par...................................... 10,000
Original issue discount on the Note.............................. (820)
Borrowings under the Senior Credit Facilities.................... 8,767
--------
$(17,391)
========
</TABLE>
(d) Represents payment of accrued interest upon the redemption of the 9 1/4%
Notes.
(e) Reflects the following changes to stockholders' equity resulting from the
Maximum Tender Offer and Recapitalization:
<TABLE>
<S> <C>
Write-off of previously deferred financing costs -- note (b)..... $ (1,209)
Write-off of deferred tax asset -- note (a)...................... (3,689)
Repurchase of shares pursuant to the Offer....................... (18,688)
Original issue discount on the Note.............................. 820
Non-financing costs of the Offer and Recapitalization............ (3,000)
--------
$(25,766)
========
</TABLE>
(f) Reflects the following changes in short-term and long-term debt resulting
from the Minimum Tender Offer and Recapitalization:
<TABLE>
<S> <C>
Repayment of current portion of existing senior term debt........ $ (4,750)
Redemption of 9 1/4% Notes....................................... (8,788)
Repayment of long-term portion of existing senior term debt...... (13,250)
Repayment of revolving line of credit............................ (8,550)
Issuance of the Note at par...................................... 10,000
Original issue discount on the Note.............................. (824)
Borrowings under the Senior Credit Facilities.................... 829
--------
$(25,333)
========
</TABLE>
30
<PAGE> 34
AURORA ELECTRONICS, INC.
NOTES TO THE PRO FORMA CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995
(IN THOUSANDS)
(UNAUDITED)
(g) Reflects the following changes to stockholders' equity resulting from the
Minimum Tender Offer and Recapitalization:
<TABLE>
<S> <C>
Write-off of previously deferred financing costs -- note (b)..... $ (1,209)
Write-off of deferred tax asset -- note (a)...................... (3,689)
Repurchase of shares pursuant to the Offer....................... (5,750)
Original issue discount on the Note.............................. 824
Non-financing costs of the Offer and Recapitalization............ (3,000)
--------
$(12,824)
========
</TABLE>
31
<PAGE> 35
AURORA ELECTRONICS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER MAXIMUM TENDER MINIMUM TENDER
ENDING ------------------------ ------------------------
DECEMBER 31, PRO FORMA PRO PRO FORMA PRO
1995 ADJUSTMENTS FORMA ADJUSTMENTS FORMA
------------ ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Net revenues................ $ 29,920 $ -- $ 29,920 $ -- $ 29,920
Cost of sales............... 21,928 -- 21,928 -- 21,928
------- ------ ------- ------ -------
Gross profit.............. 7,992 -- 7,992 -- 7,992
Selling, general and
administrative expenses... 6,248 -- 6,248 -- 6,248
Amortization of intangible
assets.................... 366 -- 366 -- 366
------- ------ ------- ------ -------
Operating income............ 1,378 -- 1,378 -- 1,378
Interest expense............ (1,250) 404(a) (846) 592(f) (658)
Other income (expense),
net....................... 21 -- 21 -- 21
------- ------ ------- ------ -------
Income (loss) before
provision for income
taxes..................... 149 404 553 592 741
Provision for income
taxes.................. 45 122(b) 167 179(b) 224
------- ------ ------- ------ -------
Net income (loss)........... 104 282 386 413 517
Preferred dividend........ -- 700(c) 700 613(c) 613
------- ------ ------- ------ -------
Net income (loss) available
to common................. $ 104 $ (418) $ (314) $ (200) $ (95)
======= ====== ======= ====== =======
Primary net earnings (loss)
per share available to
common.................... $ 0.01 $ (0.08) $ (0.07) $ (0.02) $ (0.01)
Fully-diluted net earnings
(loss) per share(1)....... $ 0.01 $ 0.01 $ 0.02 $ 0.01 $ 0.02
Weighted average number of
common and common
equivalent shares......... 9,997 (5,469)(d) 4,528 (926)(g) 9,071
Fully-diluted weighted
average number of
shares(1)................. 9,997 13,354(e) 23,351 15,545(h) 25,542
</TABLE>
- ---------------
(1) Fully diluted net earnings per share is not presented in historical
financial statements due to its anti-dilutive effects.
32
<PAGE> 36
NOTES TO THE PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1995
(IN THOUSANDS)
(UNAUDITED)
(a) Reflects the following changes to interest expense resulting from the
Maximum Tender Offer and Recapitalization:
<TABLE>
<S> <C>
Elimination of interest on existing senior term debt and revolving
line of credit.................................................... $ 608
Elimination of interest and original issue discount amortization on
9 1/4% Notes...................................................... 272
Elimination of amortization of deferred financing costs............. 98
Estimated interest expense on new Senior Credit Facilities at an
assumed rate of 9.5%.............................................. (208)
Estimated interest expense on the Note.............................. (250)
Estimated amortization of the original issue discount of the Note... (41)
Estimated amortization of capitalized fees and expenses of the Offer
and Recapitalization.............................................. (75)
-----
$ 404
=====
</TABLE>
(b) Reflects the income tax effect of the changes in note (a) and (f).
(c) Reflects the preferred dividend equal to 7% of the Preferred Stock issue
amount.
(d) Reflects the following changes to weighted average number of common and
common equivalent shares outstanding resulting from the Maximum Tender
Offer and Recapitalization:
<TABLE>
<S> <C>
Shares issued in conjunction with the Note.......................... 607
Effect of the vested options under the New Option Plan, assuming the
treasury stock buy-back method utilizing a stock price equal to
the Offer price of $2.875......................................... 424
Shares repurchased in the Offer..................................... (6,500)
------
(5,469)
======
</TABLE>
(e) Reflects the following changes to the fully-diluted weighted average number
of common and common equivalent shares outstanding resulting from the
Maximum Tender Offer and Recapitalization:
<TABLE>
<S> <C>
Shares issuable upon conversion of the Preferred Stock.............. 18,824
Shares issued in conjunction with the Note.......................... 607
Effect of the vested options under the New Option Plan, assuming the
treasury stock buy-back method utilizing a stock price equal to
the Offer price of $2.875......................................... 423
Shares repurchased in the Offer..................................... (6,500)
------
13,354
======
</TABLE>
33
<PAGE> 37
NOTES TO THE PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1995
(IN THOUSANDS)
(UNAUDITED)
(f) Reflects the following changes to interest expense resulting from the
Minimum Tender Offer and Recapitalization:
<TABLE>
<S> <C>
Elimination of interest on existing senior term debt and revolving
line of credit.................................................... $ 608
Elimination of interest and original issue discount amortization on
9 1/4% Notes...................................................... 272
Elimination of amortization of deferred financing costs............. 98
Estimated interest expense on new Senior Credit Facilities at an
assumed rate of 9.5%.............................................. (20)
Estimated interest expense on the Note.............................. (250)
Estimated amortization of the original issue discount of the Note... (41)
Estimated amortization of capitalized fees and expenses of the Offer
and Recapitalization.............................................. (75)
-----
$ 592
=====
</TABLE>
(g) Reflects the following changes to weighted average number of common and
common equivalent shares outstanding resulting from the Minimum Tender Offer
and Recapitalization:
<TABLE>
<S> <C>
Shares issued in conjunction with the Note......................... 610
Effect of the vested options under the New Option Plan, assuming
the treasury stock buy-back method utilizing a stock price equal
to the Offer price of $2.875..................................... 464
Shares repurchased in the Offer.................................... (2,000)
------
(926)
======
</TABLE>
(h) Reflects the following changes to the fully-diluted weighted average number
of common and common equivalent shares outstanding resulting from the
Minimum Tender Offer and Recapitalization:
<TABLE>
<S> <C>
Shares issuable upon conversion of the Preferred Stock............. 16,471
Shares issued in conjunction with the Note......................... 610
Effect of the vested options under the New Option Plan, assuming
the treasury stock buy-back method utilizing a stock price equal
to the Offer price of $2.875..................................... 464
Shares repurchased in the Offer.................................... (2,000)
------
15,545
======
</TABLE>
34
<PAGE> 38
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FISCAL YEAR MAXIMUM TENDER MINIMUM TENDER
ENDING ------------------------- -------------------------
SEPT. 30, PRO FORMA PRO PRO FORMA PRO
1995 ADJUSTMENTS FORMA ADJUSTMENTS FORMA
----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Net revenues............... $ 141,852 $ -- $141,852 $ -- $141,852
Cost of sales.............. 107,270 -- 107,270 -- 107,270
-------- ------- -------- ------- --------
Gross profit............. 34,582 -- 34,582 -- 34,582
Selling, general and
administrative
expenses................. 28,170 -- 28,170 -- 28,170
Amortization of intangible
assets................... 9,073 -- 9,073 -- 9,073
Restructuring charges and
other.................... 4,699 -- 4,699 -- 4,699
-------- ------- -------- ------- --------
Operating income........... (7,360) -- (7,360) -- (7,360)
Interest expense........... (5,522) 2,075(a) (3,447) 2,829(f) (2,693)
Loss on disposition of
assets................... (944) -- (944) -- (944)
Other income (expense),
net...................... 116 -- 116 -- 116
-------- ------- -------- ------- --------
Income (loss) before
provision for income
taxes.................... (13,710) 2,075 (11,635) 2,829 (10,881)
Provision for income
taxes................. 1,320 (200)(b) 1,120 (272)(b) 1,048
-------- ------- -------- ------- --------
Net income (loss).......... (15,030) 2,275 (12,755) 3,101 (11,929)
Preferred dividend....... -- 2,800(c) 2,800 2,450(c) 2,450
-------- ------- -------- ------- --------
Net income (loss) available
to common................ $ (15,030) $ (525) $(15,555) $ 651 $(14,379)
======== ======= ======== ======= ========
Primary net earnings (loss)
per share available to
common................... $ (1.79) $ (3.56) $ (5.35) $ (0.14) $ (1.93)
Fully-diluted net earnings
(loss) per share(1)...... $ (1.79) $ 1.20 $ (0.59) $ 1.79 $ (0.50)
Weighted average number of
common and common
equivalent shares........ 8,379 (5,469)(d) 2,910 (926)(g) 7,453
Fully-diluted weighted
average number of
shares(1)................ 8,379 13,355(e) 21,734 15,545(h) 23,924
</TABLE>
- ---------------
(1) Fully diluted net earnings per share is not presented in historical
financial statements due to its anti-dilutive effects.
35
<PAGE> 39
AURORA ELECTRONICS, INC.
NOTES TO THE PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1995
(IN THOUSANDS)
(UNAUDITED)
(a) Reflects the following changes to interest expense resulting from the
Maximum Tender Offer and Recapitalization:
<TABLE>
<S> <C>
Elimination of interest on existing senior term debt and revolving
credit line..................................................... $ 2,933
Elimination of interest and original issue discount amortization
on 9 1/4% Notes................................................. 1,072
Elimination of amortization of deferred financing costs........... 367
Estimated interest expense on new Senior Credit Facilities at an
assumed rate of 9.5%............................................ (833)
Estimated interest expense on the Note............................ (1,000)
Estimated amortization of the original issue discount of the
Note............................................................ (164)
Estimated amortization of capitalized fees and expenses of the
Offer and Recapitalization...................................... (300)
-------
$ 2,075
=======
</TABLE>
(b) Reflects the income tax effect of the changes in note (a) and (f).
(c) Reflects the preferred dividend equal to 7% of the Preferred Stock issue
amount.
(d) Reflects the following changes to weighted average number of common and
common equivalent shares outstanding resulting from the Maximum Tender
Offer and Recapitalization:
<TABLE>
<S> <C>
Shares issued in conjunction with the Note.......................... 607
Effect of the vested options under the New Option Plan, assuming the
treasury stock buy-back method utilizing a stock price equal to
the Offer price of $2.875......................................... 424
Shares repurchased in the Offer..................................... (6,500)
-------
(5,469)
=======
</TABLE>
(e) Reflects the following changes to the fully-diluted weighted average number
of common and common equivalent shares outstanding resulting from the
Maximum Tender Offer and Recapitalization:
<TABLE>
<S> <C>
Shares issuable upon conversion of the Preferred Stock.............. 18,824
Shares issued in conjunction with the Note.......................... 607
Effect of the vested options under the New Option Plan, assuming the
treasury stock buy-back method utilizing a stock price equal to
the Offer price of $2.875......................................... 424
Shares repurchased in the Offer..................................... (6,500)
-------
13,355
=======
</TABLE>
36
<PAGE> 40
AURORA ELECTRONICS, INC.
NOTES TO THE PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1995
(IN THOUSANDS)
(UNAUDITED)
(f) Reflects the following changes to interest expense resulting from the
Minimum Tender Offer and Recapitalization:
<TABLE>
<S> <C>
Elimination of interest on existing senior term debt and revolving
credit line..................................................... $ 2,933
Elimination of interest and original issue discount amortization
on 9 1/4% Notes................................................. 1,072
Elimination of amortization of deferred financing costs........... 367
Estimated interest expense on new Senior Credit Facilities at an
assumed rate of 9.5%............................................ (79)
Estimated interest expense on the Note............................ (1,000)
Estimated amortization of the original issue discount of the
Note............................................................ (164)
Estimated amortization of capitalized fees and expenses of the
Offer and Recapitalization...................................... (300)
-------
$ 2,829
=======
</TABLE>
(g) Reflects the following changes to weighted average number of common and
common equivalent shares outstanding resulting from the Minimum Tender
Offer and Recapitalization:
<TABLE>
<S> <C>
Shares issued in conjunction with the Note.......................... 610
Effect of the vested options under the New Option Plan, assuming the
treasury stock buy-back method utilizing a stock price equal to
the Offer price of $2.875......................................... 464
Shares repurchased in the Offer..................................... (2,000)
-------
(926)
=======
</TABLE>
(h) Reflects the following changes to the fully-diluted weighted average number
of common and common equivalent shares outstanding resulting from the
Minimum Tender Offer and Recapitalization:
<TABLE>
<S> <C>
Shares issuable upon conversion of the Preferred Stock.............. 16,471
Shares issued in conjunction with the Note.......................... 610
Effect of the vested options under the New Option Plan, assuming the
treasury stock buy-back method utilizing a stock price equal to
the Offer price of $2.875......................................... 464
Shares repurchased in the Offer..................................... (2,000)
-------
15,545
=======
</TABLE>
37
<PAGE> 41
PRICE RANGE OF SHARES; DIVIDENDS
The Common Stock is presently listed and principally traded on the AMEX
under the symbol "AUR." The following table set forth, for the periods
indicated, the high and low per Share sales prices as reported on the AMEX
Composite Tape:
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
1996 1995 1994
----------- -------------- --------------
HIGH LOW HIGH LOW HIGH LOW
---- --- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
First Quarter............................. 3 1/4 1 3/4 5- 3/4 4- 1/4 8- 1/2 6
Second Quarter............................ 1 7/8* 1 5/8* 5- 1/8 3- 3/8 9- 3/8 7- 5/8
Third Quarter............................. -- -- 3- 15/16 2- 7/8 8- 7/8 7
Fourth Quarter............................ -- -- 4- 11/16 2- 15/16 8- 7/8 5- 3/8
</TABLE>
- ---------------
* through February 21, 1996.
Since January 1, 1995, the Common Stock had an average weekly trading
volume of approximately 125,500 shares.
The Company has not paid any cash or stock dividends since September 30,
1993. At present, it is the policy of the Company to retain all earnings for
reinvestment in the Company. Certain restrictions set forth in the Company's
Senior Secured Credit Agreement limit the Company's ability to pay dividends. It
is expected that the Senior Credit Facilities will contain similar limitations.
The terms of the Preferred Stock prohibit any dividends on the Common Stock if
any accrued dividends on the Preferred Stock have not been paid.
STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THE COMMON
STOCK.
As of December 29, 1995, there were 789 Stockholders of record. The Company
believes that many Stockholders hold their shares in "street name" and,
therefore, there may be substantially more beneficial Stockholders than the
number of record holders indicated above.
THE OFFER
NUMBER OF SHARES
Upon the terms and subject to the conditions of the Offer, the Company will
accept for payment (and thereby purchase) up to 6,500,000 Shares of Common
Stock, or such lesser number of Shares as are properly tendered and not
withdrawn in accordance with the terms described in "The Offer -- Withdrawal
Rights" prior to the Expiration Date, at the price of $2.875 per Share. See "The
Offer -- Extension of the Offer, Termination; Amendments" for a description of
the Company's right to extend the period of time during which the Offer is open
and to delay, terminate or amend the Offer and certain limitations thereon and
obligations with respect thereto. See also "The Offer -- Certain Conditions of
the Offer."
The Offer is contingent on the Minimum Tender Condition and on the
consummation of the Recapitalization and the transactions associated therewith,
including the availability of funds pursuant to the Securities Purchase
Agreement and the Senior Secured Credit Agreement (the "Recapitalization
Condition"). As of February 21, 1996, there were 8,298,293 shares of Common
Stock issued and outstanding, held of record by 789 persons. In addition, an
aggregate of 3,266,577 Shares were issuable upon exercise of stock options and
warrants and pursuant to contractual rights, of which 2,113,524 shares were
exercisable or issuable at prices below the Purchase Price.
If on or before the Expiration Date the Minimum Tender Condition, the
Recapitalization Condition or any other condition to the Offer is not satisfied,
then the Company reserves the right to (i) decline to purchase any of the Shares
tendered, terminate the Offer and return all tendered Shares to tendering
shareholders, (ii) extend the Offer and, subject to withdrawal rights set forth
in
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Section 3, retain all tendered Shares until the expiration of the Offer as
extended, or (iii) waive all of the unsatisfied conditions and, subject to
complying with applicable rules and regulations of the Commission, purchase all
Shares validly tendered and not validly withdrawn. In a published release, the
Commission has stated its view that an offer must remain open for a minimum
period of time following a material change in the terms of the offer and that
the waiver of a condition such as the Minimum Tender Condition is a material
change in the terms of an offer. The release states that an offer should remain
open for a minimum of five business days from the date that a material change is
first published, sent or given to shareholders and, that if material changes are
made with respect to information that approaches the significance of price and
share levels, a minimum of ten business days may be required to allow adequate
dissemination and investor response. For purposes of this Offer, a "business
day" means any day other than a Saturday, Sunday or federal holiday, and
consists of the time period from 12:01 a.m. through 12:00 midnight, New York
time. The Company does not presently intend to waive the Minimum Tender
Condition, although it reserves the right to do so. The Company will not waive
the Recapitalization Condition.
The Company expressly reserves the right, in its sole discretion, at any
time or from time to time, and regardless of whether or not any of the
conditions to the Offer have occurred, (i) to extend the period of time during
which the Offer is open and thereby delay acceptance for payment of, and the
payment for, any Shares, by giving oral or written notice of such extension to
the Depositary and (ii) to amend the Offer in any respect (including, without
limitation, by decreasing or increasing the consideration offered in the Offer
to holders of Shares and/or by decreasing the number of Shares being sought in
the Offer) by giving oral or written notice of such amendment to the Depositary.
The rights reserved by the Company in this paragraph are in addition to the
Company's rights to terminate the Offer pursuant to this Offer to Purchase. See
"The Offer -- Certain Conditions to the Offer -- Extension of the Offer;
Termination; Amendment." Any extension, delay in payment, amendment or
termination will be followed as promptly as practicable by a public
announcement, such announcement in the case of an extension to be issued no
later than 9:00 a.m., New York City time, on the next business day after the
previously scheduled Expiration Date in accordance with the public announcement
requirements of Rule 14d-4(c) under the Exchange Act.
If the Company extends the Offer, or if the Company (whether before or
after its acceptance for payment of any Shares) is delayed in its purchase or
payment for Shares or is unable to pay for Shares pursuant to the Offer for any
reason, then, without prejudice to the Company's rights under the Offer, the
Depositary may retain tendered Shares on behalf of the Company, and such Shares
may not be withdrawn except to the extent tendering shareholders are entitled to
withdrawal rights as described herein. See "The Offer -- Withdrawal Rights."
However, the ability of the Company to delay the payment for Shares which it has
accepted for payment is limited by Rule 14e-1 under the Exchange Act, which
requires that a bidder pay the consideration offered or return the securities
deposited by or on behalf of holders of securities promptly after the
termination or withdrawal of such bidder's offer.
Upon the terms and subject to the conditions of the Offer, in the event
that prior to the Expiration Date more than 6,500,000 Shares are properly
tendered, the Company will accept Shares for purchase in the following order of
priority:
(a) first, all Shares properly tendered prior to the Expiration Date
by any stockholder who beneficially owned an aggregate of fewer than 100
Shares at February 23, 1996 (an "Odd Lot Owner"), and who:
(1) tenders all Shares beneficially owned by such Odd Lot Owner
(partial tenders will not qualify for this preference); and
(2) completes the box captioned "Odd Lots" on the Letter of
Transmittal and, if applicable, on the Notice of Guaranteed Delivery;
and
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(b) then, after purchase of all of the foregoing Shares, all other
Shares properly tendered before the Expiration Date on a pro rata basis
(with adjustments to avoid purchases of fractional Shares).
In the event that proration of tendered Shares is required, the Company
will determine the final proration factor as promptly as practicable after the
Expiration Date. Although the Company does not expect to be able to announce the
final results of such proration until approximately seven AMEX trading days
after the Expiration Date, it will announce preliminary results of proration by
press release as promptly as practicable after the Expiration Time. Stockholders
may obtain such preliminary information from the Dealer Manager and may be able
to obtain such information from their brokers.
If any tendered Shares are not purchased pursuant to the Offer for any
reason, or if certificates are submitted for more Shares than are tendered,
certificates for such unpurchased or untendered Shares will be returned (or, in
the case of Shares tendered by book-entry transfer, such Shares will be credited
to an account maintained at one of the Book-Entry Transfer Facilities), without
expense to the tendering stockholder, as promptly as practicable following the
expiration or termination of the Offer.
PROCEDURE FOR TENDERING SHARES
Proper Tender of Shares. For Shares to be properly tendered pursuant to the
Offer, (i) the certificates for such Shares must be delivered to the Depositary
along with the Letter of Transmittal or such Shares must be tendered pursuant to
the procedures for book-entry tenders set forth below and a confirmation of
receipt of such tendered Shares (including an Agent's Message if the tendering
stockholder has not delivered a Letter of Transmittal) must be received by the
Depositary, in each case prior to the Expiration Date, or (ii) the tendering
stockholder must comply with the guaranteed delivery procedure set forth below.
The term "Agent's Message" means a message, transmitted by a Book-Entry Transfer
Facility (as hereinafter defined) to and received by the Depositary and forming
a part of a book-entry confirmation, which states that such Book-Entry Transfer
Facility has received an express acknowledgment from the participant in such
Book-Entry Transfer Facility tendering the Shares which are the subject of such
book-entry confirmation, that such participant has received and agrees to be
bound by the terms of the Letter of Transmittal and that the Company may enforce
such agreement against such participant.
It is a violation of the rules promulgated under the Exchange Act (the
"Rules") for a person, directly or indirectly, to tender shares for his own
account unless, at the time of the tender the person so tendering (i) has a net
long position equal to or greater than the number of Shares tendered and (ii)
will cause such Shares to be delivered in accordance with the terms of the
Offer. The Rules provide a similar restriction applicable to the tender or
guarantee of a tender on behalf of another person. The tender of Shares pursuant
to any one of the procedures described above will constitute the tendering
stockholder's acceptance of the terms and conditions of the Offer as well as the
tendering stockholder's representation and warranty that (i) such stockholder
has a net long position in the Shares being tendered within the meaning of the
Rules, and (ii) the tender of such Shares complies with the Rules.
Signature Guarantees. Signatures on all Letters of Transmittal must be
guaranteed by a member firm of a registered national securities exchange, a
member of the National Association of Securities Dealers, Inc. or a commercial
bank or trust company having an office, branch or agency in the United States
(each an "Eligible Institution"), unless the Shares tendered thereby are
tendered (i) by a registered holder of Shares who has not completed either the
box entitled "Special Delivery Instructions" or the box entitled "Special
Payment Instructions" on the Letter of Transmittal or (ii) for the account of an
Eligible Institution. See the Instructions to the Letter of Transmittal. If the
certificates evidencing Shares are registered in the name of a person or persons
other than the signer of the Letter of Transmittal or if payment is to be made
or certificates for unpurchased or untendered
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<PAGE> 44
Shares are to be returned to a person other than the registered owner, then such
tendered certificates must be endorsed or accompanied by appropriate stock
powers, in either case signed exactly as the name or names of the registered
owner or owners appear on the certificates, with the signatures on the
certificates or stock powers guaranteed by an Eligible Institution. See the
Instructions to the Letter of Transmittal. In all cases, payment for Shares
tendered and accepted for payment pursuant to the Offer will be made only after
timely receipt by the Depositary of certificates for such Shares (or a timely
confirmation of a book-entry transfer of such Shares into the Depositary's
account at one of the Book-Entry Transfer Facilities, as defined below), a
properly completed and duly executed Letter of Transmittal (or facsimile
thereof) and any other documents required by the Letter of Transmittal.
Method of Delivery. The method of delivery of all documents, including
stock certificates, the Letter of Transmittal and any other required documents,
is at the election and risk of the tendering stockholder. If delivery is by
mail, registered mail with return receipt requested, properly insured, is
recommended.
Book-Entry Delivery. The Depositary will establish an account with respect
to the Shares at The Depository Trust Company, Midwest Securities Trust Company
and Philadelphia Depository Trust Company (the "Book-Entry Transfer Facilities")
for purposes of the Offer within two business days after the date of this Offer
to Purchase. Any financial institution that is a participant in the Book-Entry
Transfer Facility's system may make book-entry delivery of Shares by causing
such facility to transfer such Shares into the Depositary's account in
accordance with such facility's procedure for such transfer. Even though
delivery of Shares may be effected through book-entry transfer into the
Depositary's account at the Book-Entry Transfer Facility, a properly completed
and duly executed Letter of Transmittal (or facsimile thereof), with any
required signature guarantees or an Agent's Message, and other required
documents must, in any case, be transmitted to and received by the Depositary at
its address set forth on the back cover of this Offer to Purchase prior to the
Expiration Date or the guaranteed delivery procedure set forth below must be
followed. Delivery of the Letter of Transmittal and any other required documents
to the Book-Entry Transfer Facility does not constitute delivery to the
Depositary.
Guaranteed Delivery. If a stockholder desires to tender Shares pursuant to
the Offer and such stockholder's certificates are not immediately available (or
the procedures for book-entry transfer cannot be completed on a timely basis) or
time will not permit all required documents to reach the Depositary before the
Expiration Date, such Shares nevertheless may be tendered provided that all of
the following conditions are satisfied:
(a) such tender is made by or through an Eligible Institution;
(b) the Depositary receives (by hand, mail or facsimile transmission),
prior to the Expiration Date, a properly completed and duly executed Notice
of Guaranteed Delivery substantially in the form the Company has provided
with this Offer to Purchase; and
(c) the certificates for all tendered Shares in proper form for
transfer (or confirmation of book-entry transfer of such Shares into the
Depositary's account at one of the Book-Entry Transfer Facilities),
together with a properly completed and duly executed Letter of Transmittal
(or facsimile thereof) with any required signature guarantees or an Agent's
Message, and any other documents required by the Letter of Transmittal, are
received by the Depositary within five AMEX trading days after the date the
Depositary received such Notice of Guaranteed Delivery.
Determination of Validity; Rejection of Shares; Waiver of Defects; No
Obligation to Give Notice of Defects. All questions as to the number of Shares
to be accepted and the validity, form, eligibility (including time of receipt)
and acceptance for payment of any tender of Shares will be determined by the
Company in its sole discretion, which determination shall be final and binding
on all parties. The Company reserves the absolute right to reject any or all
tenders of Shares it determines not to be
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<PAGE> 45
in proper form or the acceptance of which or payment for which may, in the
opinion of the Company's counsel, be unlawful. The Company also reserves the
absolute right to waive any of the conditions of the Offer and any defect or
irregularity in the tender of any particular Shares. No tender of Shares will be
deemed to be properly made until all defects and irregularities have been cured
or waived. None of the Company, the Depositary, the Dealer Manager or any other
person is or will be obligated to give notice of any defects or irregularities
in tenders and none of them will incur any liability for failure to give any
such notice.
Conditional Tenders Will Not be Accepted.
WITHDRAWAL RIGHTS
Except as otherwise provided in this section, tenders of Shares pursuant to
the Offer are irrevocable. Shares tendered pursuant to the Offer may be
withdrawn at any time prior to the Expiration Date and, unless theretofore
accepted for payment by the Company, may also be withdrawn after April 19, 1996.
For a withdrawal to be effective, the Depositary must receive on a timely
basis (at its address set forth on the back cover of this Offer to Purchase) a
written, telegraphic or facsimile transmission notice of withdrawal. Such notice
of withdrawal must specify the name of the person having deposited the Shares to
be withdrawn, the number of Shares to be withdrawn and the name of the
registered owner, if different from that of the person who tendered such Shares.
If the certificates have been delivered or otherwise identified to the
Depositary, then, prior to the release of such certificates, the tendering
stockholder must also submit the serial numbers shown on the particular
certificates evidencing the Shares to be withdrawn and the signature on the
notice of withdrawal must be guaranteed by an Eligible Institution (except in
the case of Shares tendered by an Eligible Institution). If Shares have been
tendered pursuant to the procedure for book-entry transfer set forth in "The
Offer -- Procedure for Tendering Shares -- Book-Entry Delivery," the notice of
withdrawal also must specify the name and the number of the account at the
Book-Entry Transfer Facility to be credited with withdrawn Shares and otherwise
comply with the procedures of such facility.
All questions as to the form and validity (including time of receipt) of
notices of withdrawal will be determined by the Company in its sole discretion,
which determination shall be final and binding on all parties. None of the
Company, the Depositary or any other person is or will be obligated to give any
notice of any defects or irregularities in any notice of withdrawal and none of
them will incur any liability for failure to give any such notice. Any Shares
properly withdrawn thereafter will be deemed not tendered for purposes of the
Offer. Withdrawn Shares may, however, be retendered before the Expiration Date
by again following any of the procedures described in "The Offer -- Procedure
for Tendering Shares."
PURCHASE OF SHARES AND PAYMENT OF PURCHASE PRICE
For purposes of the Offer, the Company will be deemed to have accepted for
payment (and thereby purchased), Shares which are tendered and not withdrawn
when, as and if it gives oral or written notice to the Depositary of its
acceptance of such Shares for payment pursuant to the Offer. Upon the terms and
subject to the conditions of the Offer, the Company will purchase up to
6,500,000 Shares (subject to decrease as provided in "The Offer -- Extension of
the Offer, Termination; Amendments") or such lesser number of Shares as are
properly tendered and not withdrawn as permitted in "The Offer -- Withdrawal
Rights" promptly after the Expiration Date.
Payment for Shares purchased pursuant to the Offer will be made by the
Company by depositing the aggregate purchase price therefor with the Depositary,
which will act as agent for tendering Stockholders for the purpose of receiving
payment from the Company and transmitting payment to the tendering Stockholders.
In all cases, payment for Shares accepted for payment pursuant to the Offer will
be made only after timely receipt by the Depositary of certificates for such
Shares (or of a timely confirmation of a book-entry transfer of such Shares into
the Depositary's account at one of
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<PAGE> 46
the Book-Entry Transfer Facilities), a properly completed and duly executed
Letter of Transmittal (or facsimile thereof) and any other required documents.
Certificates for all Shares not purchased will be returned (or, in the case
of Shares tendered by book-entry transfer, such Shares will be credited to the
account maintained with the Book-Entry Transfer Facility by the participant
therein which so delivered such Shares) as soon as practicable after the
Expiration Date without expense to the tendering stockholder. In addition, if
certain events occur, the Company may not be obligated to accept for payment any
Shares pursuant to the Offer. See "The Offer -- Certain Conditions of the
Offer."
The Company will pay all stock transfer taxes, if any, payable on the
transfer to it of Shares purchased pursuant to the Offer; provided, however,
that if payment of the Purchase Price is to be made to, or (in the circumstances
permitted by the Offer) if unpurchased or untendered Shares are to be registered
in the name of, any person other than the person signing the Letter of
Transmittal, the amount of all stock transfer taxes, if any (whether imposed on
the registered owner of such other person), payable on account of the transfer
to such person will be deducted from the payment of the Purchase Price unless
satisfactory evidence of the payment of such taxes or exemption therefrom is
submitted. See the Instructions to the Letter of Transmittal.
The Company will not, under any circumstances, pay interest on the purchase
price.
THE COMPANY MAY BE REQUIRED TO WITHHOLD AND REMIT TO THE INTERNAL REVENUE
SERVICE 31% OF THE GROSS PROCEEDS PAID TO ANY TENDERING STOCKHOLDER OR OTHER
PAYEE WHO FAILS TO COMPLETE FULLY AND SIGN THE FORM W-9 INCLUDED IN THE LETTER
OF TRANSMITTAL (OR, IN THE CASE OF AN EXEMPT FOREIGN PERSON, A FORM W-8.)
CERTAIN CONDITIONS OF THE OFFER
Notwithstanding any other provisions of this Offer, the Company shall not
be required to accept for payment any Shares tendered, and may terminate or
amend the Offer or may postpone the acceptance for payment of Shares tendered,
if at any time on or after February 21, 1996 and at or before the time of
acceptance for payment of any such Shares, any of the following events shall
have occurred (or shall have been determined by the Company to have occurred)
which, in the Company's sole judgment in any such case and regardless of the
circumstances (including any action or omission to act by the Company), makes it
inadvisable to proceed with the Offer or with such acceptance for payment:
(a) the Recapitalization and the transactions associated therewith,
including without limitation, the availability of funds pursuant to the
Securities Purchase Agreement and the Senior Credit Facilities, are not
consummated for any reason; or
(b) the Minimum Tender Condition is not satisfied; or
(c) there shall have been threatened, instituted or pending any
action, proceeding or approval withheld or any statute, rule, regulation,
judgment, order or injunction proposed, sought, enacted, enforced,
promulgated, amended, issued or deemed applicable to the Offer or the
Company or any of its subsidiaries by any court, government or governmental
authority or regulatory or administrative agency, domestic or foreign, (i)
challenging or seeking to make illegal, or delay or otherwise directly or
indirectly restrain or prohibit the making of the Offer, the acceptance for
payment of or payment for some or all of the Shares by the Company or
otherwise directly or indirectly relating in any manner to or affecting the
Offer, or (ii) that otherwise, in the sole judgment of the Company, has or
may have a material adverse effect on the business, financial condition,
income, operations or prospects of the Company and its subsidiaries taken
as a whole or has or may materially impair the contemplated benefits of the
Offer to the Company; or
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(d) there shall have occurred (i) any general suspension of trading
in, or limitation in prices for, securities on any national securities
exchange or in the over-the-counter market, (ii) the declaration of a
banking moratorium or any suspension of payments in respect of banks in the
United States, (iii) the commencement of a war, armed hostilities or other
international or national calamity directly or indirectly involving the
United States, (iv) any limitation by any governmental, regulatory or
administrative authority or agency or any other event that, in the sole
judgment of the Company, might affect the extension of credit by banks or
other lending institutions, or (v) any significant decrease in the market
price of the Common Stock or in the market prices of equity securities
generally in the United States or any change in the general political,
market, economic or financial conditions in the United States or any change
in the general political, market, economic or financial conditions in the
United States or abroad that has or may have material adverse significance
with respect to the Company's business, operations, prospects or ability to
obtain financing generally, or the trading in the Common Stock, or in the
case of any of the foregoing existing at the time of the commencement of
the Offer, in the Company's sole judgment, a material acceleration or
worsening thereof; or
(e) a tender or exchange offer for some or all of the Common Stock
(other than the Offer) or a proposal with respect to a merger,
consolidation, acquisition of all or substantially all the assets of the
Company or its subsidiaries, or other business combination with or
involving the Company or its subsidiaries shall have been proposed to be
made or shall have been made by another person; or
(f) any change or changes shall have occurred (or any development
shall have occurred involving any prospective change or changes) in the
business, assets, liabilities, condition (financial or otherwise),
operations, results of operations or prospects of the Company or its
subsidiaries that, in the sole judgment of the Company, have or may have
material adverse significance with respect to the Company and its
subsidiaries, taken as a whole.
The foregoing conditions are for the Company's sole benefit and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition (including any action or inaction by the Company) and any such
condition may be waived by the Company in whole or in part at any time and from
time to time in its sole discretion prior to its acceptance of Shares for
payment. The Company's failure at any time to exercise any of the foregoing
rights shall not be deemed a waiver of any such right; the waiver of any such
right with respect to other facts and circumstances shall not be deemed a waiver
of any such right with respect to particular facts and circumstances; and each
such right shall be deemed an ongoing right which may be asserted at any time
and from time to time prior to the Company's acceptance of Shares for payment.
Any determination by the Company concerning the events described in this section
shall be final and shall be binding on all parties. See "The Offer -- Extension
of the Offer; Termination; Amendments."
LISTING ON THE AMEX
If a sufficient number of Stockholders tender their Shares pursuant to the
Offer, it is possible that the Company's Common Stock will be delisted from the
AMEX. Even if its Common Stock becomes delisted from the AMEX, the Company
expects that the Common Stock would continue to trade in the over-the-counter
market, and the Company does not currently intend to file with the Commission a
notice of the termination of the registration of the Company's Common Stock
under the Exchange Act. Accordingly, the Company will still be required to
prepare and file quarterly and annual reports with the Commission and will
continue to be subject to certain provisions of the Exchange Act, such as the
short swing profit recovery provisions and the requirement of furnishing a proxy
statement in connection with a Stockholders' meeting and the related requirement
of furnishing an annual report to Stockholders.
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The Common Stock currently is considered a "margin security" under the
rules of the Federal Reserve Board. This has the effect, among other things, of
allowing brokers to extend credit secured by a pledge of Shares of Common Stock.
The Company believes that, depending upon the number of Shares purchased
pursuant to the Offer, the Common Stock may no longer be a "margin security" for
purposes of the Federal Reserve Board's margin regulations if AMEX delists the
Common Stock.
CERTAIN LEGAL MATTERS; REGULATORY AND FOREIGN APPROVALS
Except for the expiration or early termination of the waiting period under
the HSR Act with respect to WCAS VII's acquisition of Preferred Stock in the
Recapitalization (the completion of which is a condition to the Offer), the
Company is not aware of any license, regulatory permit or approval that appears
to be material to its business that is likely to be adversely affected by its
acquisition of Shares pursuant to the Offer or of any approval or other action
by any government or governmental, administrative or regulatory authority or
agency, domestic or foreign, that would be required for the Company's
acquisition or ownership of Shares pursuant to the Offer. The Company intends to
file its application for approval under the HSR Act together with WCAS VII on or
prior to February 29, 1996. Should any such approval or other action be
required, the Company currently contemplates that it will seek such approval or
other action. The Company cannot predict whether it may determine that it is
required to delay the acceptance for payment of Shares tendered pursuant to the
Offer pending the outcome of any such matter. There can be no assurance that any
such approval or other action, if needed, would be obtained without substantial
conditions or that the failure to obtain any such approval or other action might
not result in adverse consequences to the Company's business. The Company's
obligation pursuant to the Offer to accept Shares for payment is subject to
certain conditions. See "The Offer -- Certain Conditions of the Offer."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a general summary of certain of the U.S.
federal income tax consequences of a sale of Shares pursuant to the Offer, based
upon the current tax law. This summary does not purport to cover all aspects of
federal income taxation that may be relevant to Stockholders. In addition,
certain Stockholders (including insurance companies, tax-exempt organizations,
financial institutions, foreign persons and broker dealers) may be subject to
special rules not discussed below.
The disposition of Shares by a stockholder pursuant to the Offer will
generally be a taxable transaction for U.S. federal income tax purposes under
the Internal Revenue Code of 1986, as amended (the "Code"), and may also be
treated as a taxable transaction under applicable state, local and foreign tax
laws.
For U.S. federal income tax purposes, the disposition of Shares pursuant to
the Offer will be treated as a taxable sale of the Shares by the stockholder if
the receipt of such cash (a) is "substantially disproportionate" with respect to
the stockholder, (b) is "not essentially equivalent to a dividend" with respect
to the stockholder, or (c) results in a "complete termination" of the
stockholder's stock interest in the Company (collectively, the "Code Section 302
Tests"). If any of the Code Section 302 Tests is met, the stockholder will
recognize gain or loss equal to the difference between the amount of cash
received by him pursuant to the Offer and his basis in the Shares sold. Such
gain or loss will be capital gain or loss (assuming the Shares are held as a
capital asset), and will be long-term if the Shares sold were held for more than
one year.
If none of the Code Section 302 Tests is satisfied, the stockholder will be
treated as having received a dividend in an amount equal to the full amount of
cash received pursuant to the Offer, assuming the Company has (as it believes it
does) sufficient current or accumulated earnings and profits. In that event, the
tax basis of Shares purchased by the Company pursuant to the Offer will
generally be added to the tax basis of Shares that the stockholder continues to
own; this increase may cause any subsequent taxable sale of such Shares to give
rise to a loss, which may be a capital
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loss if the Shares are held as a capital asset. (In the case of a corporate
stockholder, any amount treated as a dividend (i) will generally be eligible for
a 70% dividends received deduction under Section 243 of the Code, subject to the
limitations provided in Sections 246 and 246A of the Code, and (ii) may
constitute an "extraordinary dividend" under Section 1059 of the Code.)
In order to avoid dividend treatment of the cash received from the Company,
the disposition of Shares by a stockholder pursuant to the Offer must meet one
of the three Code Section 302 Tests. In determining whether any of the Code
Section 302 Tests is satisfied, a stockholder must take into account not only
shares of Company stock that are actually owned by him or her, but also shares
that are constructively owned by him or her within the meaning of Section 318 of
the Code. Under Section 318, a stockholder may constructively own (i) shares of
stock actually owned, and in some cases constructively owned, by certain related
individuals and certain related entities in which the stockholder, a related
party or a related entity has in interest, and (ii) shares of stock which such
Stockholder has the right to acquire.
The disposition of Shares pursuant to the Offer will be "substantially
disproportionate" with respect to a stockholder if (i) the percentage of the
voting stock of the Company actually and constructively owned by the stockholder
immediately following the purchase of Shares pursuant to the Offer (treating all
Shares purchased by the Company pursuant to the Offer as not outstanding) is
less than 80% of the percentage of the voting stock of the Company actually and
constructively owned by such stockholder immediately before the purchase of
Shares pursuant to the Offer (treating all Shares purchased by the Company
pursuant to the Offer as outstanding), and (ii) immediately after the purchase,
the stockholder does not own, actually or constructively, 50% or more of the
total combined voting power of all classes of Company stock entitled to vote.
In order to be "not essentially equivalent to a dividend," a disposition of
Shares pursuant to the Offer must result in a "meaningful reduction" in the
stockholder's percentage interest in the Company, taking into account the
constructive ownership rules discussed above. The Internal Revenue Service has
indicated in a public ruling that a 3.3% reduction in the proportionate interest
of a small minority stockholder (substantially less than 1%) in a publicly-held
corporation who exercises no control over corporate affairs should constitute
such a "meaningful reduction." Nonetheless, a stockholder who intends to qualify
for sale or exchange treatment by demonstrating that proceeds received from the
Company are not "essentially equivalent to a dividend" is strongly urged to
consult his tax advisor because this test will be met only if the reduction in
his proportionate interest in the Company is "meaningful" given his particular
facts and circumstances in the context of the Offer.
Finally, a disposition of Shares pursuant to the Offer will be deemed to
result in a "complete termination" of such stockholder's stock interest in the
Company if immediately following the disposition the selling stockholder does
not actually or constructively own any shares of Company stock. The disposition
of Shares pursuant to the Offer may also be treated as a complete termination if
the stockholder disposes of all of the shares of Company stock actually owned by
the stockholder, even if the stockholder is deemed to continue to own shares of
Company stock pursuant to the constructive ownership rules discussed above,
provided that the stockholder is eligible to waive, and does waive, the
constructive ownership of such stock.
Each stockholder should be aware that contemporaneous dispositions or
acquisitions of shares of Company stock which are deemed for federal income tax
purposes to be part of an integrated transaction with the Offer may be taken
into account in determining whether the stockholder satisfies any of the Code
Section 302 Tests.
To prevent backup federal income tax withholding equal to 31% of the gross
payments made for Shares purchased by the Company pursuant to the Offer, each
tendering stockholder who does not otherwise establish an exemption from such
withholding must notify the Depositary of such stockholder's current social
security number or taxpayer identification number (or certify that such taxpayer
is awaiting a social security number or taxpayer identification number) and
provide certain
46
<PAGE> 50
other information by completing the Substitute Form W-9 included in the Letter
of Transmittal. In such case, the stockholder is entitled to a credit against
such Stockholder's federal income tax for the amount of any backup withholding.
THE CONSEQUENCES TO ANY PARTICULAR STOCKHOLDER MAY DIFFER DEPENDING UPON
THAT STOCKHOLDER'S OWN CIRCUMSTANCES AND TAX POSITION. FURTHERMORE, THIS SUMMARY
DOES NOT DISCUSS ANY ASPECTS OF STATE, LOCAL, FOREIGN OR OTHER TAX LAWS. EACH
STOCKHOLDER IS URGED TO CONSULT AND RELY ON SUCH STOCKHOLDER'S OWN TAX ADVISOR
WITH RESPECT TO THE TAX CONSEQUENCES TO SUCH STOCKHOLDER OF ENGAGING IN A
TRANSACTION PURSUANT TO THE OFFER.
EXTENSION OF THE OFFER; TERMINATION; AMENDMENTS
The Company expressly reserves the right in its sole discretion, at any
time and from time to time, and regardless of whether or not any of the events
set forth in "The Offer -- Certain Conditions of the Offer" shall have occurred
or shall be deemed by the Company to have occurred, to extend the period of time
during which the Offer is open and thereby delay acceptance for payment of any
Shares by giving oral or written notice of such extension to the Depositary and
making a public announcement thereof. During any such extension, all Shares
previously tendered and not withdrawn will remain subject to the Offer, except
to the extent that such Shares may be withdrawn as set forth in "The
Offer -- Withdrawal Rights." The Company also expressly reserves the right in
its sole discretion to terminate the Offer and not accept for payment any Shares
not previously accepted for payment. The Company further reserves the right, in
its sole discretion and regardless of whether any of the events set forth in
"The Offer -- Certain Conditions of the Offer" shall have occurred or shall be
deemed by the Company to have occurred, to amend the Offer in any respect
(including, without limitation, by decreasing or increasing the consideration
offered in the Offer to owners of Shares or by decreasing the number of Shares
being sought in the Offer).
The Rules require that the Company permit Shares tendered pursuant to the
Offer to be withdrawn (i) at any time during the period the Offer remains open
and (ii) if not yet accepted for payment, after the expiration of forty business
days from commencement of the Offer. The Rules also require that the Company pay
the consideration offered, or return the Shares tendered, promptly after the
termination or withdrawal of the Offer. Amendments to the Offer may be made at
any time and from time to time effected by public announcement thereof, such
announcement, in the case of an extension, to be issued no later than 9:00 a.m.
New York City time on the next business day after the previously scheduled
Expiration Date. Any public announcement made pursuant to the Offer will be
disseminated promptly to Stockholders in a manner reasonably designed to inform
Stockholders of such change. Without limiting the manner in which the Company
may choose to make a public announcement, except as required by applicable law,
the Company shall have no obligation to publish, advertise or otherwise
communicate any such public announcement other than by making a release to the
Dow Jones News Service.
If the Company materially changes the terms of the Offer or the information
concerning the Offer or if the Company waives a material condition of the Offer,
the Company will extend the Offer to the extent required by applicable law. In
particular, if (i) the Company increases or decreases the price to be paid for
Shares or the Company decreases the number of Shares being sought and (ii) the
Offer is scheduled to expire at any time earlier than the expiration of a period
ending on the tenth business day from, and including, the date that notice of
such change is first published, sent or given, the Offer will be extended at
least until the expiration of such ten business day period. For purposes of the
Offer, a "business day" means any day other than a Saturday or Sunday or federal
holiday and consists of the time period from 12:01 a.m. through midnight New
York City time. Other changes in the terms of the Offer or the information
concerning the Offer may also require an extension of the Offer under applicable
law; depending on the particular facts and circumstances, including the relative
materiality of such terms and information.
47
<PAGE> 51
ESTIMATED FEES AND EXPENSES
The Company has retained Alex. Brown as Dealer-Manager, D.F. King & Co.,
Inc. as Information Agent and American Stock Transfer & Trust Company as
Depositary in connection with the Offer. The Dealer-Manager may contact
Stockholders by mail, telephone, facsimile transmission, telex, telegraph and
personal interviews, and may request brokers, dealers and other nominee
Stockholders to forward materials relating to the Offer to beneficial owners.
The Company will reimburse the Dealer-Manager and the Depositary for
out-of-pocket expenses, including reasonable fees and expenses of counsel, and
has agreed to indemnify the Dealer-Manager and the Depositary against certain
liabilities in connection with Offer, including certain liabilities under the
federal securities laws.
The Company will not pay fees or commissions to any broker, commercial
bank, trust company or other person for soliciting any Shares pursuant to the
Offer. The Company will, however, on request, reimburse such persons for
customary handling and mailing expenses incurred in forwarding materials in
respect of the Offer to the beneficial owners for which they act as nominees. No
such broker, dealer, commercial bank or trust company has been authorized to act
as the Company's agent for purposes of this Offer. The Company will pay (or
cause to be paid) any stock transfer taxes on its purchase of Shares, except as
otherwise provided in Instruction 6 of the Letter of Transmittal.
Estimated costs and fees in connection with the Offer and the
Recapitalization and related transactions, all of which are the obligation of
the Company, are as follows:
<TABLE>
<S> <C>
Financing fees.......................................................... $1,550,000
Financial advisory fees................................................. 1,385,000
Dealer-Manager fee...................................................... 100,000
Legal, accounting, and other professional fees.......................... 1,100,000
Printing and distribution fees.......................................... 100,000
Miscellaneous........................................................... 265,000
----------
Total......................................................... $4,500,000
==========
</TABLE>
The above amounts are estimates only and actual expenditures may vary
substantially from the estimates depending on the circumstances.
MISCELLANEOUS
The Offer is not being made to, nor will the Company accept tenders from or
on behalf of, owners of Shares residing in any jurisdiction in which the making
of the Offer or its acceptance would not comply with the securities, Blue Sky or
other laws of such jurisdiction. The Company does not know, and has not been
advised, of any jurisdiction in which the making of the Offer or the tender of
Shares in accordance with the Offer would not be in compliance with or would
violate the laws of such jurisdiction. Accordingly, the Offer presently is being
made to all Stockholders in all jurisdictions. However, the Company reserves the
right to exclude holders in any jurisdiction in which it is asserted that the
Offer cannot lawfully be made. So long as the Company makes a good faith effort
to comply with any such law deemed applicable to the Offer, the Company believes
that the exclusion of holders residing in such jurisdiction is permitted under
the Rules. In any jurisdiction, the securities or Blue Sky laws of which require
the Offer to be made by a licensed broker or dealer, the Offer shall be deemed
to be made on the Company's behalf by one or more registered brokers or dealers
licensed under the laws of such jurisdiction.
AURORA ELECTRONICS, INC.
February 23, 1996
48
<PAGE> 52
Facsimile copies of the Letter of Transmittal will be accepted. The Letter
of Transmittal and certificates for your Shares should be sent or delivered by
you, your broker, dealer, commercial bank or trust company to the Depositary at
one of its addresses below:
The Depositary for the Offer is:
AMERICAN STOCK TRANSFER & TRUST COMPANY
<TABLE>
<S> <C> <C>
By Mail: By Facsimile Transmission: By Hand:
40 Wall Street (718) 236-2641 40 Wall Street
New York, New York 10005 New York, New York 10005
</TABLE>
Stockholders should contact the Information Agent, the Dealer Manager, or
their broker, dealer, commercial bank or trust company for assistance concerning
the Offer. Requests for additional copies of the Offer to Purchase and Letter of
Transmittal may also be directed to the Information Agent or the Dealer-Manager.
Information Agent:
D.F. KING & CO., INC.
77 Water Street
New York, New York 10005
(800) 669-5550 (toll free)
or
(212) 269-5550 (collect)
The Dealer Manager for the Offer is:
ALEX. BROWN & SONS INCORPORATED
135 East Baltimore Street
Baltimore, Maryland 21202
(410) 727-1700
49
<PAGE> 53
ANNEX A
OPINION OF ALEX. BROWN & SONS INCORPORATED
<PAGE> 54
February 21, 1996
Board of Directors
Aurora Electronics, Inc.
2030 Main Street, Suite 1120
Irvine, CA 92714
Dear Sirs:
We understand that Aurora Electronics, Inc. ("Aurora") and Welsh, Carson,
Anderson & Stowe VII, L.P. ("WCAS VII"), WCAS Capital Partners II, L.P. ("WCAS
CP II") and certain other purchasers (such purchasers, together with WCAS VII,
being the "Purchasers") propose to enter into a Securities Purchase Agreement
(the "Agreement"), pursuant to which the Purchasers will purchase between
$35,000,000 and $40,000,000 of 7% Convertible Preferred Stock, convertible at a
price of $2.125 (the "Preferred Stock"), of the Company and WCAS CP II will
purchase $10,000,000 of 10% Senior Subordinated Notes (the "Notes") and a number
of shares of the Common Stock, $.03 par value per share ("Common Stock"), of
Aurora based on the number of outstanding shares of Common Stock. In addition,
the Company will agree to (i) enter into a revolver credit facility with a bank
or bank group with an initial availability of up to $35,000,000, (ii) commence a
tender offer to purchase up to 6,500,000 of the outstanding shares of Common
Stock for $2.875 per share, conditioned on, among other things, tenders by the
holders of not less than 2,000,000 of the outstanding shares of Common Stock
(the "Tender Offer"), (iii) terminate its existing Senior Secured Credit
Agreement, (iv) provide for the redemption of its 9 1/4% Senior Subordinated
Notes due 1996 and (v) adopt and implement a new stock option plan. The purchase
and sale of the Preferred Stock, the Notes and the Common Stock pursuant to the
Agreement taken together with the transactions described in clauses (i) through
(v) of the previous sentence being hereinafter collectively called, the
"Transaction." You have requested our opinion as to whether the Transaction is
fair, from a financial point of view, to the holders of Common Stock (other than
WCAS CP II and its affiliates).
Alex. Brown & Sons Incorporated ("Alex. Brown"), as a customary part of its
investment banking business, is engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, private placements and valuations for estate, corporate and other
purposes. We have acted as financial advisor to Aurora in connection with the
Transaction and will receive a fee for our services, a portion of which is
contingent upon the consummation of the Transaction. Alex. Brown regularly
publishes research reports regarding the semiconductor and enabling components
industries and the businesses and securities of publicly owned companies in
these industries.
In connection with our opinion, we have reviewed certain publicly available
financial information concerning Aurora and certain internal financial analyses
and other information furnished to us by Aurora. We have also held discussions
with members of the senior management of Aurora regarding the business and
prospects of the Company. In addition, we have (i) reviewed the reported price
and trading activity for the Common Stock of Aurora, (ii) compared certain
financial and stock market information for Aurora with similar information for
certain companies whose securities are publicly traded, (iii) reviewed the
financial terms of certain business combinations and acquisitions of less than
100% of target companies which we deemed comparable in whole or in part, (iv)
reviewed the terms of the Agreement in a draft dated February 20, 1996 and draft
copies of certain related documents and (v) performed such other studies and
analyses and considered such other factors as we deemed appropriate.
We have not independently verified the information described above and for
purposes of this opinion have assumed the accuracy, completeness and fairness
thereof. With respect to information relating to the prospects of Aurora, we
have assumed that such information reflects the best currently
A-1
<PAGE> 55
available estimates and judgments of management of Aurora as to the likely
future financial performance of Aurora. In addition, we have not made an
independent evaluation or appraisal of the assets of Aurora (nor have we been
furnished with any such evaluation or appraisal), nor have we made any physical
inspection of the properties or assets of the Company. In arriving at our
opinion, we were not authorized to solicit, and did not solicit, interest from
any party with respect to the acquisition of the Company or any of its assets,
nor were we authorized to participate, and we did not participate in, any
negotiations with any parties in connection with the Transaction. In arriving at
our opinion, we also assumed that the terms of the Tender Offer and Transaction
will not deviate in any material respects from the terms set forth in the draft
documents that we reviewed. The valuation of the Aurora securities to be
outstanding after completion of the Tender Offer is subject to uncertainties and
contingencies, including, without limitation, the liquidity of the market, if
any, for such securities, prevailing interest rates, market conditions and the
condition and prospects of the Company, all of which are difficult to predict.
Our opinion is based on market, economic and other conditions as they exist and
can be evaluated as of the date of this letter. We express no opinion as to the
price at which Aurora Common Stock will trade subsequent to the consummation of
the Transaction.
It is understood that this letter is for the information of the Board of
Directors of the Company and may not be used for any other purpose without our
prior written consent, except that this opinion may be included in its entirety
in any filing made by the Company with the Securities and Exchange Commission
with respect to the Tender Offer and the Transaction. In addition, we express no
opinion as to whether the stockholders of the Company should tender their shares
of Common Stock in the Tender Offer or how such stockholders should vote at any
stockholders' meeting held in connection with the Transaction. We express no
opinion as to the fairness or adequacy of any consideration received in the
Transaction by the Purchasers or WCAS CP II.
Based upon and subject to the foregoing, it is our opinion that, as of the
date of this letter, the Transaction is fair, from a financial point of view, to
the holders of Common Stock (other than WCAS CP II and its affiliates).
Very truly yours,
ALEX. BROWN & SONS INCORPORATED
A-2
<PAGE> 1
LETTER OF TRANSMITTAL
TO TENDER SHARES OF COMMON STOCK
OF
AURORA ELECTRONICS, INC.
PURSUANT TO THE OFFER TO PURCHASE
DATED FEBRUARY 23, 1996
- --------------------------------------------------------------------------------
THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.
NEW YORK CITY TIME, ON MARCH 22, 1996 UNLESS EXTENDED
- --------------------------------------------------------------------------------
To: American Stock Transfer & Trust Company
<TABLE>
<S> <C> <C>
By Hand: By Overnight Courier: By Mail:
40 Wall Street 40 Wall Street 40 Wall Street
46th Floor 46th Floor 46th Floor
New York, New York 10005 New York, New York 10005 New York, New York 10005
Other Information:
By Facsimile:
(718) 236-2641 To Confirm by Telephone:
(718) 234-5001 (718) 921-8200
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS
VIA A FACSIMILE, OTHER THAN AS SET FORTH ABOVE, DOES NOT CONSTITUTE A VALID
DELIVERY.
This Letter of Transmittal is to be used either if certificates are to be
forwarded herewith or if delivery of Shares (as defined below) is to be made by
book-entry transfer to the account maintained by the Depositary at a Book-Entry
Transfer Facility as defined in and pursuant to the procedures set forth in
"Procedure for Tendering Shares -- Book-Entry Delivery" of the Offer to
Purchase. Stockholders whose certificates are not immediately available or who
cannot deliver their Shares and all other documents required hereby to the
Depositary (or who are unable to complete the procedure for book-entry transfer
on a timely basis) on or prior to the Expiration Date must tender their Shares
according to the guaranteed delivery procedure set forth in "Procedure for
Tendering Shares -- Guaranteed Delivery" of the Offer to Purchase. See
Instruction II.
PLEASE SEE THE INSTRUCTIONS BEGINNING ON PAGE 8.
/ / CHECK HERE IF TENDERED SHARES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO THE ACCOUNT MAINTAINED BY THE DEPOSITARY WITH A BOOK-ENTRY TRANSFER
FACILITY AND COMPLETE THE FOLLOWING (ONLY PARTICIPANTS IN A BOOK-ENTRY
TRANSFER FACILITY MAY DELIVER SHARES BY BOOK-ENTRY TRANSFER):
Name of Tendering Institution
---------------------------------------------
Check box of Book-Entry Transfer Facility:
--------------------------------
/ / Depository Trust Company
/ / Midwest Securities Trust Company
/ / Philadelphia Depository Trust Company
Account Number
--------------------------------------------------------------
Transaction Code Number
-----------------------------------------------------
/ / CHECK HERE IF TENDERED SHARES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE DEPOSITORY AND COMPLETE THE
FOLLOWING:
Name(s) of Registered Owner(s)
----------------------------------------------
Date of Execution of Notice of Guaranteed Delivery
--------------------------
Name of Institution which Guaranteed Delivery
-------------------------------
<PAGE> 2
If Delivered by Book-Entry Transfer Check Box:
/ / Depository Trust Company
/ / Midwest Securities Trust Company
/ / Philadelphia Depository Trust Company
Account Number
--------------------------------------------------------------
Transaction Code Number
-----------------------------------------------------
<TABLE>
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
DESCRIPTION OF SHARES TENDERED
- -----------------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF REGISTERED OWNER(S) CERTIFICATE(S) ENCLOSED
(PLEASE FILL IN, IF BLANK, EXACTLY AS SIGNATURE(S) (ATTACH ADDITIONAL LIST
APPEAR(S) ON CERTIFICATE(S)) IF NECESSARY)
- -----------------------------------------------------------------------------------------------------
TOTAL NUMBER OF NUMBER OF
CERTIFICATE SHARES REPRESENTED SHARES
NUMBER(S)* BY CERTIFICATE(S)* TENDERED**
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
TOTAL SHARES
- -----------------------------------------------------------------------------------------------------
</TABLE>
* Need not be completed by Book-Entry Stockholders.
** If you desire to tender fewer than all Shares evidenced by any certificates
listed above, please indicate in this column the number of Shares you wish to
tender. Otherwise, all Shares evidenced by such certificates will be deemed
to have been tendered.
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
The undersigned hereby tenders to Aurora Electronics, Inc. a Delaware
corporation (the "Company"), the above-described shares of the Company's
outstanding common stock, par value $.03 per Share (the "Shares"), for purchase
at a purchase price of $2.875 per Share net to the undersigned in cash, without
interest thereon, upon the terms and conditions of the Company's Offer to
Purchase, dated February 23, 1996 (the "Offer to Purchase"), and this Letter of
Transmittal (which together constitute the "Offer"), receipt of which is hereby
acknowledged. Capitalized terms used herein and not otherwise defined have the
meaning given them in the Offer to Purchase.
Subject to, and effective upon, acceptance for payment of the Shares
tendered herewith, in accordance with the terms and subject to the conditions of
the Offer (including, if the Offer is extended or amended, the terms and
conditions of any such extension or amendment), the undersigned hereby sells,
assigns and transfers to the Company all right, title and interest in and to all
the Shares tendered hereby and irrevocably constitutes and appoints the
Depositary the true and lawful agent and attorney-in-fact of the undersigned
with respect to such Shares with full power of substitution (such power of
attorney being deemed to be an irrevocable power coupled with an interest), to
deliver certificates for such Shares or transfer ownership of such Shares on the
account books maintained by the Book-Entry Transfer Facility, together, in any
such case, with all accompanying evidence of transfer and authenticity, to the
Company.
<PAGE> 3
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, assign and transfer the tendered Shares and
that, when the same are accepted for payment, the Company will acquire good,
marketable and unencumbered title thereto, free and clear of all liens,
restrictions, charges and encumbrances and the same will not be subject to any
adverse claim. The undersigned will, upon request, execute any additional
documents deemed by the Depositary or the Company to be necessary or desirable
to complete the purchase of the tendered Shares.
All authority conferred or agreed to be conferred in this Letter of
Transmittal shall not be affected by, and shall survive, the death or incapacity
of the undersigned, and any obligation of the undersigned hereunder shall be
binding upon the successors, assigns, heirs, executors, administrators and legal
representatives of the undersigned.
The undersigned understands that the acceptance for payment by the Company
of tenders of Shares pursuant to the Offer to Purchase and in accordance with
the Instructions hereto will constitute a binding agreement between the
undersigned and the Company.
Unless otherwise indicated herein under "Special Payment Instructions,"
please issue the check for the purchase price in the name(s) of the registered
holder(s) appearing under "Description of Shares Tendered." Similarly, unless
otherwise indicated under "Special Delivery Instructions," please mail the check
for the purchase price or return any certificates for Shares not accepted for
payment (and accompanying documents, as appropriate) to the address(es) of the
registered holder(s) appearing under "Description of Shares Tendered."
In the event that either or both of the Special Delivery Instructions and
the Special Payment Instructions are completed, please issue the check for the
purchase price in the name of, and deliver said check, or return any
certificates for Shares not accepted for payment or nor tendered to, the person
or persons so indicated. The undersigned recognizes that the Company has no
obligation pursuant to the Special Payment Instructions to transfer any Shares
from the name of the registered holder thereof if the Company does not accept
for payment any of the Shares tendered hereby.
Unless otherwise indicated herein under "Special Delivery Instructions," in
the case of a book-entry delivery of Shares, please credit the account
maintained at the Book-Entry Transfer Facility indicated above with any Shares
not accepted for payment.
<PAGE> 4
SPECIAL PAYMENT INSTRUCTIONS
(SEE INSTRUCTION III)
To be completed ONLY if the check for the purchase price of Shares
purchased (less the amount of any federal income and backup withholding tax
required to be withheld) or certificates for Shares not tendered or not
purchased are to be issued in the name of someone other than the undersigned.
Issue check to:
Name
---------------------------------------------------------------------------
(Please Print)
Address
------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(Include Zip Code)
- -------------------------------------------------------------------------------
(Tax Identification or Social Security Number)
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTION III)
To be completed ONLY if certificates for Shares not accepted for payment or
not tendered or the check for the purchase price are to be sent to someone other
than the undersigned at an address other than that above or if Shares tendered
by book-entry transfer which are not purchased are to be returned by credit to
an account maintained at the Book-Entry Transfer Facility other than that
designated above.
Mail checks and certificate(s) to:
Name
--------------------------------------------------------------------------
(Please Print)
Address
----------------------------------------------------------------------
- -------------------------------------------------------------------------------
(Include Zip Code)
- -------------------------------------------------------------------------------
(Tax Identification or Social Security Number)
/ / Credit unpurchased Shares tendered by book-entry transfer to the Book-Entry
Facility account set forth below
/ / DTC / / MSTC / / PDTC
- -------------------------------------------------------------------------------
(Account Number)
<PAGE> 5
YOU MUST ALSO SIGN HERE
REMEMBER TO COMPLETE FORM W-9 ON PAGE 10
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Signature(s) of Stockholder(s))
(Must be signed by registered holder(s) as name(s) appear(s) on stock
certificate(s) or on a security position listing or by person(s) authorized to
become registered holder(s) by certificates and documents transmitted herewith.
If signature is by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporation or others acting in a fiduciary or
representative capacity, please set forth full title and see Instruction III.)
Dated: , 1996
-------------------------------------------------------------------
Name(s)
-------------------------------------------------------------------------
(Please Print)
Capacity (Full Title)
-----------------------------------------------------------
Address
-------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Include Zip Code)
Area Code and Tel. No.
----------------------------------------------------------
- --------------------------------------------------------------------------------
(Complete Form W-9 on Page 10)
GUARANTEE OF SIGNATURE(S)
(SEE INSTRUCTION III)
Authorized Signature
------------------------------------------------------------
Name
---------------------------------------------------------------------------
Title
---------------------------------------------------------------------------
Name of Firm
--------------------------------------------------------------------
Address
-------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Include Zip Code)
Dated: , 1996
--------------------------------------------------------------------
<PAGE> 6
INSTRUCTIONS FOR TENDERING SHARES
I. GENERAL
These Instructions are part of the terms and conditions of the Offer and
are to be followed by stockholders wishing to tender their Shares for purchase.
All questions as to the validity, form, eligibility (including the time of
receipt and acceptance for payment of any tender of Shares) will be determined
by the Company, in its sole discretion, which determination shall be final and
binding on all parties. The Company reserves the absolute right to reject any or
all tenders it determines not to be in proper form or the acceptance of or
payment for which may, in the opinion of the Company's counsel, be unlawful. The
Company also reserves the absolute right to waive any of the conditions of the
Offer and any defect or irregularity in the tender of any particular Shares. No
tender of Shares will be deemed to be properly made until all defects and
irregularities have been cured or waived. Neither the Company, the Depositary
nor any other person is or will be obligated to give notice of any defects or
irregularities in tenders, and none of them will incur any liability for failure
to give such notice.
II. COMPLETION OF LETTER OF TRANSMITTAL
In tendering your certificates, please carefully comply with the following
instructions:
(1) Certificates for all delivered Shares (or confirmation of any
book-entry transfer into the Depositary's account at the Book-Entry
Transfer Facility of Shares) as well as properly completed and duly
executed Letter of Transmittal, must be received by Depositary at its
address set forth herein on or prior to 5:00 p.m. New York City time, March
22, 1996 unless extended (the "Expiration Date"). If certificates are not
immediately available (or the procedure for book-entry transfer cannot be
completed on a timely basis) or time will not permit all other required
documents to reach the Depositary on or prior to the Expiration Date,
Shares may nevertheless be tendered by properly completing and duly
executing the Notice of Guaranteed Delivery (pink copy) pursuant to the
guaranteed delivery procedure set forth in "Procedure for Tendering
Shares -- Guaranteed Delivery" of the Offer to Purchase. Pursuant to that
procedure, (a) tender must be made by or through a member firm of a
registered national securities exchange, a member of the National
Association of Securities Dealers, Inc., or a commercial bank or trust
company having an office, branch or agency in the United States (as
"Eligible Institution"), (b) a properly completed and duly executed Notice
of Guaranteed Delivery (pink copy) substantially in the form provided by
the Company must be received by the Depositary on or prior to the
Expiration Date and (c) the certificates for all tendered Shares (or
confirmation of a book-entry transfer into the Depositary's account at the
Book-Entry Transfer Facility of Shares) as well as a properly completed and
duly executed Letter of Transmittal (or manually signed facsimile thereof)
with any required signature guarantees or, in the case of a book-entry
delivery, an Agent's Message and any other documents required by this
Letter of Transmittal, must be received by the Depositary within five (5)
business days after the date of execution of such Notice of Guaranteed
Delivery, all as provided in "Procedure for Tendering Shares -- Guaranteed
Delivery" of the Offer to Purchase.
(2) No alternative or contingent tenders will be accepted. All
tendering stockholders, by execution of this Letter of Transmittal (or
facsimile thereof), waive any right to receive any notice of the acceptance
of their Shares for payment.
(3) If the space provided in the "Description of Shares Tendered"
table is inadequate, additional certificate numbers and/or the number of
Shares should be listed on a separate sheet of paper and attached hereto.
(4) Additional copies of the Letter of Transmittal may be obtained,
upon request, from the Depositary and the Dealer-Manager at the respective
addresses and telephone numbers specified below.
III. SIGNATURES ON LETTER OF TRANSMITTAL, ENDORSEMENTS AND STOCK POWERS;
SIGNATURE GUARANTEES
(1) If checks are to be issued in the name of the registered holder of the
surrendered certificates, certificates need not be endorsed or accompanied by a
separate executed stock power. The Letter of Transmittal need merely be
completed, dated and signed. The signature must correspond with the name as
written on the face of the certificate(s) without any change whatsoever.
(2) If checks are to be issued in a name different from that in which
surrendered certificates are registered (pursuant to the box marked "Special
Payment Instructions"), the registered holder's signature on the Letter of
Transmittal must be guaranteed by an Eligible Institution.
(3) If certificates are transmitted for surrender by a person or persons
other than the registered holder(s) thereof, the signature on the Letter of
Transmittal of the person surrendering the certificates must be guaranteed as
described above and the certificates must be duly endorsed for transfer or
accompanied by an appropriate stock power, in either case signed exactly as the
name or names of the registered owner or owners appear on the certificates, with
such signature also guaranteed.
(4) Signatures of trustees, executors, administrators, guardians, officers
of corporations, attorneys-in-fact or others acting in a fiduciary or
representative capacity must be accompanied by appropriate evidence of authority
to sign and of appointment or incumbency. Questions regarding such evidence of
authority and appointment of incumbency may be referred to the Depositary at the
telephone number set forth below.
<PAGE> 7
(5) If any of the Shares tendered hereby are owned of record by two or more
joint owners, all such owners must sign this Letter of Transmittal.
(6) If any tendered Shares are registered in different names on several
certificates, you must complete, sign and submit as many separate Letters of
Transmittal as there are different registrations of certificates.
(7) Please be sure to insert the date and your telephone number in the
spaces below your signature on the Letter of Transmittal.
(8) To avoid backup withholding, you must complete and sign the Form W-9
included in the Letter of Transmittal. See Instruction V below. You must strike
out the language in clause (2) of the certification on the Form W-9 if you have
been notified that you are subject to backup withholding due to underreporting
and have not been notified by the Internal Revenue Service that the backup
withholding has been terminated.
IV. DELIVERY
The method of delivery of the certificates to the Depositary is at the
option and risk of the holder surrendering such certificates. If the
certificates are sent by mail, registered mail, with return receipt request,
properly insured, is recommended. Risk of loss is not assumed by the Company or
the Depositary.
V. IMPORTANT TAX INFORMATION CONCERNING TAXPAYER IDENTIFICATION NUMBERS
(1) BACKUP WITHHOLDING. Under federal income tax law, any person who
receives cash upon purchase of tendered Shares is required to provide the
Depositary with such person's correct taxpayer identification number ("TIN") on
Form W-9 (set forth in the Letter of Transmittal) unless an exemption applies.
If such person is an individual, the TIN is his or her social security number.
If the Depositary is not provided with the correct TIN, such person may be
subject to a $50 penalty imposed by the Internal Revenue Service and the
Depositary will be required to withhold 31% of any payments made to such person
("backup withholding").
Certain persons (including, among others, all corporations and certain
foreign persons) are not subject to backup withholding and reporting
requirements. Such persons should comply with the Certification Instructions
contained in the Form W-9 and write "exempt" under their social security or
other taxpayer identification number. In order for a foreign person to qualify
as an exempt recipient, that person must submit a statement on Form W-8, signed
under penalties of perjury, attesting to that person's exempt status. You should
consult your tax advisor or the Internal Revenue Service to obtain a copy of
Form W-8, if necessary.
Backup withholding is not additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained.
(2) WHAT NUMBER TO GIVE THE PAYING AGENT. The Depositary must be provided
with the TIN of the record owner of the tendered certificates. If you do not
have a TIN, write "applied for" in the space for the TIN on the Form W-9. You
will then have 60 days to obtain a TIN and furnish it to the Depositary. In
addition, if the check is to be issued in the name of a person other than the
record owner of the tendered certificates, the TIN of that person should be
provided in the space provided under "Special Payment Instructions."
If the tendered certificate are in more than one name or are not in the
name of the actual owner, consult the Depositary for additional guidance on
which number to report. You should consult with your tax advisor if you have
questions regarding the applicability of backup withholding.
VI. STOCK TRANSFER TAXES
The Company will pay any stock transfer taxes with respect to the transfer
and tender to it of Shares pursuant to the Offer. If, however, payment of the
purchase price is to be made to any person other than the registered holder, or
if tendered certificates are registered in the name of any person other than the
person(s) signing this Letter of Transmittal, the amount of any stock transfer
taxes (whether imposed on the registered holder or such person) payable on
account of the transfer to such person will be deducted from the purchase price
unless satisfactory evidence of the payment of such taxes or exemption therefrom
is submitted.
VIII. INQUIRIES
Questions or requests for assistance or for additional copies of the Offer
to Purchase, the Letter of Transmittal or the Notice of Guaranteed Delivery may
be directed to the Dealer-Manager at its addresses and telephone numbers listed
below. You may also contact your local broker, dealer, commercial bank or trust
company for assistance concerning the Offer.
NOTE: FAILURE TO COMPLETE AND RETURN THE FOLLOWING FORM MAY RESULT IN
BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT HERETO. PLEASE
SEE INSTRUCTION V TO THIS LETTER OF TRANSMITTAL AND REVIEW THE ENCLOSED
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON FORM W-9 FOR
ADDITIONAL DETAILS.
<PAGE> 8
The Information Agent for the Offer is:
D.F. King & Co., Inc.
77 Water Street
New York, New York 10005
(800) 669-5550 (toll free)
or
(212) 269-5550 (collect)
The Dealer Manager for the Offer is:
Alex. Brown & Sons, Incorporated
135 East Baltimore Street
Baltimore, Maryland 21202
(410) 727-1700
<PAGE> 9
<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
PAYOR'S NAME:
- ------------------------------------------------------------------------------------------------------------------
Social security number or
SUBSTITUTE Part 1 -- PLEASE PROVIDE YOUR TIN IN THE Employer ID number
BOX AT RIGHT AND CERTIFY BY SIGNING AND
DATING BELOW. / /
-----------------------------------------
------------------------------------------------------------------------------------
Part 2 -- Certification -- Under penalties of perjury, I certify that:
FORM W-9
DEPARTMENT OF THE TREASURY (1) The number shown on this form is my correct Taxpayer Identification Number (or I
INTERNAL REVENUE SERVICE am waiting for a number to be issued to me and I have checked the box in Part 3
PAYER'S REQUEST FOR below) and
TAXPAYER IDENTIFICATION
NUMBER (TIN) (2) I am not subject to backup withholding because: (a) I am exempt from backup
withholding, or (b) I have not been notified by the Internal Revenue Service (the
"IRS") that I am subject to backup withholding as a result of a failure to report
all interest or dividends, or (c) the IRS has notified me that I am no longer
subject to backup withholding.
Certification Instructions -- You must cross out item (2) above if you have been
notified by the IRS that you are currently subject to backup withholding because
of underreporting interest or dividends on your tax return. However, if, after
being notified by the IRS that you were subject to backup withholding you
received another notification from the IRS that you are no longer subject to
backup withholding, do not cross out item (2).
------------------------------------------------------------------------------------
Part 3 --
SIGNATURE DATE Awaiting TIN / /
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF
ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER. PLEASE REVIEW THE ENCLOSED
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON
SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART
3 OF SUBSTITUTE FORM W-9.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (1) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office or (2) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number by the time of payment, 31% of all
reportable payments made to me will be withheld, but that such amounts will be
refunded to me if I then provide a Taxpayer Identification Number within sixty
(60) days.
Signature Date
--------------------------------- ---------------------------
<PAGE> 10
INSTRUCTIONS WITH RESPECT TO AURORA ELECTRONICS, INC.'S
OFFER TO PURCHASE FOR CASH UP TO 6,500,000 SHARES
OF ITS COMMON STOCK
AT
$2.875 NET PER SHARE
The undersigned acknowledges receipt of your letter enclosing the Offer to
Purchase dated February 23, 1996 of Aurora Electronics, Inc. (the "Company"), a
Delaware corporation, and the related Letter of Transmittal, relating to the
Company's offer to purchase up to 6,500,000 shares of its Common Stock, par
value $.03 per share (the "Shares"). The undersigned understands that the Offer
applies to Shares allocated to the undersigned in the Company's Employee Stock
Purchase Plan (the "Plan").
This will instruct you, as Plan Administrator and Record Holder of the
Shares held in the account of the undersigned as a participant in the Plan, to
tender the number of Shares indicated below that are held for the Plan account
of the undersigned on the terms and conditions set forth in such Offer to
Purchase and the related Letter of Transmittal.
Dated: , 1996
--------------------
<TABLE>
<S> <C>
- -------------------------------------------------
NUMBER OF SHARES TO BE TENDERED*
Shares
- ------------------
- -------------------------------------------------
</TABLE>
------------------------------------
------------------------------------
Signature(s)
------------------------------------
------------------------------------
Please print name(s)
------------------------------------
------------------------------------
Address (Include Zip Code)
------------------------------------
------------------------------------
Area Code and Telephone No.
------------------------------------
------------------------------------
Taxpayer Identification or Social
Security No.
- ---------------
* Unless otherwise indicated, it will be assumed that all Shares in your Plan
account are to be tendered.
<PAGE> 1
NOTICE OF GUARANTEED DELIVERY
TO TENDER SHARES OF COMMON STOCK OF
AURORA ELECTRONICS, INC.
PURSUANT TO ITS OFFER TO PURCHASE DATED FEBRUARY 23, 1996
This form or one substantially equivalent hereto must be used to accept the
Offer (as defined below) if certificates for Shares are not immediately
available or time will not permit all required documents to reach the Depositary
prior to the Expiration Date of the Offer (as defined in the Offer to Purchase).
Such form may be delivered by hand or transmitted by facsimile transmission or
mailed to the Depositary. See "Procedure for Tendering Shares -- Guaranteed
Delivery" of the Offer to Purchase.
To: American Stock Transfer & Trust Company
<TABLE>
<S> <C> <C>
By Hand: By Overnight Courier: By Mail:
40 Wall Street 40 Wall Street 40 Wall Street
New York, New York 10005 New York, New York 10005 New York, New York 10005
By Facsimile: To Confirm by Telephone:
(718) 236-2641 (718) 921-8200
(718) 234-5001
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OR TRANSMISSION OF INSTRUCTIONS
VIA A FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID
DELIVERY.
1
<PAGE> 2
Gentlemen:
The undersigned hereby tenders to Aurora Electronics, Inc. (the "Company"),
upon the terms and subject to the conditions set forth in the Offer to Purchase
dated February 23, 1996, and the related Letter of Transmittal (which together
constitute the "Offer"), receipt of which is hereby acknowledged, the number of
Shares of the Company's issued and outstanding common stock, par value $.03 per
share (the "Shares"), set forth below the signature of the undersigned, pursuant
to the guaranteed delivery procedures set forth in "Procedure for Tendering
Shares -- Guaranteed Delivery" of the Offer to Purchase.
SIGN HERE
------------------------------------
------------------------------------
Name(s):
-----------------------------
-----------------------------
(Please Print)
Number of Shares Tendered:
----------
Address:
----------------------------
------------------------------------
Area Code and Tel. No.:
-------------
Dated , 1996
-----------------
GUARANTEE
(Not to be used for signature guarantee)
The undersigned, a firm that is a member of a registered national
securities exchange or the National Association of Securities Dealers, Inc., or
a commercial bank or trust company having an office, branch or agency in the
United States, guarantees (a) that the above named person(s) "owns" the Shares
tendered hereby within the meaning of Rule 14c-4 under the Securities Exchange
Act of 1934, as amended, (b) that such tender of Shares complies with Rule 14c-4
and (c) to deliver to the Depositary the Shares tendered hereby, together with a
properly completed and duly executed Letter of Transmittal (or facsimile
thereof), unless an Agent's Message is utilized, and any other required
documents, all within three business days of the date hereof.
---------------------------------
(Name of Firm)
---------------------------------
(Authorized Signature)
---------------------------------
(Name)
---------------------------------
(Address)
---------------------------------
---------------------------------
(Area Code and Telephone No.)
Dated , 1996
--------------------------
DO NOT SEND STOCK CERTIFICATES WITH THIS FORM. YOUR STOCK CERTIFICATES MUST BE
SENT WITH THE LETTER OF TRANSMITTAL.
2
<PAGE> 1
AURORA ELECTRONICS, INC.
OFFER TO PURCHASE FOR CASH
UP TO 6,500,000 SHARES OF ITS COMMON STOCK
AT
$2.875 NET PER SHARE
To: Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees:
We have been appointed by Aurora Electronics, Inc., a Delaware corporation
(the "Company") to act as Dealer Manager in connection with the Company's offer
to purchase from its stockholders up to 6,500,000 shares of Common Stock, $.03
par value per share (the "Shares"), at $2.875 per Share, net to the seller in
cash, upon the terms and subject to the conditions set forth in the Company's
Offer to Purchase dated February 23, 1996 and the related Letter of Transmittal
(which together constitute the "Offer"). Please furnish copies of the enclosed
materials to those of your clients for whom you hold Shares registered in your
name or the name of your nominee.
For your information and for forwarding to your clients for whom you hold
Shares registered in your name or in the name of your nominee, we are enclosing
the following documents:
1. Offer to Purchase, dated February 23, 1996.
2. Letter of Transmittal for your use and for the information of your
clients.
3. Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9 providing information relating to backup federal income
tax withholding.
4. Notice of Guaranteed Delivery to be used to accept the Offer if the
Shares and all other required documents cannot be delivered to the
Depositary by the Expiration Date (as defined in the Offer to Purchase).
5. A form of letter which may be sent to your clients for whose
accounts you hold Shares registered in your name or in the name of your
nominee, with space provided for obtaining such clients' instructions with
regard to the Offer.
6. Return envelope addressed to American Stock Transfer & Trust
Company, the Depositary.
WE URGE YOU TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE. THE OFFER,
PRORATION PERIOD AND WITHDRAWAL RIGHTS EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON FRIDAY, MARCH 22, 1996, UNLESS THE OFFER IS EXTENDED.
THE OFFER IS SUBJECT TO THE TERMS AND CONDITIONS SET FORTH IN THE OFFER TO
PURCHASE AND IN THE RELATED LETTER OF TRANSMITTAL, INCLUDING A CONDITION THAT AT
LEAST 2,000,000 SHARES BE TENDERED AND NOT WITHDRAWN AND A CONDITION THAT THE
RECAPITALIZATION (AS DEFINED IN THE OFFER TO PURCHASE) AND THE TRANSACTIONS
ASSOCIATED THEREWITH ARE CONSUMMATED.
The Purchaser will not pay any fees or commissions to any broker or dealer
or any other person (other than the Dealer Manager described in the Offer to
Purchase) for soliciting tenders of Shares pursuant to the Offer. You will upon
request be reimbursed for customary mailing and handling expenses incurred by
you in forwarding any of the enclosed material to your clients.
This Offer is not being made to (nor will tenders be accepted from or on
behalf of) holders of Shares in any jurisdiction in which the Offer or the
acceptance thereof would not be in compliance with the laws of such
jurisdiction.
Any inquiries you may have with respect to the Offer should be addressed
to, and additional copies of the enclosed materials may be obtained from, the
Information Agent or the undersigned at the address and telephone numbers set
forth on the back cover of the Offer to Purchase.
Very truly yours,
ALEX. BROWN & SONS, INCORPORATED
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
THE AGENT OF AURORA ELECTRONICS, INC., THE DEALER MANAGER, THE INFORMATION AGENT
OR THE DEPOSITARY, OR AUTHORIZE YOU OR ANY OTHER PERSON TO USE ANY DOCUMENT OR
MAKE ANY STATEMENT ON BEHALF OF ANY OF THEM IN CONNECTION WITH THE OFFER OTHER
THAN THE DOCUMENTS ENCLOSED HEREWITH AND THE STATEMENTS CONTAINED THEREIN.
<PAGE> 1
AURORA ELECTRONICS, INC.
OFFER TO PURCHASE FOR CASH
UP TO 6,500,000 SHARES OF ITS COMMON STOCK
AT
$2.875 NET PER SHARE
THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON FRIDAY, MARCH 22, 1996
UNLESS THE OFFER IS EXTENDED.
To Our Clients:
Enclosed for your consideration is an Offer to Purchase dated February 23,
1996 and the related Letter of Transmittal (which together constitute the
"Offer") relating to an offer by Aurora Electronics, Inc., a Delaware
corporation (the "Company") to purchase for cash up to 6,500,000 of its
outstanding shares of Common Stock, $.03 par value (the "Shares"), at $2.875 per
Share net to you. We are the holder of record of Shares held for your account. A
TENDER OF SUCH SHARES CAN BE MADE ONLY BY US AS THE HOLDER OF RECORD AND
PURSUANT TO YOUR INSTRUCTIONS. THE LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR
YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO TENDER SHARES HELD BY US FOR
YOUR ACCOUNT.
We request instructions as to whether you wish to tender any or all of the
Shares held by us for your account, upon the terms and subject to the conditions
set forth in the Offer.
Your attention is invited to the following:
1. The tender price is $2.875 per Share, net to you in cash.
2. The Offer is being made for up to 6,500,000 of the Company's
Shares.
3. THE OFFER IS SUBJECT TO THE TERMS AND CONDITIONS SET FORTH IN THE
OFFER TO PURCHASE AND IN THE RELATED LETTER OF TRANSMITTAL, INCLUDING A
CONDITION THAT AT LEAST 2,000,000 SHARES BE TENDERED AND NOT WITHDRAWN AND
A CONDITION THAT THE RECAPITALIZATION (AS DEFINED IN THE OFFER TO PURCHASE)
AND THE TRANSACTIONS ASSOCIATED THEREWITH ARE CONSUMMATED.
4. Tendering shareholders will not be obligated to pay brokerage fees
or commissions or, except as set forth in Instruction 6 of the Letter of
Transmittal, transfer taxes on the sale of Shares pursuant to the Offer.
If you wish to have us tender any or all of your Shares, please so instruct
us by completing, executing and returning to us the instruction form on the
reverse hereof. An envelope to return your instructions to us is enclosed. If
you authorize tender of your Shares, all such Shares will be tendered unless
otherwise specified on the reverse hereof. Your instructions should be forwarded
to us in ample time to permit us to submit a tender on your behalf by the
expiration of the Offer.
The Offer is not being made to (nor will tenders be accepted from or on
behalf of) holders of Shares in any jurisdiction in which the making of the
Offer or acceptance thereof would not be in compliance with the laws of such
jurisdiction.
1
<PAGE> 2
INSTRUCTIONS WITH RESPECT TO
AURORA ELECTRONICS, INC.'S
OFFER TO PURCHASE FOR CASH
UP TO 6,500,000 SHARES OF ITS COMMON STOCK
AT
$2.875 PER SHARE
The undersigned acknowledge(s) receipt of your letter and the enclosed
Offer to Purchase dated February 23, 1996, and the related Letter of
Transmittal, in connection with the offer by Aurora Electronics, Inc., a
Delaware corporation, to purchase up to 6,500,000 shares of its Common Stock,
$.03 par value (the "Shares"), at $2.875 per Share net in cash.
This will instruct you to tender the number of Shares indicated below held
by you for the account of the assigned, upon the terms and subject to the
conditions set forth in the Offer to Purchase and the related Letter of
Transmittal.
Number of Shares to be tendered:
Shares*
- -------------------------- --------------------------------------
Signature(s)
--------------------------------------
--------------------------------------
--------------------------------------
Dated: , 1996.
----------------- --------------------------------------
Please print name(s) and address(es) here
- ---------------
* Unless otherwise indicated, it will be assumed that all Shares held by us for
your account are to be tendered.
<PAGE> 1
AURORA ELECTRONICS, INC.
OFFER TO PURCHASE FOR CASH
UP TO 6,500,000 SHARES OF ITS COMMON STOCK
AT
$2.875 NET PER SHARE
THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON FRIDAY, MARCH 22, 1996
UNLESS THE OFFER IS EXTENDED.
To Participants in the Employee Stock Purchase Plan of Aurora Electronics, Inc.:
Enclosed for your consideration is an Offer to Purchase dated February 23,
1996 and the related Letter of Transmittal (which together constitute the
"Offer") relating to an offer by Aurora Electronics, Inc., a Delaware
corporation (the "Company") to purchase for cash up to 6,500,000 of its
outstanding shares of Common Stock, $.03 par value (the "Shares"), at $2.875 per
Share net to seller.
WE ARE THE HOLDER OF RECORD OF SHARES HELD FOR YOUR ACCOUNT AS A
PARTICIPANT IN THE COMPANY'S EMPLOYEE STOCK PURCHASE PLAN (THE "PLAN"). A TENDER
OF SUCH SHARES CAN BE MADE ONLY BY US AS THE HOLDER OF RECORD AND PURSUANT TO
YOUR INSTRUCTIONS AS EXPLAINED HEREIN. THE LETTER OF TRANSMITTAL IS FURNISHED TO
YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO TENDER SHARES HELD IN
YOUR PLAN ACCOUNT.
We request instructions as to whether you wish to tender any or all of the
Shares held by us for your account, upon the terms and subject to the conditions
set forth in the Offer.
Your attention is invited to the following:
1. The tender price is $2.875 per Share, net to the seller in cash.
2. The Offer is being made for up to 6,500,000 of the Company's
Shares.
3. THE OFFER IS SUBJECT TO THE TERMS AND CONDITIONS SET FORTH IN THE
OFFER TO PURCHASE AND IN THE RELATED LETTER OF TRANSMITTAL, INCLUDING A
CONDITION THAT AT LEAST 2,000,000 SHARES BE TENDERED AND NOT WITHDRAWN AND
A CONDITION THAT THE RECAPITALIZATION (AS DEFINED IN THE OFFER TO PURCHASE)
AND THE TRANSACTIONS ASSOCIATED THEREWITH ARE CONSUMMATED.
4. Tendering shareholders will not be obligated to pay brokerage fees
or commissions or, except as set forth in Instruction 6 of the Letter of
Transmittal, transfer taxes on the sale of Shares pursuant to the Offer.
IF YOU WISH TO HAVE US TENDER ANY OF OR ALL THE SHARES HELD IN YOUR PLAN
ACCOUNT, PLEASE SO INSTRUCT US BY COMPLETING, EXECUTING, DETACHING AND RETURNING
TO US THE INSTRUCTION FORM ENCLOSED WITH THIS LETTER AND THE SUBSTITUTE FORM W-9
BY 5:00 P.M., NEW YORK CITY TIME, ON THURSDAY, MARCH 21, 1996, UNLESS THE OFFER
IS EXTENDED. PLEASE NOTE THAT YOU WILL BE EXEMPT FROM BACKUP WITHHOLDING IF YOU
PROVIDE YOUR SOCIAL SECURITY NUMBER OR EMPLOYER IDENTIFICATION NUMBER ON THE
FORM W-9 OR CERTIFY THAT YOU HAVE APPLIED OR WILL PROMPTLY APPLY FOR SUCH A
NUMBER. AN ENVELOPE TO RETURN YOUR INSTRUCTIONS TO US IS ENCLOSED. IF YOU
AUTHORIZE TENDER OF SUCH SHARES, ALL SUCH SHARES WILL BE TENDERED UNLESS
OTHERWISE SPECIFIED BELOW. YOUR INSTRUCTIONS TO US SHOULD BE FORWARDED
<PAGE> 2
PROMPTLY TO PERMIT US TO SUBMIT A TENDER ON YOUR BEHALF PRIOR TO THE EXPIRATION
OF THE OFFER.
The Offer is not being made to (nor will tenders be accepted from or on
behalf of) holders of Shares in any jurisdiction in which the making of the
Offer or acceptance thereof would not be in compliance with the laws of such
jurisdiction.
<PAGE> 3
INSTRUCTIONS WITH RESPECT TO
AURORA ELECTRONICS, INC.'S
OFFER TO PURCHASE FOR CASH
UP TO 6,500,000 SHARES OF ITS COMMON STOCK
AT
$2.875 PER SHARE
The undersigned acknowledge(s) receipt of your letter and the enclosed
Offer to Purchase dated February 23, 1996, and the related Letter of
Transmittal, in connection with the offer by Aurora Electronics, Inc., a
Delaware corporation, to purchase up to 6,500,000 shares of its Common Stock,
$.03 par value (the "Shares"), at $2.875 per Share net in cash.
This will instruct you to tender the number of Shares indicated below held
by you for the account of the assigned, upon the terms and subject to the
conditions set forth in the Offer to Purchase and the related Letter of
Transmittal.
Number of Shares to be tendered:
Shares*
- -------------------------- --------------------------------------
Signature(s)
--------------------------------------
--------------------------------------
--------------------------------------
Dated: , 1996.
----------------- --------------------------------------
Please print name(s) and address(es) here
- ---------------
* Unless otherwise indicated, it will be assumed that all Shares held by us for
your account are to be tendered.
<PAGE> 4
<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
PAYOR'S NAME:
- ------------------------------------------------------------------------------------------------------------------
Social security number or
SUBSTITUTE Part 1 -- PLEASE PROVIDE YOUR TIN IN THE Employer ID number
BOX AT RIGHT AND CERTIFY BY SIGNING AND
DATING BELOW. / /
-----------------------------------------
------------------------------------------------------------------------------------
Part 2 -- Certification -- Under penalties of perjury, I certify that:
FORM W-9
DEPARTMENT OF THE TREASURY (1) The number shown on this form is my correct Taxpayer Identification Number (or I
INTERNAL REVENUE SERVICE am waiting for a number to be issued to me and I have checked the box in Part 3
PAYER'S REQUEST FOR below) and
TAXPAYER IDENTIFICATION
NUMBER (TIN) (2) I am not subject to backup withholding because: (a) I am exempt from backup
withholding, or (b) I have not been notified by the Internal Revenue Service (the
"IRS") that I am subject to backup withholding as a result of a failure to report
all interest or dividends, or (c) the IRS has notified me that I am no longer
subject to backup withholding.
Certification Instructions -- You must cross out item (2) above if you have been
notified by the IRS that you are currently subject to backup withholding because
of underreporting interest or dividends on your tax return. However, if, after
being notified by the IRS that you were subject to backup withholding you
received another notification from the IRS that you are no longer subject to
backup withholding, do not cross out item (2).
------------------------------------------------------------------------------------
Part 3 --
SIGNATURE DATE Awaiting TIN / /
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF
ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER. PLEASE REVIEW THE ENCLOSED
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON
SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART
3 OF SUBSTITUTE FORM W-9.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (1) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office or (2) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number by the time of payment, 31% of all
reportable payments made to me will be withheld, but that such amounts will be
refunded to me if I then provide a Taxpayer Identification Number within sixty
(60) days.
Signature Date
--------------------------------- ---------------------------
<PAGE> 5
INSTRUCTIONS WITH RESPECT TO AURORA ELECTRONICS, INC.'S
OFFER TO PURCHASE FOR CASH UP TO 6,500,000 SHARES
OF ITS COMMON STOCK
AT
$2.875 NET PER SHARE
The undersigned acknowledges receipt of your letter enclosing the Offer to
Purchase dated February 23, 1996 of Aurora Electronics, Inc. (the "Company"), a
Delaware corporation, and the related Letter of Transmittal, relating to the
Company's offer to purchase up to 6,500,000 shares of its Common Stock, par
value $.03 per share (the "Shares"). The undersigned understands that the Offer
applies to Shares allocated to the undersigned in the Company's Employee Stock
Purchase Plan (the "Plan").
This will instruct you, as Plan Administrator and Record Holder of the
Shares held in the account of the undersigned as a participant in the Plan, to
tender the number of Shares indicated below that are held for the Plan account
of the undersigned on the terms and conditions set forth in such Offer to
Purchase and the related Letter of Transmittal.
Dated: , 1996
--------------------
<TABLE>
<S> <C>
- -------------------------------------------------
NUMBER OF SHARES TO BE TENDERED*
Shares
- ------------------
- -------------------------------------------------
</TABLE>
------------------------------------
------------------------------------
Signature(s)
------------------------------------
------------------------------------
Please print name(s)
------------------------------------
------------------------------------
Address (Include Zip Code)
------------------------------------
------------------------------------
Area Code and Telephone No.
------------------------------------
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Taxpayer Identification or Social
Security No.
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* Unless otherwise indicated, it will be assumed that all Shares in your Plan
account are to be tendered.
