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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO ____
COMMISSION FILE NUMBER 0-9725
AURORA ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-1539534
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9477 WAPLES ST., SUITE 150, SAN DIEGO, CA 92121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (619) 552-1213
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.03 par value per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [X] No [ ]
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The aggregate market value of the voting stock held by non-affiliates of the
registrant on December 12, 1997, based on the closing price of the Common Stock
on the American Stock Exchange on December 12, 1997 was approximately
$7,689,200.
Indicated below is the number of shares outstanding of each class of the
registrant's Common Stock, as of December 12, 1997.
Title of Each Class of Common Stock Number of Outstanding
Common Stock, $.03 par value 6,847,966
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PART I
ITEM 1. BUSINESS.
OVERVIEW
Aurora Electronics, Inc. ("Aurora" or the "Company") provides spare parts
distribution and electronics recycling services to major personal computer
manufacturers and computer service organizations. Aurora operates worldwide
through its wholly-owned subsidiary, Aurora Electronics Group, Inc. ("AEG"),
with facilities in the United States, Canada, and Europe. AEG distributes new
and refurbished computer spare parts, primarily to the field service departments
of computer original equipment manufacturers ("OEMs"), third-party maintenance
and multivendor service organizations ("TPMOs" and "MVSOs", respectively)
computer resellers and dealers, and large corporate self-maintainers. AEG
distributes spare parts from over 500 manufacturers, with particular emphasis on
products from Apple Computer, AST Computer, AT&T, Compaq, Dell Computer, Digital
Equipment Corporation ("DEC"), Hewlett-Packard, IBM and Toshiba. In addition,
AEG provides a broad range of materials management services, such as advance
exchange, returned materials management, inventory management, and electronic
materials recycling and remarketing.
CAPITALIZATION
In March 1996, the Company completed a comprehensive recapitalization of the
Company (the "Recapitalization"). The Recapitalization included: (1) a tender
offer pursuant to which the Company repurchased approximately 4,268,000 shares
of $.03 par value common stock (the "Common Stock") at $2.875 per share; (2) the
Company's sale of $40 million of convertible preferred stock, $.01 par value per
share (the "Preferred Stock"), and $10 million in subordinated debt (with
approximately 607,000 shares of common stock attached) to partnerships managed
by Welsh, Carson, Anderson & Stowe ("WCAS"), affiliates of WCAS and certain
other purchasers; (3) the establishment of a new $35 million senior credit
facility with The Chase Manhattan Bank (formerly Chemical Bank, N.A.) (the
"Credit Agreement"); (4) the repayment in full of AEG's existing senior bank
indebtedness of approximately $26 million; and (5) the redemption of the
Company's 9-1/4% Senior Subordinated Notes (approximately $9.3 million). The
Preferred Stock is convertible into Common Stock at $2.125 per share, subject to
anti-dilution adjustments, and votes on an as-converted basis.
At June 30, 1996, and at various subsequent dates, AEG was not in compliance
with certain financial covenants under the Credit Agreement. To obtain waivers
of noncompliance from the lenders, on September 30, 1996, the Company, AEG and
WCAS (the Company's largest shareholder) entered into a Financial Support
Agreement, pursuant to which, with subsequent amendments, WCAS has guaranteed
$16,292,000, the total borrowings currently outstanding under the Credit
Agreement, and the Company has granted WCAS warrants to purchase 2,227,902
shares of Common Stock at prices ranging from $1.025 to $2.10 per share. The
Credit Agreement has been amended to waive all events of non-compliance with
financial covenants, to eliminate future financial covenants and to establish
the maturity date for the facility as April 30, 1999. At present, no additional
borrowings are available under the Credit Agreement.
INDUSTRY
The worldwide personal computer installed base has grown to approximately 180
million units, and requires a wide range of support, maintenance, upgrade and
recycling services. Due to the competitiveness of the personal computer industry
and the increasingly short manufacturing life cycle of the products, companies
involved in the manufacture, service and distribution of computers are seeking
outsourcing solutions to meet these requirements, preferably from a single
source. Aurora offers its customers a wide range of these critical aftermarket
services through integrated outsourcing programs provided on a worldwide basis,
thereby allowing its customers to achieve cost savings associated with reduced
inventories, lower headcount and less investment in plant and equipment.
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As a result of the trend toward outsourcing of support, maintenance, upgrade and
recycling activities, an independent spare parts distribution, recycling and
repair industry has emerged in support of personal computer manufacturers and
maintenance service providers. This industry is comprised of companies that are
unaffiliated with the manufacturers of computers and computer parts, yet possess
expertise in providing spare parts procurement, distribution, logistics, repair
and recycling services. Companies in this industry operate in the secondary
market for both new and used spare parts, relying on thousands of parts sourcing
contacts among system and subsystem manufacturers, distributors, brokers and
large end-users. Aurora is among the largest companies in the independent parts
distribution, recycling and repair industry.
SERVICES
The range of spare parts distribution, electronics recycling services and
aftermarket service programs which AEG provides includes:
o Spare Parts Distribution. AEG sources and distributes a wide range of
spare parts, many of which are out-of-warranty and often
out-of-production. AEG sources these parts either from its own
inventory or by utilizing its parts sourcing database to locate and
procure the parts, and then ships them to the customer, typically
within 24 hours. Currently, approximately 70% of AEG's shipments are
products that are sourced, reconditioned and tested the same day. AEG
also works directly with computer OEMs and spare parts manufacturers as
an authorized parts distributor, providing same and next-day shipment
of new spare parts stocked by AEG on behalf of the OEM.
o Aurora Exchange Programs. AEG provides selected customers with good
working parts at a discounted price in exchange for their defective
parts. In most cases, the defective unit is repaired and placed back
into inventory to fulfill future requests under this program.
o Asset Recovery and Re-marketing. AEG refurbishes, reconditions, and
redistributes systems and subsystems received as a result of
manufacturing fallout, field dispositions, dealer and distributor
returns, stock rotations, excess and obsolete inventories and customer
trade-in and exchange programs. Refurbished systems and subsystems are
either utilized for AEG's spare parts inventories or redistributed
worldwide.
o Returns Management Programs. AEG's returns management program assists
OEMs and distributors by facilitating the return of units which are
defective, returned due to buyer's remorse or stock rotation or
otherwise removed from the marketplace. Returned units are received,
processed, tested, refurbished, as required, and either returned to the
manufacturer, sold in secondary channels or used for spare parts
inventory.
o Parts Procurement Outsourcing. In some cases, customers are interested
in total outsourcing of the parts ownership, management and logistics
function. In these cases, AEG commits to certain service levels with
respect to parts availability and response time, and takes
responsibility for all aspects of the parts fulfillment process,
including ownership of the part.
CUSTOMERS AND SUPPLIERS
AEG provides spare parts sourcing and distribution services primarily to five
groups of customers:
o Customer Maintenance Departments of Major Computer OEMs -- AEG provides
spare parts and related repair, spare parts inventory management and
logistics programs to support the customer maintenance departments of
customers such as AT&T, Compaq, DEC, Hewlett-Packard, IBM and ICL.
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o Third-Party Maintenance Organizations and Multi-Vendor Service
Organizations -- Customers in this category include not only
independent field service organizations (DecisionOne, Entex, Granada,
Sorbus, Vanstar), but also MVSOs of current or former computer OEMs
(IBM, DEC, Hewlett-Packard, Data General, Unisys).
o Computer Resellers, Distributors and Dealers -- Major computer
resellers, distributors and dealers are increasingly offering
maintenance services to their customers as a means of capturing
additional margin. AEG supports these organizations through parts
sourcing and inventory remarketing programs. Typical customers include
Circuit City, Compucom, Inacomp and Microage.
o Corporate Self-Maintainers -- An increasing number of large
corporations are satisfying their internal service requirements through
in-house organizations which meet their spare parts requirements
through external suppliers such as AEG.
o Major Computer OEM's -- By using recycling services, OEM customers,
such as Apple Computer, Compaq Computer, Dell Computer,
Hewlett-Packard, IBM and Storage Technology, can reduce or eliminate
the potential liability and expense related to disposing of excess,
obsolete and defective products, while realizing an economic return on
these products.
For fiscal 1997 and 1996, IBM accounted for approximately 11% and 19%,
respectively, of the Company's sales.
OPERATIONS
AEG services more than 5,000 customers worldwide, maintains a parts sourcing
database of over 8,000 contacts, and completes over 150,000 transactions
annually.
o Sales and Marketing. AEG believes that it is a market leader in terms
of its approach to the sales and marketing of its materials management
services, spare parts, and recycled parts, and its utilization of
sophisticated information systems to support these efforts. AEG
maintains an internal sales and customer support group of 76 employees
which handles daily sales transactions involving spare parts and
recycled product sales. In addition, AEG's materials management
services are marketed through a direct sales force of 9 employees, who
work closely with computer OEMs, TPMOs and MVSOs, and computer
resellers in developing customized programs that meet their particular
materials management requirements. Supporting these sales forces is a
marketing department comprised of 9 employees who perform: (i)
marketing communications; (ii) OEM and distributor relations; (iii)
industry and competitive analysis; and (iv) development of new
customer targets and new applications for AEG services.
o Purchasing. Because customers are often under severe time pressure in
procuring spare parts, AEG's ability to confirm a customer request
immediately from inventory, rather than initiating just-in-time
procurement from its parts sourcing suppliers, increases the
likelihood of completing a transaction. In order to increase the
percentage of spare parts sourced directly from inventory, AEG
maintains a department which procures a variety of commonly requested
parts in advance and attempts to select parts from the recycle flow
which can be sold as spares. AEG's information system regularly
examines parts usage patterns and available stocks and performs
trend-line analyses to assist this department in its procurement
activities.
o Processing. AEG provides its spare parts distribution services
primarily through distribution facilities in Marina del Rey,
California; Toronto, Canada; and Hoofddorp, The Netherlands; and
through its recycling facility in San Diego, California. AEG's
distribution operations receive purchased spare parts or perform
specific tear-down of whole systems in order to obtain spare parts,
identify and cross-reference those parts for the AEG database, test
and/or refurbish, as required, package, warehouse and ship. Often
these activities must be performed within a 12 hour period in order to
fulfill same-day requirements. AEG's recycling operations rely on the
Company's ability to receive, identify, test, tear down as appropriate
and
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dispose of materials rapidly, in large volumes and consistent with
customers' requirements. The Company's San Diego facility is ISO 9002
certified. AEG has developed proprietary methods for recycling and
reconditioning certain materials, particularly including integrated
circuits (ICs), the purpose of which is to produce material that is of
the highest value for either return to the recycling customer or
resale. A key value to customers is the Company's ability to dispose
of all unsalable materials in environmentally safe ways, thus
minimizing such customers', and the Company's, environmental
liability.
COMPETITION
The independent spare parts distribution and the electronic recycling services
industry is fragmented with widespread competition from a variety of small
independent suppliers. AEG believes that competition for OEM, TPMO and MVSO
customers is based on a number of factors, including: (i) breadth of parts
distributed; (ii) ability to offer sophisticated inventory and materials
management programs; (iii) ability to offer rapid delivery and sophisticated
logistics programs; and (iv) price. Among AEG's major independent competitors
are DecisionOne, Data Trend, PC Service Source, and The Cerplex Group.
PATENTS / TRADEMARKS
The Company does not currently hold any patents or registered trademarks.
However, the Company has developed several private labels for use in its
business, including PartSmart, Micro-C, Memory Master, MM, and Advantage. The
Company has applied for registration of "The PartSmart Company" trademark. While
management believes that this approach helps distinguish the Company to its
customers, none of these brand names is material to the continuation of the
business.
ENVIRONMENTAL REGULATION
The Company's business is subject to various federal, state and local
environmental laws and regulations relating to the disposal of waste material.
The Company believes that it is in compliance with such environmental laws and
regulations and is not aware of any situation or condition that could reasonably
be expected to have a material adverse affect on the Company's financial
condition or competitive position.
SEASONALITY
The Company does not consider its business to be seasonal.
EMPLOYEES
On December 20, 1997, the Company had approximately 260 employees. None of the
Company's employees is represented by a union and none are subject to a
collective bargaining agreement. The Company has never experienced a work
stoppage due to labor difficulties and believes that its employee relations are
good.
ITEM 2. PROPERTIES.
The following table sets forth certain information as of December 20, 1997
relating to the Company's principal properties, all of which are leased. The
Company believes that its properties are adequate and suitable for its current
needs.
<TABLE>
<CAPTION>
Approximate
LOCATION Principal Use Square Footage
- -------- ------------- --------------
<S> <C> <C>
Marina del Rey, CA (1) Office, Warehouse and Service Facility 106,715
San Diego, CA Office, Processing and Warehouse Facility 56,808
and Corporate Headquarters
Toronto, Canada Warehouse and Service Facility 9,475
</TABLE>
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<TABLE>
<S> <C> <C>
Hoofddorp, Netherlands Warehouse and Service Facility 8,945
Chicago, IL (2) Discontinued Operations 163,000
</TABLE>
(1) The Company subleased 48,473 square feet of the Marina del Rey, California
facility to an unrelated third party for a five year period, which
commenced December 1, 1994.
(2) The Chicago facility is subject to a sale/leaseback arrangement between the
Company and an unrelated third party, as lessor. This property relates to a
discontinued operation. See Note D of the Notes to Consolidated Financial
Statements -- Discontinued Operations, and Note N of the Notes to
Consolidated Financial Statements -- Commitments and Contingencies. The
lease expires in 2005.
ITEM 3. LEGAL PROCEEDINGS.
The Company is engaged in routine legal proceedings incidental to its business,
none of which the Company believes will have a material adverse effect on the
financial position of the Company. See Note N of the Notes to Consolidated
Financial Statements -- Commitments and Contingencies.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Until December 12, 1997, the Company's Common Stock was traded on the American
Stock Exchange ("AMEX") under the symbol AUR. Commencing December 15, 1997, the
Company's Common Stock is reported on the OTC Bulletin Board under the symbol
AURU. The following table sets forth the range of the high and low sales prices
for the Common Stock for each quarterly period during the last two fiscal years.
<TABLE>
<CAPTION>
FISCAL YEAR 1997 FISCAL YEAR 1996
---------------- ----------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter 2-3/8 1-1/2 3-1/4 1-3/4
Second Quarter 2-3/16 1-3/8 2-15/16 1-1/2
Third Quarter 2 1-3/8 4-3/4 1-1/2
Fourth Quarter 2-1/8 3/4 3-3/8 1-15/16
</TABLE>
On December 12, 1997, the last sale price of the Common Stock as reported by
AMEX was $ 1-1/4 per share. As of December 20, 1997, the Company had 1,020
holders of record of its Common Stock, and two (2) holders of warrants to
purchase up to 2,227,902 shares of its Common Stock at prices ranging from
$1.025 to $2.100 per share. See Note K of the Notes to Consolidated Financial
Statements -- Stockholders' Deficit.
The Company has not paid any cash or stock dividend on its Common Stock since
September 30, 1993. At present, it is the policy of the Company to retain all
earnings for reinvestment into the Company. In addition, the Credit Agreement
restricts AEG's ability to pay dividends to the Company, and thus limits the
Company's ability to pay dividends to its stockholders.
ITEM 6. SELECTED FINANCIAL DATA.
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The following table sets forth selected financial data regarding the Company's
results of operations and financial position. This information should be read in
conjunction with Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated Financial
Statements and related notes included elsewhere herein.
<TABLE>
<CAPTION>
(In thousands, except per share figures)
-----------------------------------------------------------------------------
OPERATING DATA 1997 1996 1995 1994 1993
-------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenues $ 64,892 $ 98,019 $ 141,852 $ 120,386 $ 58,328
Gross profit 12,986 24,443 34,582 26,350 11,274
SG&A Expenses 23,466 25,943 28,170 17,573 4,657
Amortization of intangibles 34,044(1) 18,042(2) 9,073(3) 4,539(4) 1,284
Restructuring charge and other -- -- 5,643(5) 2,161 --
Litigation settlement -- -- -- 1,943 --
Operating income (loss) (44,524) (19,542) (8,304) 134 5,333
Interest expense (4,050) (6,221) (5,522) (4,449) (1,276)
Other income (expense), net (498) (1,284) 116 197 --
Earnings (loss) from continuing
operations before taxes (49,072) (27,047) (13,710) (4,118) 2,505
Net income (loss) (49,605) (30,353) (15,030) (6,518) 3,005
Earnings (loss) from continuing
operations per share $ (7.86) $ (4.44) $ (1.79) $ (0.55) $ 0.40
Net income (loss) per share $ (7.86) $ (4.44) $ (1.79) $ (0.87) $ 0.48
Weighted average number of
shares outstanding 6,675 7,159(6) 8,379 7,491 6,273
</TABLE>
(1) During the fourth quarter of fiscal 1997, approximately $29,602 relating
to a write-down of intangible assets acquired in fiscal 1994 in
connection with the Century acquisition were charged to operations
(2) During the fourth quarter of fiscal 1996, approximately $16,580 relating
to a write-down of intangible assets acquired in fiscal 1992 in
connection with the Micro-C Corporation acquisition was charged to
operations.
(3) During fiscal 1995, approximately $7,400 relating to a write-down of
intangible assets associated with the repair business acquired in fiscal
1993 in connection with the FRS, Inc. acquisition was charged to
operations.
(4) During fiscal 1994, approximately $2,400 relating to a write-down of
intangible assets associated with a covenant not to compete was charged
to operations.
(5) During fiscal 1995, the Company substantially completed a major corporate
reorganization into two core businesses operating through the IC
recycling and recovery division and the spare parts distribution
division.
(6) In connection with the Recapitalization, on March 29, 1996, the Company
repurchased approximately 4,268 shares of Common Stock and issued 607
shares of Common Stock and 400 shares of Preferred Stock to WCAS and
certain other purchasers. The Preferred Stock is convertible into 18,824
shares of Common Stock.
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<TABLE>
<CAPTION>
As of September 30,
--------------------------------------------------------
BALANCE SHEET DATA 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital $ (3,113) $ 610 $ 196 $ 9,013 $ 10,713
Total assets 14,629 52,788 80,716 102,927 76,857
Long-term obligations (less
current maturities) 36,585 25,842 46,183 51,761 25,904
Redeemable convertible
preferred stock 46,722 40,000 -- -- --
Stockholder's equity (deficit) (83,320) (31,690) 12,338 26,903 26,655
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
(In thousands, except per share figures)
OVERVIEW
Aurora, as it exists today, was formed on September 30, 1992. Prior to September
30, 1992, the corporation was known as BSN Corp. and was engaged in the sporting
goods industry. From 1990 through 1992, BSN divested itself of a majority of its
sporting goods assets and, effective September 30, 1992, announced that all of
its remaining sporting goods assets would be accounted for as discontinued
operations and that such operations would be sold. Effective September 30, 1992,
the Company entered the computer and electronics industry through the
acquisition of Micro-C Corporation, a San Diego, California based company
founded in 1985, which provided both integrated circuits ("IC") recycling
services to computer OEMs and memory IC distribution services for semiconductor
manufacturers. Effective September 30, 1993, Aurora acquired FRS, Inc., a
Sacramento, California based company founded in 1984, which provided depot
repair services to computer and peripheral OEMs. Effective March 1, 1994, Aurora
acquired Century Computer Marketing, a Marina del Rey, California based company
founded in 1984, a leading supplier of new and refurbished spare parts to the
computer maintenance market.
In the third quarter of fiscal 1995, the Company completed a corporate
reorganization, in which it: (a) exited the memory upgrade manufacturing and
supply business formerly known as the Premier Division; and (b) substantially
downsized its depot repair services operation acquired in the FRS, Inc.
acquisition, and refocused these operations to support the Company's remaining
spare parts distribution and electronic recycling services business.
In March 1996, the Company completed the Recapitalization. See Item 1. Business
- -- Overview.
In October of 1997, the Company completed the sale of the remainder of its depot
repair services operation and sold its Irvine, Scotland recovery processing
facility. A reserve for the losses resulting from these transactions was accrued
in the fourth quarter of fiscal 1997.
RESULTS OF OPERATIONS YEAR ENDED SEPTEMBER 30, 1997 COMPARED WITH YEAR ENDED
SEPTEMBER 30, 1996
Net revenues for the year ended September 30, 1997 for the Company were $64,892
as compared to $98,019 for the year ended September 30, 1997. Gross profit for
fiscal 1997 was $12,986 (20.0% of net revenues) as compared to gross profit for
fiscal 1996 of $24,443 (24.9% of net revenues). The Company's decline in
revenues and gross profit was due to a continued decline in the average sales
prices for DRAM memory chips in the Asset Recovery Services Division (ARS) and
an overall decline in the prices of computer repair parts in its Parts Services
Supply Division ("PSS").
Selling, General and Administrative ("SG&A") expenses for fiscal 1997 were
$23,466 (36.2% of revenue) as compared to $25,943 (26.5% of revenue) for fiscal
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1996. Included in the 1996 SG&A expenses were approximately $725 in one time
charges related to the Recapitalization. The increase of the SG&A expenses as a
percentage of revenue was due to the reduction in revenues described in the
preceding paragraph.
Amortization expense for fiscal 1997 was $34,044 as compared with $18,042 in
fiscal 1996. The 1997 expense included $29,602 of unamortized goodwill and other
intangibles remaining from the acquisition of Century Computer Marketing and
$3,390 of computer system software and development costs in PSS. In
consideration of the continued decline in prices for computer repair parts,
management's projections do not support recovery of these assets over their
amortization lives. The fiscal 1996 amortization included the write-off of
$16,580 of goodwill related to the acquisition of Micro-C Corporation, Inc.
Net interest expense for fiscal 1997 was $4,050, or 6.2% of revenue, as compared
to $6,221, or 6.3% of revenue, for fiscal 1996. The interest expense for fiscal
1996 includes approximately $2,243 of charges related to the Recapitalization,
which includes approximately $1,070 of previously capitalized financed charges,
$917 of interest, fees and expenses due to the Company's previous lenders and
$256 relating to the 9-1/4% Senior Subordinated Notes.
Other expense for 1997 was $498, including a loss of approximately $450 from the
sales of its repair facility in Sacramento, California, and its asset recovery
facility in Irvine, Scotland. Other expense for fiscal 1996 was $1,284 including
writedowns and disposal of property and equipment totaling $1,369.
Provision for income taxes for fiscal 1997 was $533 as compared to $3,306 for
fiscal 1996. The fiscal 1997 provision includes the increase in the deferred
income tax valuation allowance in the amount of $500 for deferred tax assets
not anticipated to be realized. The fiscal 1996 provision includes the increase
of the deferred income tax valuation allowance in the amount of $3,234 due to
management's determination that the deferred tax asset will not be fully
realized.
Net loss applicable to common stockholders for fiscal 1997 was $52,427 as
compared to $31,753 for fiscal 1996. The fiscal 1997 loss included dividends
on preferred stock of approximately $2,822, writedowns of information system
software and development costs of approximately $3,390, and the write-off of
goodwill from the Century acquisition of approximately $29,602.
RESULTS OF OPERATIONS - YEAR ENDED SEPTEMBER 30, 1996, COMPARED WITH YEAR ENDED
SEPTEMBER 30, 1995.
Net revenues for the year ended September 30, 1996 for the Company were $98,019
as compared to $141,852 for the year ended September 30, 1995. The Company's
decline in revenues was due primarily to the discontinuation of the Premier
Division ($36,254) during fiscal 1995. Excluding the Premier Division, net
revenues for fiscal 1996 decreased 7.2% over the comparable period in fiscal
1995. The decrease was due to a 27.4% decline in revenues in the IC recycling
and recovery business, offset by an increase of 5.3% in revenues for PSS. The
decline in revenues for ARS was due primarily to a decline during the year in
the average sales price for DRAM chips of approximately 87.0%.
Gross profit for fiscal 1996 was $24,443 (24.9% of net revenues) as compared to
gross profit for fiscal 1996 of $34,582 (24.4% of net revenues). The decrease in
gross profit was due primarily to the discontinuation of the Premier Division
and the decrease of approximately $6,261 for ARS over the comparable period in
fiscal 1995. This decline in gross profit was due to the decline of DRAM prices
discussed above.
SG&A expenses for fiscal 1996 were $25,943, (26.5% of revenue) as compared to
$28,170, (19.9% of revenue) for fiscal 1995. Included in the SG&A expenses were
approximately $725 in one time charges related to the Recapitalization. The
increase of the SG&A expenses as a percentage of revenue was due to the
reduction in revenues from the discontinuation of the Premier Division and the
decline in revenues for ARS.
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Amortization expense for fiscal 1996 was $18,042 (18.4% of revenue), as compared
to $9,073, (6.4% of revenue) for fiscal 1995. The increase was due to the
write-off in the fourth quarter of fiscal 1996 of $16,580 of goodwill related to
the acquisition of Micro-C Corporation, which was only partially matched by the
third quarter of fiscal 1995 write-off of goodwill related to the acquisition of
FRS, Inc. Management wrote off the goodwill related to the Micro-C acquisition
due to the deterioration of the pricing levels in the IC market and their
negative effects on the Company's business prospects going forward.
Net interest expense for fiscal 1996 was $6,221, (6.3% of revenue) as compared
to $5,522 (3.9% of revenue) for fiscal 1995. The interest expense for 1996
includes approximately $2,243 of charges related to the Recapitalization which
includes approximately $1,070 of previously capitalized financed charges, $917
of interest, fees and expenses due to the Company's previous lenders and $256
relating to the 9-1/4% Senior Subordinated Notes.
Other income (expense) for fiscal 1996 included writedowns and disposal of
property and equipment totaling $(1,369).
Provision for income taxes for fiscal 1996 was $3,306 (3.4% of revenue) as
compared to $1,320 (.9% of revenue) for fiscal 1995. This provision includes the
increase of the deferred income tax valuation allowance in the amount of $3,234
due to management's determination that the deferred tax asset will not be fully
realized. Management reached this conclusion as a result of the limitation in
the utilization of the Company's net operating loss carryforwards caused by the
change of ownership pursuant to the Recapitalization.
Net loss applicable to common stockholders for fiscal 1996 was $31,753 as
compared to a net loss of $15,030 for fiscal 1995. The fiscal 1996 loss included
approximately $6,620 of charges incurred in the second quarter of fiscal 1996
due to the Recapitalization completed on March 29, 1996, $6,320 of reduced
operating income from the ARS when compared to 1995, dividends on preferred
stock of approximately $1,400, writedowns and disposal of property and equipment
totaling $1,369, and the write-off of goodwill from the Micro-C acquisition
totaling $16,580.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary requirements for capital are related to its accounts
receivable, inventory levels, improvements to its property and equipment,
investment in data processing equipment and software development, costs
resulting from the consolidation of its businesses and funding its losses from
operations. The Company's working capital was $(3,113) as of September 30,
1997, compared to $610 as of September 30, 1996.
At June 30, 1996, and at various subsequent dates, AEG was not in compliance
with certain financial covenants under the Credit Agreement. To obtain waivers
of noncompliance from the lenders, on September 30, 1996, the Company, AEG and
WCAS (the Company's largest shareholder) entered into a Financial Support
Agreement, pursuant to which, with subsequent amendments, WCAS has guaranteed
$16,292, the total borrowings currently outstanding under the Credit Agreement,
and the Company has granted WCAS warrants to purchase 2,228 Shares of Common
Stock at prices ranging from $1.025 to $2.10 per share. The Credit Agreement has
been amended to waive all events of non-compliance with financial covenants, to
eliminate future financial covenants and to establish the maturity date for the
facility as April 30, 1999. At present, no additional borrowings are available
under the Credit Agreement. See Note K of the Notes to Consolidated Financial
Statements -- Stockholders' Equity and Item 12 -- Security Ownership of Certain
Beneficial Owners and Management.
Subsequent to the Recapitalization on March 29, 1996, WCAS has provided
additional capital to the Company through purchases of Redeemable Convertible
Preferred Stock and a 10% Senior Subordinated Demand Note as follows:
<TABLE>
<S> <C>
August 14, 1997 Series B Redeemable Convertible Preferred Stock $2,500
October 2, 1997 Series C Redeemable Convertible Preferred Stock 2,500
October 24, 1997 Series D Redeemable Convertible Preferred Stock 2,000
December 2, 1997 10% Demand Promissory Note 2,800
</TABLE>
11
<PAGE> 12
Management believes that the Company will continue to experience operating
losses and negative cash flow in fiscal 1998 and does not have additional funds
available to it pursuant to the Credit Agreement. Since the Recapitalization,
WCAS has provided the Company financial support by loan guarantees, preferred
stock purchases and a direct loan. There can be no assurance that such
additional capital will be available to the Company. Absent continued financial
support of WCAS, it is unlikely that the Company can successfully implement its
1998 business plans and strategies. These matters raise substantial doubt about
the Company's ability to continue as a going concern. See Note A to the
Consolidated Financial Statements.
OUTLOOK AND UNCERTAINTIES
The following is a "safe harbor" statement under the Private Securities
Litigation Reform Act of 1995: The matters discussed in this Annual Report on
Form 10-K contain statements that constitute forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
The words "expect," "estimate," "anticipate," "predict," "believe," and similar
expressions and variations thereof are intended to identify forward-looking
statements. Such statements appear in a number of places in this Annual Report
on Form 10-K and include statements regarding the intent, belief or current
expectations of the Company, its directors or its officers with respect thereto,
among other things: (i) trends affecting the Company's financial condition or
results of operations; (ii) the Company's financing plans; and (iii) the
Company's business growth strategies. Readers are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those projected in the forward-looking statements as a result of various
factors. These risks and uncertainties include, but are not limited to, the
following:
o Other Uncertainties. Other operating, financial or legal risks or
uncertainties are discussed in the Form 10-K or in the Company's
other filings with the Commission from time to time in specific
contexts. The Company is, of course, also subject to general
economic risks, the risk of interruption in the source of supply,
the risk of loss of a major customer and other risks and
uncertainties.
o Market in Early Stages of Development. The Company believes that
the market for its spare parts distribution and electronics
recycling 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.
The Company addresses these issues in many ways, particularly
including the development of information tools to use in its
business, and the installation of information processing software.
These projects require large budgets and manpower commitments, and
have uncertain time schedules. Successful completion of these
projects is not certain, and a failure of these projects may have
adverse consequences for the development of the Company's business
and/or its ability to successfully compete.
o 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.
o 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 the
12
<PAGE> 13
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.
o 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 to 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.
o 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.
o Competition. The independent spare parts distribution and the
electronic recycling services industry is fragmented with
widespread competition from a variety of small independent
suppliers. The Company believes that competition for OEM, TPMO and
MVSO customers is based on a number of factors, including: (i)
breadth of parts distributed; (ii) ability to offer sophisticated
inventory and materials management programs; (iii) ability to
offer rapid delivery and sophisticated logistics programs; and
(iv) price. Among the Company's major independent competitors are
DecisionOne, Data Trend, PC Service Source, and The Cerplex Group.
Certain of these competitors are larger in total company revenue
or have larger capitalizations than the Company.
o Control by and Dependence on Major Shareholder. As discussed above
under "Recapitalization," WCAS, and their affiliates, own
approximately 79.5% of the Company's voting stock. As a result,
WCAS is able to elect the entire Board of Directors, and will
retain the voting power to control all matters requiring
shareholder approval. The Company's ability to raise additional
capital or to sell control of the Company to third parties depends
on WCAS's approval. Absent continued financial support of WCAS, it
is unlikely that the Company can successfully implement its 1998
business plans and strategies. These matters raise substantial
doubt about the Company's ability to continue as a going concern.
See Note A to the Consolidated Financial Statements.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". This
statement is effective for both interim and annual reporting periods ending
after December 15, 1997. SFAS No. 128 replaces primary EPS and basic EPS and
fully diluted EPS with diluted EPS. Basic EPS is computed by dividing reported
earnings by weighted average shares outstanding. Diluted EPS is computed in the
same way as fully diluted EPS, except that the calculation now uses the average
share price for the reporting period to compute dilution from options under the
treasury stock method. Management does not believe that adoption of this
standard will have a significant impact on earnings per share.
In June 1997, FASB issued SFAS Nos. 130 and 131 "Reporting Comprehensive
Income" and "Disclosures about Segments of an Enterprise and Related
Information." FASB No. 130 and No. 131 are effective for fiscal years beginning
after December 15, 1997, with earlier adoption permitted. The Company does not
believe that adoption of these standards will have a material effect on the
Company.
13
<PAGE> 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<TABLE>
<CAPTION>
AURORA ELECTRONICS, INC. AND SUBSIDIARIES PAGE
<S> <C>
Index to the Company's Financial Statements and Financial
Statement Schedules.
Report of Independent Public Accountants 15
Consolidated Balance Sheets as of September 30, 1997 and
September 30, 1996. 16
Consolidated Statements of Operations for the years ended
September 30, 1997, 1996 and 1995 17
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended September 30, 1997, 1996 and 1995 18
Consolidated Statements of Cash Flows for the years ended
September 30, 1997, 1996 and 1995 19
Notes to Consolidated Financial Statements 20
Schedule II-- Valuation and Qualifying Accounts for the
years ended September 30, 1997, 1996 and 1995 31
</TABLE>
All other financial statement schedules are omitted as the required information
is presented in the financial statements or the notes thereto or is not
necessary.
14
<PAGE> 15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Aurora Electronics, Inc.:
We have audited the accompanying consolidated balance sheets of Aurora
Electronics, Inc. (a Delaware Corporation) and subsidiaries as of September 30,
1997 and 1996, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended September 30, 1997. These consolidated financial statements and
the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aurora Electronics,
Inc. and subsidiaries as of September 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the
period ended September 30, 1997 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note A to the
consolidated financial statements, the Company has experienced declining
revenues, significant operating losses, has negative working capital and a
deficit in stockholders' equity. In addition, since a recapitalization of the
Company in March 1996, the Company has relied upon the financial support of its
largest shareholder for additional capital and to maintain its existing credit
facilities. The Company's losses are expected to continue for the foreseeable
future and the Company will require additional funding and financial support
from its largest shareholder or another third party. There can be no assurance
that such additional funding and financial support will be available on
acceptable terms, or that such funds, if available, would enable the Company to
continue operating. These matters raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note A. The financial statements do not include
any adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index to the consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Orange County, California
January 12, 1998
15
<PAGE> 16
AURORA ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 323 $ 1,537
Trade receivables, less allowance for doubtful accounts
of $736 ($1,209 in 1996) 5,480 8,629
Inventories 3,389 4,098
Deferred income taxes -- 500
Other current assets 449 716
--------- ---------
Total current assets 9,641 15,480
Property, plant and equipment, net 3,023 4,811
Intangible and other assets 1,965 32,497
--------- ---------
Total assets $ 14,629 $ 52,788
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $ 1,177 $ 1,974
Accounts payable 6,846 8,465
Accrued compensation 1,904 1,912
Accrued interest 503 433
Current portion of reserve for discontinued operations 702 702
Other current liabilities 1,622 1,384
--------- ---------
Total current liabilities 12,754 14,870
Reserve for discontinued operations 1,888 2,366
Long-term debt 36,585 25,842
Commitments and contingencies
Redeemable convertible preferred stock, 425,000 shares issued
(400,000 shares in 1996) 46,722 41,400
Stockholders' equity (deficit):
Preferred stock, 1,000 shares authorized, none issued -- --
Common stock, 11,590 shares issued (10,486 shares in 1996) 348 315
Additional paid-in capital 62,443 61,679
Accumulated deficit (129,472) (77,045)
Treasury stock, at cost, 4,743 shares (16,639) (16,639)
--------- ---------
Total stockholders' equity (deficit) (83,320) (31,690)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 14,629 $ 52,788
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE> 17
AURORA ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE FIGURES)
<TABLE>
<CAPTION>
Years ended September 30,
-------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net revenues $ 64,892 $ 98,019 $ 141,852
Cost of sales 51,906 73,576 107,270
--------- --------- ---------
Gross profit 12,986 24,443 34,582
Selling, general and administrative expenses 23,466 25,943 28,170
Amortization of intangibles, including write-offs of $29,602,
$16,580 and $7,407 in 1997, 1996 and 1995, respectively 34,044 18,042 9,073
Restructuring charges and other -- -- 5,643
--------- --------- ---------
Operating loss (44,524) (19,542) (8,304)
Interest expense (4,050) (6,221) (5,522)
Other income (expense), net (498) (1,284) 116
--------- --------- ---------
Loss from operations before provision for income taxes (49,072) (27,047) (13,710)
Provision for income taxes 533 3,306 1,320
--------- --------- ---------
Net loss (49,605) (30,353) (15,030)
Accrued dividends on preferred stock (2,822) (1,400) --
--------- --------- ---------
Net loss applicable to common stockholders $ (52,427) $ (31,753) $ (15,030)
========= ========= =========
Net loss applicable to common stockholders
per share of common stock $ (7.86) $ (4.44) $ (1.79)
========= ========= =========
Weighted average number of common and
common equivalent shares 6,675 7,159 8,379
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE> 18
AURORA ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID-IN ACCUMULATED TREASURY
SHARES PAR VALUE CAPITAL DEFICIT STOCK TOTAL
------ --------- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1994 8,020 $240 $61,827 $ (29,300) $ (5,864) $ 26,903
Issuance of common stock/treasury stock -
acquisitions 42 2 (240) (353) 711 120
Common stock to be issued - acquisitions -- -- 345 -- -- 345
Net loss -- -- -- (15,030) -- (15,030)
------ ---- ------- --------- -------- --------
Balances at September 30, 1995 8,062 242 61,932 (44,683) (5,153) 12,338
Issuance of common stock/treasury stock -
acquisitions 1,476 45 66 (601) 771 281
Issuance of common stock with notes payable 607 18 1,029 -- -- 1,047
Repurchase of common stock -- -- -- -- (12,271) (12,271)
Issuance of common stock 340 10 903 (8) 14 919
Financing costs from issuance of redeemable,
convertible preferred stock -- -- (2,254) -- -- (2,254)
Accretion of dividends on redeemable,
convertible preferred stock -- -- -- (1,400) -- (1,400)
Exercise of stock options 1 -- 3 -- -- 3
Net loss -- -- -- (30,353) -- (30,353)
------ ---- ------- --------- -------- --------
Balances at September 30, 1996 10,486 315 61,679 (77,045) (16,639) (31,690)
Issuance of common stock - acquisitions 235 7 380 -- -- 387
Issuance of common stock - employee bonuses 94 3 151 -- -- 154
Issuance of common stock - litigation settlement 775 23 (23) -- -- --
Financing costs - warrants issued for guarantees
on bank debt -- -- 256 -- -- 256
Accretion of dividends on redeemable, convertible
preferred stock -- -- -- (2,822) -- (2,822)
Net loss -- -- -- (49,605) -- (49,605)
------ ---- ------- --------- -------- --------
Balances at September 30, 1997 11,590 $348 $62,443 $(129,472) $(16,639) $(83,320)
====== ==== ======= ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE> 19
AURORA ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years ended September 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations $(49,605) $(30,353) $(15,030)
Adjustments to reconcile loss from continuing operations
to net cash flows from operating activities:
Depreciation and amortization 32,322 19,686 10,493
Noncash interest expense 2,044 1,340 655
Loss on disposition of assets 3,390 1,369 944
Changes in assets and liabilities, net of acquisitions:
Trade receivables, inventories and other assets 4,227 7,133 6,667
Accounts payable, accrued compensation and other liabilities (1,389) (729) (1,789)
Accrued interest and income taxes receivable/payable 70 632 (60)
Deferred income taxes 500 3,234 1,304
-------- -------- --------
Net cash flows from continuing operations (8,441) 2,312 3,184
Net cash flows from discontinued operations (478) (1,005) (951)
-------- -------- --------
Net cash flows from operating activities (8,919) 1,307 2,233
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (3,053) (2,072) (1,440)
-------- -------- --------
Proceeds from sales of marketable securities and SSG note -- -- 1,171
-------- -------- --------
Net cash flows from investing activities (3,053) (2,072) (269)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt (861) (19,454) (4,092)
Issuance of preferred stock 2,500 37,747 --
Purchases of treasury stock, net -- (12,271) --
Advances under line of credit 9,663 7,486 12,070
Repayments under line of credit (544) (11,287) (11,400)
-------- -------- --------
Net cash flows from financing activities 10,758 2,221 (3,422)
-------- -------- --------
Net change in cash and cash equivalents (1,214) 1,456 (1,458)
Cash and cash equivalents at beginning of period 1,537 81 1,539
-------- -------- --------
Cash and cash equivalents at end of period $ 323 $ 1,537 $ 81
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE> 20
AURORA ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years ended September 30,
1997 1996 1995
---- ----- ----
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest $1,907 $5,368 $4,157
====== ====== ======
Income taxes $ 42 $ 72 $ 16
====== ====== ======
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING
AND FINANCIAL ACTIVITIES:
Payment of employment contract with issuance of $ -- $ -- $ 119
====== ====== ======
Contingent shares issuable for additional acquisition costs $ -- $ -- $ 345
====== ====== ======
Reduction in 7% debt as a result of common stock sale $ -- $ 956 $ --
====== ====== ======
Reduction in 9 1/4% debt as a result of issuance of Notes $ -- $8,593 $ --
====== ====== ======
Reduction in 7% debt as a result of indemnity claim settlement $ -- $ -- $1,224
====== ====== ======
Issuance of common stock for employee bonuses $ 154 $ -- $ --
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE> 21
AURORA ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share figures)
NOTE A - CURRENT FINANCIAL CONDITION
During the years ended September 30, 1997, 1996 and 1995 the Company experienced
significant declines in revenues and increasing levels of operating losses. As a
result of these losses, at September 30, 1997 the Company has a deficit of
$83,320 in stockholders' equity and negative working capital of $3,113. In
addition, since a recapitalization of the Company in March 1996, the Company has
relied upon the financial support of its largest shareholder for additional
capital and to maintain its existing credit facilities. The Company's losses are
expected to continue for the foreseeable future and the Company will require
additional funding and financial support from its largest shareholder or another
third party. There can be no assurance that such additional funding and
financial support will be available on acceptable terms, or that such funds, if
available, would enable the Company to combine operating. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management has made significant changes in its business to address its adverse
financial position. The remaining portion of its depot repair business has been
sold. In its asset recovery business, its Scotland facility has been sold and
its product selection is limiting its exposure to the price fluctuations in
integrated circuits and emphasizing system and sub-systems. In parts service,
the Company is implementing an internet-based, electronic sales and fulfillment
system which is expected to reduce inventory exposure, increase order fill
rates and be more cost efficient than the existing process. Management believes
that, when fully implemented, the new process will be a market advantage over
its competition.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization. Aurora Electronics, Inc. operates in one business segment
providing spare parts distribution and electronics recycling services to major
personal computer manufacturers and field service organizations.
Principles of Consolidation. The accompanying consolidated financial statements
include the accounts of Aurora Electronics, Inc. (the "Company") and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates. The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. The Company's industry is subject to significant
fluctuations in prices and technologies.
Cash and Cash Equivalents. The Company considers all liquid investments with a
maturity of three months or less at the date of purchase to be cash equivalents.
Inventories. Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method. Reserves for cost in excess of
net realizable value are determined periodically by comparing sales prices and
volumes to cost and quantity of inventory on hand.
Property, Plant and Equipment. Property, plant and equipment is recorded at cost
and is depreciated over the estimated useful lives of the related assets by the
straight-line method for financial reporting purposes, and accelerated methods
with respect to certain assets for income tax purposes. Property, plant and
equipment includes computer hardware, software and implementation costs which
are purchased, acquired and modified for internal use. The Company's policy is
to capitalize and accumulate such costs as incurred and to commence amortization
when placed in service. Leasehold improvements are amortized over the terms of
the related leases or their useful lives, whichever is shorter.
Intangible Assets. Goodwill associated with the acquisition of MicroLine, Inc.
is amortized using the straight-line method over five years. Goodwill resulting
from prior acquisitions has been written off. (See Note G -- Intangible and
Other Assets.) The Company assesses the recoverability of its goodwill by
determining whether the amortization of the goodwill balance over its remaining
life can be recovered through projected non-discounted future cash flows over
the remaining amortization period. If projected future cash flows indicate that
unamortized goodwill will not be recovered, an adjustment is made to reduce the
net goodwill to an amount consistent with projected future cash flows discounted
at the Company's incremental borrowing rate. Cash flow projections, although
subject to a degree of uncertainty, are based on trends of historical
performance and management's estimate of future performance, giving
consideration to existing and anticipated competitive and economic conditions.
Revenue Recognition. Revenue is recognized upon shipment of products to
customers. The Company warrants products against defects and has policies
permitting the return of products under certain circumstances. Provisions are
made for warranty costs and returns. Such costs generally have not been
material. The Company does not offer price protection to its customers. The
Company performs ongoing credit evaluations of its customers and has established
provisions for potential credit losses.
Earnings Per Share of Common Stock. Earnings per share of common stock is based
upon the weighted average number of common and common equivalent shares
outstanding, less cumulative dividends to holders of the Company's preferred
stock. Outstanding stock options and warrants are treated under the treasury
21
<PAGE> 22
stock method as common stock equivalents when dilution results from their
assumed exercise. The Company's Redeemable Convertible Preferred Stock, 7-3/4%
Convertible Subordinated Debentures due April 15, 2001, and 7% Subordinated
Convertible Promissory Notes (the "7% Notes") due September 30, 1998, were not
common stock equivalents at the time of issuance and are therefore not included
in the calculation of primary earnings per share. Fully diluted net earnings per
share is not presented as it is anti-dilutive.
Stock-Based Compensation. In October 1995, the Financial Accounting Standards
Board issued SFAS 123 "Accounting for Stock Based Compensation." This standard,
if fully adopted, requires the accounting for employee stock-based compensation
using a fair value methodology. For stock options, fair value is determined
using an option pricing model that takes into account the stock price at the
date of grant, the exercise price, the expected life of the option, the
volatility of the underlying stock, the expected dividends and the risk-free
interest rate. For stock based compensation issued to non-employees, the
standard requires measurement based on the value of the related services
performed or the stock based compensation issued,whichever is more reliably
measurable.
The adoption of the accounting methodology of SFAS 123 related to employees is
optional and as permitted under SFAS 123, the Company intends to continue to
account for employee stock options using the Intrinsic value methodology in
accordance with APB Opinion No. 25; however, pro forma disclosure as if the
Company adopted the accounting methodology of SFAS 123 are required to be
presented.
New Accounting Standards. The Financial Accounting Standards Board (FASB) has
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share." This statement is effective for both interim and annual reporting
periods ending after December 15, 1997. SFAS No. 128 replaces primary EPS and
basic EPS and fully diluted EPS with diluted EPS. Basic EPS is computed by
dividing reported earnings by weighted average shares outstanding. Diluted EPS
is computed in the same way as fully diluted EPS, except that the calculation
now uses the average share price for the reporting period to compute dilution
from options under the treasury stock method.
In June 1997, the FASB issued SFAS Nos. 130 and 131 "Reporting Comprehensive
Income" and "Disclosures about Segments of an Enterprise and Related
Information." FASB No. 130 and No. 131 are effective for fiscal years beginning
after December 15, 1997, with earlier adoption permitted.
The Company does not believe that adoption of these new standards will have a
material effect on the Company.
NOTE C - ACQUISITIONS
Micro-C Corporation ("Micro-C")
Effective September 30, 1992, the Company acquired all of the outstanding Common
Stock of Micro-C, a recycler of integrated circuits for the electronics
industry. The purchase price consisted of $10,949 in cash and the issuance of
the 7% Notes in the original principal amount of $7,379. Additionally, the
purchase agreement provided for the issuance of up to approximately 447 shares
of the Company's Common Stock valued at $11.20 per share (subject to
anti-dilution adjustments) to the sellers over a three year period commencing in
1993. In fiscal 1996, 1995 and 1994, the Company issued 82, 77 and 61 shares,
respectively in connection with the fiscal 1995, 1994 and 1993 operating
results. Pursuant to the terms of a settlement agreement, the remaining 227
shares will not be issued.
FRS, Inc. ("FRS")
On September 30, 1993, the Company acquired all of the outstanding Common Stock
of FRS, a provider of maintenance and repair services on selected computer
peripherals and products. FRS also provides inventory management control
services to certain manufacturers of electronic products and third party
maintenance organizations. Pursuant to the Merger Agreement, the total
consideration paid to the former shareholders of FRS was approximately $5,400
comprised of cash of approximately $100 and 744 shares of the Company's Common
Stock valued at $7.125 per share (the last closing share price of Aurora's
Common Stock prior to signing the Merger Agreement on September 12, 1993).
Century Computer Marketing ("Century")
Effective March 1, 1994, the Company acquired substantially all of the assets
and assumed substantially all of the liabilities of Century. Century is a
distributor of new and refurbished spare parts to the computer maintenance
market, supporting the products of over 500 manufacturers. Pursuant to the terms
of the Asset Purchase Agreement, the total consideration paid to Century was
approximately $29,000 in cash, $2,000 in Common Stock of the Company and an
additional $2,700 in Common Stock of the Company. The Company financed the
acquisition of Century with proceeds from a five year $25,000 senior term loan
and internally generated cash.
MicroLine, Inc.
Effective March 31, 1997, the Company acquired MicroLine, Inc. the developer and
operator of PowerSource On-line, an internet-based information service that
matches computer parts buyers to available inventories from distributors that
participate in the on-line parts data base of PowerSource. The consideration to
the former shareholders of MicroLine was 235,116 shares of common stock of the
Company. The business now operates as the PowerSource Division of AEG.
All acquisitions have been accounted for by the purchase method of accounting,
and accordingly each purchase price has been allocated to the assets acquired
and the liabilities assumed based on the estimated fair values at the date of
the acquisitions. The excess of the purchase price over the estimated fair
values of the net assets acquired was recorded as goodwill amortizable over 40
years, or 5 years for MicroLine.
22
<PAGE> 23
Goodwill from the Micro-C, FRS and Century acquisitions has been written off.
See Note G -- Intangibles and Other Assets.
The estimated fair value of assets and liabilities as of the date of the
acquisition of MicroLine is summarized as follows:
<TABLE>
<CAPTION>
MicroLine
---------
<S> <C>
Current asset $ 78
Machinery and equipment 21
Other assets 3
Goodwill 496
Liabilities (211)
-----
$ 387
=====
</TABLE>
NOTE D - DISCONTINUED OPERATIONS
Commencing in 1990, the Company began to discontinue its sporting goods
operations and divest itself of the related assets. Effective September 30,
1992, the Company announced that its remaining sporting goods operations would
be accounted for as discontinued operations and the remaining assets would be
sold. As of September 30, 1994, no material assets remained related to the
discontinued operations. Obligations and contingencies relating to discontinued
operations consists primarily of a leased building. (See Note N of the Notes to
Consolidated Financial Statements -- Commitments and Contingencies).
NOTE E - INVENTORIES
Inventories at September 30, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Spare and repair parts $ 377 $ 395
Work in process 94 59
Finished goods 2,918 3,644
-------- --------
Total inventories $ 3,389 $ 4,098
======== ========
</TABLE>
NOTE F - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at September 30, 1997 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
Estimated Life 1997 1996
-------------- ---- ----
<S> <C> <C> <C>
Furniture, fixtures and equipment 3 - 5 year $ 6,707 $ 7,150
Leasehold improvements 1 - 5 years 1,112 949
------- -------
7,819 8,099
Less accumulated depreciation and amortization (4,796) (3,288)
------- -------
Total property, plant and equipment $ 3,023 $ 4,811
======= =======
</TABLE>
The Company leases office, processing and warehousing facilities under various
operating leases through 2002. Future minimum lease payments under
non-cancelable operating leases with remaining terms in excess of one year for
the fiscal year ending September 30 are as follows: 1998 - $988; 1999 - $941;
2000 - $539; 2001 - $58. Rent expense was approximately $1,531, $1,246, and
$1,662 for the years ended September 30, 1997, 1996 and 1995, respectively.
In connection with changes in the Parts Services Division (formerly Century),
the Company charged $3,390 of capitalized information systems software and
development costs to operations in the fourth quarter of fiscal 1997. (See Note
G -- Intangibles and Other Assets).
23
<PAGE> 24
NOTE G - INTANGIBLES AND OTHER ASSETS
Intangibles and other assets at September 30, 1997 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Goodwill $ 496 $ 31,730
Database valuation -- 1,462
Debt issuance costs 1,741 1,485
Other 518 620
Less accumulated amortization (790) (2,800)
-------- --------
$ 1,965 $ 32,497
======== ========
</TABLE>
In fiscal 1997, due to continuing declines in the prices for replacement and
repair parts, the Parts Services Division (formerly Century) experienced a
continued decrease in inventory values and increasing levels of operating
losses. As a result management decided to reorganize its parts business to
reduce inventory exposure and to more cost effectively deliver parts to its
customers. The plan is to utilize the internet-based electronic processing
technology acquired in the MicroLine acquisition (see Note C -- Acquisitions) to
replace its inventory and labor intensive operating methods. As a result,
management charged the remaining balance of goodwill and the database valuation
resulting from the acquisition of Century, aggregating $29,602, to operations in
the fourth quarter of fiscal 1997. These charges were determined necessary as
management estimated that the amortization of the respective intangible balances
over their remaining lives would not be recovered through the projected
non-discounted future cash flows over their respective remaining amortization
periods. Also, the new internet technology made obsolete much of the Company's
capitalized information systems software and development cost and, therefore,
$3,390 of formerly capitalized costs were charged to operations in the fourth
quarter of fiscal 1997.
Due to the deterioration of the pricing levels in the integrated circuit market
in the latter part of fiscal 1996 and their related negative effects on the
Company's business prospects, management charged the remaining balance of
goodwill related to the acquisition of Micro-C, totaling $16,580, to operations
in the fourth quarter of fiscal 1996. Also, upon the completion of a major
corporate reorganization in the third quarter of fiscal 1995, management charged
the remaining balance of goodwill related to the acquisition of FRS, totaling
$7,407, to operations in fiscal 1995. These charges were determined necessary as
management estimated that the amortization of the respective goodwill balances
over their remaining lives would not be recovered through the projected
non-discounted future cash flows over their respective remaining amortization
periods. Other reductions of goodwill related to the reduction of the notes
payable due to the sellers of Micro-C as a result of a favorable arbitration
award in April 1995. (See Note H -- Long-term Debt.)
NOTE H - LONG-TERM DEBT
Long-term debt at September 30, 1997 and 1996 consists of the following:
24
<PAGE> 25
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Revolving line of credit $ 16,292 $ 6,342
10% Senior subordinated notes 9,727 9,043
7-3/4% Convertible subordinated debentures 10,353 10,326
7% Subordinated convertible promissory notes 883 1,692
Capital lease financing 507 413
-------- --------
Total long-term debt 37,762 27,816
Less current portion of long-term debt (1,177) (1,974)
-------- --------
$ 36,585 $ 25,842
======== ========
</TABLE>
Bank Financing
In March 1996, in conjunction with the recapitalization of the Company
("Recapitalization"), the Company's operating subsidiary, Aurora Electronics
Group, Inc. ("AEG"), entered into a Credit Agreement with a group of lenders
which provided for up to $35,000 of borrowings for working capital and for
approved acquisitions. Borrowings under the Credit Agreement are secured by
substantially all of the assets of AEG. The term of the Credit Agreement was
originally five years. The interest rate is 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.
At June 30, 1996, and at various subsequent dates, AEG was not in compliance
with certain financial covenants under the Credit Agreement. To obtain waivers
of noncompliance from the lenders, on September 30, 1996, the Company, AEG and
WCAS (the Company's largest shareholder) entered into a Financial Support
Agreement, pursuant to which, with subsequent amendments, WCAS has guaranteed
$16,292, the total borrowings currently outstanding under the Credit Agreement,
and the Company has granted WCAS warrants to purchase 2,228 Common Shares at
prices ranging from $1.025 to $2.10 per share. At September 30, 1997 the Credit
Agreement has been amended to waive all events of non-compliance with financial
covenants, to eliminate future financial covenants and to establish the maturity
date for the facility as April 30, 1999. At present, no additional borrowings
are available under the Credit Agreement.
10% Senior Subordinated Notes
In connection with the Recapitalization, the Company issued 10% Notes to its
largest shareholder with a face value of $10 million due September 30, 2001. The
Notes are shown net of the value of 607 shares of common stock issued
simultaneously with the Notes which is reflected as a discount to the related
debt. The discount is being amortized through the maturity date of the 10%
Notes. Interest on the Notes is payable on March 31 and September 30 of each
year beginning September 30, 1996 through maturity. Unpaid interest totaling
$500 was added to the principal balance of the Notes in the fourth quarter of
fiscal 1997, pursuant to the terms of the Notes. The proceeds of the Notes were
used to repay the 9-1/4% Senior Subordinated Notes due November 1996. (See Note
K of the Notes to Consolidated Financial Statements -- Stockholders' Equity.)
7-3/4% Convertible Subordinated Debentures
The 7-3/4% Convertible Subordinated Debentures mature April 15, 2001
("Convertible Debentures") and are shown net of unamortized discount of
approximately $98 and $125 at September 30, 1997 and 1996, respectively. The
Company is required to make partial sinking fund payments of approximately $117
and $2,516 in 1999 and 2000, respectively. The Convertible Debentures are
convertible into Common Stock of the Company at a conversion price, subject to
adjustment in certain instances, of $11.66 per share, and are redeemable at the
option of the Company at face value plus accrued interest thereon. Interest on
the 7-3/4% Debentures is payable on April 14 and October 14 of each year through
maturity.
7% Subordinated Convertible Promissory Notes
In connection with the acquisition of Micro-C, the Company issued 7% Notes to
the sellers aggregating approximately $7,379. In April 1995, the Company was
25
<PAGE> 26
awarded in arbitration a final settlement which reduced the outstanding balance
of the notes to $2,648. Interest on the 7% Notes is payable on March 31 and
September 30 of each year beginning March 31, 1993 through maturity. The
remaining principal balance of the 7% Notes is due in monthly installments
totaling $74 beginning September 30, 1996 through September 30, 1998. The 7%
Notes are convertible into shares of the Company's Common Stock at a rate of
$11.20 per share, subject to certain adjustments as defined in the note
agreements.
Subsequent to September 30, 1997, the Company borrowed $2,800 from its largest
shareholder under the terms of a 10% Demand Promissory Note.
Other Long-term Debt
Additional long-term debt consists primarily of secured equipment financing and
capital lease obligations with interest rates ranging from 8.9% to 12.9%, due in
monthly installments through 1999.
Aggregate maturities of long-term debt for the fiscal years ending September 30
are as follows:, 1998 - $1,177, 1999 - $16,586, 2000 - $2,553 and 2001 -
$17,447.
NOTE I - INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
For the years ended September 30,
1997 1996 1995
<S> <C> <C> <C>
Current provision (benefit) - Federal $ - $ - $ -
-------- --------- --------
- State
Total current provision - - -
-------- --------- --------
Deferred provision (benefit):
Net operating loss generated (4,229) (4,895) (3,193)
Net reversal of non-deductible accruals and reserves 1,358 768 213
Reserve method for allowances for doubtful accounts 230 83 (146)
Depreciation (1,774) 1,467 276
Goodwill amortization (9,689) 532 616
Deferred benefits not currently recognized 14,104 2,045 2,234
Increase in non-utilization of deferred tax asset due
uncertainty of recovery 500 3,234 1,304
Other 33 72 16
-------- --------- --------
Total deferred provision 533 3,306 1,320
-------- --------- --------
Total federal income tax provision $ 533 $ 3,306 $ 1,320
======== ========= ========
</TABLE>
The provision (benefit) for income taxes in the accompanying consolidated
statements of operations differs from the amount of tax based on the statutory
federal income tax rate as follows:
26
<PAGE> 27
<TABLE>
<CAPTION>
For the years ended September 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Provision (benefits) for income taxes at statutory rate $(16,684) $(9,196) $(4,661)
Nondeductible expenses 30 5,794 3,227
Deferred benefit not currently recognized 3,860 2,045 2,234
Permanent effect of book/tax adjustments 14,104 1,747 --
Increase in non-utilization of deferred tax asset due
to uncertainty 500 3,234 1,304
State taxes, net of federal benefit (1,310) (614) (823)
Other 33 296 39
-------- ------- -------
Total provision for income taxes $ 533 $ 3,306 $ 1,320
-------- ------- -------
</TABLE>
The components of the Company's deferred income tax benefit are as follows:
<TABLE>
<CAPTION>
as of September 30,
1997 1996
------ --------
<S> <C> <C>
Reserves for discontinued operations $ 1,040 $ 1,232
Allowance for doubtful accounts and notes 410 640
Inventory reserves 374 318
Nondeductible accruals 899 1,102
Valuation allowance - current (2,723) (2,792)
-------- ---------
Current deferred income tax benefit -- 500
-------- ---------
Depreciation 659 (1,115)
Net operating loss carryforwards - long-term 18,381 14,152
Capital loss carryback 2,084 3,218
Tax credits 273 158
Goodwill amortization 8,541 (1,148)
Valuation allowance - long-term (29,938) (15,265)
-------- ---------
Long-term deferred income tax benefit -- --
-------- ---------
$ -- $ 500
======== =========
</TABLE>
At September 30, 1997, the Company had tax basis net operating losses ("NOLs")
of approximately $54,513 available to offset future ordinary taxable income. The
utilization of the Company's NOLs will be substantially limited due to the
Recapitalization. These carryforwards begin to expire during 2007. The income
tax benefit related to these NOLs, as well as to certain reserves recorded by
the Company, have been reflected in the deferred income tax asset accounts to
the extent they are considered realizable.
The Company has established a valuation allowance for the entire deferred tax
asset because it is not likely to be realized in the foreseeable future.
NOTE J - REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company has issued, in series, Redeemable Convertible Preferred Stock (the
"Shares"), primarily to its largest shareholder. The Shares have a par value of
$.01 per share and were issued for $100 per share. The Shares have a liquidation
preference of $100 per share plus accrued and unpaid dividends. Dividends accrue
at 7% per annum. The Shares (including all unpaid dividends) are convertible
into common stock of the Company and are subject to mandatory redemption by the
Company on September 30, 2006 at the price of $100 per share plus all
27
<PAGE> 28
accrued and unpaid dividends to the redemption date. The holders of the Shares
have voting rights equivalent to the holders of Common Stock on an "as
converted" basis. The issues were:
Series A - 400 shares issued concurrent with the Recapitalization with
a current conversion price of $1.91 as adjusted for anti-dilution
adjustments.
Series B - 25 shares issued August 14, 1997 with a current conversion
price of $1.37 as adjusted for anti-dilution adjustments.
Subsequent to September 30, 1997, the Company issued an additional 45 shares to
its largest shareholder.
NOTE K - STOCKHOLDERS' EQUITY
The Company has 1,000 shares of authorized $.01 par value preferred stock, with
none issued or outstanding. The Company has 50,000 shares of authorized $.03 par
value Common Stock with 11,590 shares issued and 6,847 shares outstanding at
September 30, 1997, (compared to 10,486 and 5,743, respectively, at September
30, 1996).
In October 1995, the Company sold 340 shares of Common Stock to investors in a
private placement of equity securities in exchange for proceeds totaling $883,
net of issuance costs. Proceeds from the offering were used to make the
principal payment due September 30, 1996 on the 7% notes payable.
In March 1996, the Company completed a comprehensive Recapitalization of the
Company, pursuant to which the Company (a) sold (i) 400 shares of Redeemable
Convertible Preferred Stock, $.01 par value, to WCAS and certain other investors
for an aggregate purchase price of $40,000 and (ii) 607 shares of Common Stock,
along with a $10,000 10% Senior Subordinated Note due September 2001, to WCAS
Capital Partners II, L.P. ("WCAS CP II") for an aggregate purchase price of
$10,000, and (b) repurchased 4,268 shares of the Company's Common Stock at
$2.875 per share pursuant to a tender offer for up to 6,500 shares of Common
Stock.
In consideration for WCAS guaranteeing borrowings under the AEG senior secured
revolving credit facility, the Company has granted WCAS warrants to purchase
2,228 Common Shares at prices ranging from $2.10 to $1.025 per share. See Note H
- - Long-term Debt.
In connection with AEG's prior Senior Credit Agreement dated May 1994, and the
Third Amendment effective September 30, 1995 which was repaid in full as part of
the Recapitalization, the Company issued Warrants to the lenders to acquire 397
shares of common stock at $2.18 per share.
NOTE L - EMPLOYEE STOCK AND SAVINGS PLANS
Employee stock purchase plan. Effective October 1, 1994, the Company established
an employee stock purchase plan for all eligible employees. Under the plan,
shares of the Company's Common Stock may be purchased at three-month intervals
at 85% of the lower of the fair market value on the first or the last day of
each three-month period. Employees may purchase shares having a value not
exceeding 15% of their gross compensation during an offering period.
Savings plan. The Company has a savings plan, which qualifies under Section
401(k) of the Internal Revenue Code. Under the plan, participating U.S.
employees may defer up to 15% of their pretax salary, but not more than
statutory limits. The Company contributes a discretionary amount, set by the
Board of Directors, for each dollar contributed by a participant, with a maximum
of 6% of participant earnings. The Company's matching contribution to the
savings plan was $207, $252, and $279 for the years ended September 30, 1997,
1996 and 1995, respectively.
Stock option plan. The Company has a stock option plan for directors, officers,
and key employees which provides for incentive and nonqualified stock options. A
committee comprised of disinterested directors determines the option price (not
less than the fair market value of the stock at the date of grant). The options
generally expire ten years from the date of grant and generally vest over four
years. As of September 30, 1997, options for 4,420 shares were issued and 988
shares were available for future grants under the plan. Options for 200 shares
28
<PAGE> 29
were issued outside the Stock Option Plan. The new stock option plan was
instituted at the time of the Recapitalization. At that time, the Company
offered to exchange options issued under prior stock option plans for options
under the new plan at the market price per share at the time of the
Recapitalization ($2.125).
The Company accounts for its stock option plans under APB Opinion No. 25, under
which no compensation cost has been recognized. The following pro forma
disclosures represent what the Company's net income and earnings per share
would have been had the Company recorded compensation cost for these plans in
accordance with the provisions of FASB Statement No. 123, "Accounting for
Stock-Based Compensation." (SFAS No. 123).
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Pro forma net loss applicable
to common stockholders ...................... $(53,497) $(32,231)
Pro forma EPS ................................. $ (8.01) $ (4.50)
</TABLE>
Because the method of accounting required under Statement No. 123 has not been
applied to options granted prior to October 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years.
<TABLE>
<CAPTION>
Outstanding Options
-------------------------------------------
Shares
(in thousands) Range of Option Prices
-------------- ----------------------
<S> <C> <C> <C>
Outstanding at September 30, 1994 967 $6.00 - $12.00
Granted 1,130 3.38 - 4.50
Forfeited (953) 7.00 - 8.13
------ ----- ------
Outstanding at September 30, 1995 1,144 3.38 - 11.75
Granted 4,901 2.13 - 4.19
Exercised (1) 2.13
Forfeited (2,013) 3.38 - 11.75
------ ----- ------
Outstanding at September 30, 1996 4,031 2.13 - 11.75
Granted 1,658 1.00 - 1.75
Forfeited (1,269) 2.13
------ ----- ------
Outstanding at September 30, 1997 4,420 $1.00 - $12.00
====== ===== ======
</TABLE>
The weighted-average grant-date fair value of options granted during fiscal
1997 and 1996 was $1.18 and $1.67, respectively.
The 4,420 shares under the 1996 plan outstanding at September 30, 1997 and 1996
have a weighted average exercise price of $1.93 and $2.39, respectively.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1997 and 1996, respectively: risk-free interest
rates of 6.5% and 6.6%; no expected dividend yield; expected lives of 4 years;
expected volatility of 117% in both years.
29
<PAGE> 30
Pursuant to a Tax Indemnity Agreement entered into between the Company and Sport
Supply Group, Inc. ("SSG") in connection with the SSG Public Offering, the
Company agreed to indemnify SSG against certain consolidated income tax
liabilities of the Company incurred prior to the SSG Public Offering. The
Company does not believe that amounts paid, if any, pursuant to these agreements
will have a material effect on the results of operations and financial condition
of the Company.
Class Action Settlement
In connection with the settlement of a class action complaint, the parties
reached agreement on the terms of a settlement, which required the Company to
contribute $250 in cash and $1,250 in Common Stock priced at the issuance date.
The balance of the settlement ($1,500 in cash) was funded by the Company's
insurer. The settlement was approved on September 5, 1995. In fiscal 1997, the
Company issued 775 shares of its Common Stock in final settlement of this
action.
NOTE O - EXPORT SALES AND MAJOR CUSTOMERS
Export sales to customers in foreign countries amounted to approximately
$16,244, $21,192, and $28,032 in fiscal 1997, 1996 and 1995, respectively.
Revenues from the Company's foreign operations approximated $9,905, $9,278, and
$10,109 in 1997, 1996 and 1995, respectively. In fiscal 1997 one customer
accounted for approximately 11% of net revenues. One customer accounted for 19%
percent or more of net revenues in fiscal 1996 and no customer accounted for
more than 10% of net revenues in 1995.
30
<PAGE> 31
SCHEDULE II
AURORA ELECTRONICS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(amounts in thousands)
<TABLE>
<CAPTION>
Additions
Balance at Charged to Charged to
beginning of costs and other Balance at end
period expenses accounts Deductions of period
------ -------- -------- ---------- --------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED SEPTEMBER 30, 1997
Allowance for doubtful accounts $1,209 $ 372 $ -- $ 845(1) $ 736
====== ====== ==== ======== ======
Reserve for discontinued operations $3,068 $ -- $ -- $ 478 $2,590
====== ====== ==== ======== ======
FOR THE YEAR ENDED SEPTEMBER 30, 1996
Allowance for doubtful accounts $1,414 $ 410 $ -- $ 615(1) $1,209
====== ====== ==== ======== ======
Reserve for discontinued operations $4,073 $ -- $ -- $ 1,005 $3,068
====== ====== ==== ======== ======
FOR THE YEAR ENDED SEPTEMBER 30, 1995
Allowance for doubtful accounts $1,046 $ 857 $ -- $ 489(1) $1,414
====== ====== ==== ======== ======
Reserve for discontinued operations $5,024 $ -- $ -- $ 951 $4,073
------ ------ ---- -------- ------
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
31
<PAGE> 32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The directors and executive officers of the Company as of December 20, 1997 were
as follows:
<TABLE>
<CAPTION>
NAME AGE PRESENT POSITION SINCE
- ---- --- ---------------- -----
<S> <C> <C>
Jim C. Cowart 46 Chairman of the Board 1992
Harvey B. Cash 59 Director 1993
David A. Lahar 40 Director 1992
Thomas E. McInerney 56 Director 1996
Richard H. Stowe 54 Director 1996
John F. Thompson 55 President and Chief Executive Officer 1997
Amir Asadi 39 Vice President - Information Systems 1996
Eric Augusta 52 Vice President - Strategic Planning 1994
James N. Contardi 34 Senior Vice President & General Manager - Parts Services 1997
George M. Korchinsky 56 Senior Vice President & Managing Director - 1996
European Operations
Thomas M. Peck 34 Senior Vice President & General Manager - 1997
PowerSource Division
James Stameson 39 Senior Vice President & General Manager - 1997
Asset Recovery Services
F. Wayne Withers 62 Senior Vice President & Chief Financial Officer 1997
</TABLE>
JIM C. COWART, since December 31, 1992, has served as the Chairman of the Board
and until October 1997 as Chief Executive Officer, and formerly served as Vice
President of Strategic Development of the Company. Since February 1992, Mr.
Cowart has served as Chairman of EOS Capital, Inc., a private capital firm which
has been, from time to time, retained by the Company. Mr. Cowart is also a
director of B/E Aerospace, Inc. ("BEAV" - NASD), a leading manufacturer of
aircraft cabin interior products. Mr. Cowart has been a director of the Company
since October 1992. Mr. Cowart and Mr. Cash are first cousins.
HARVEY B. CASH, from June 1985 to present, has been a general partner of
InterWest Partners III, and from June 1989 to present, Mr. Cash has been a
general partner of InterWest Partners IV, both of which are venture capital
firms. Mr. Cash, since December 1983, has also been a general partner of Berry
Cash Southwest Partnership, a venture capital firm. Mr. Cash is a director of
Cirrus Logic, Inc. ("CRUS" - NASD), a semiconductor company and ProNet, Inc.,
("PNET" - NASD), a distributor of medical pagers and electronic tracking
systems. He served as a director of Cyrix Corporation ("CYRX" - NASD), a
manufacturer and distributor of math co-processors until it was acquired by
National Semiconductor in 1997. Mr. Cash has served as a director of the Company
since September 1993. Mr. Cash and Mr. Cowart are first cousins.
DAVID A. LAHAR, since February 1992 has served as President of EOS Capital,
Inc., a private capital firm which has been, from time to time, retained by the
Company. From December 31, 1992 until July 1996, Mr. Lahar also served as the
President of the Company and formerly served as the Chief Financial Officer of
the Company. Mr. Lahar has been a director of the Company since October 1992.
32
<PAGE> 33
THOMAS E. McINERNEY, since 1987, has been a general partner of Welsh, Carson,
Anderson & Stowe and has been a general partner of the respective sole general
partners of its associated limited partnerships. Mr. McInerney, since 1988, has
served as a Director of DecisionOne Holdings Corp. ("DOCI" - NASD), and from
1994 to 1995, served as its Chairman. Mr. McInerney is also a director of Bisys
Group, Inc. ("BSYS" - NASD). Mr. McInerney has been a director of the Company
since March 1996.
RICHARD H. STOWE, since 1979, has been a general partner of Welsh, Carson,
Anderson & Stowe and has been a general partner of the respective sole general
partners of its associated limited partnerships. Mr. Stowe is a director of
EmCare Holdings Inc. ("EMCR" - NASD), a provider of physician services
management in hospital emergency departments; Medaphis Corporation ("MEDA" -
NASD), a provider of accounts receivable management services to
hospital-affiliated physicians and hospitals; Health Management Systems,
Inc.("HMSY" - NASD), a provider of revenue enhancement services for health care
providers and payors, and several private companies.
Mr. Stowe has been a director of the Company since March 1996.
JOHN F. THOMPSON joined the Company in July 1997 as President and Chief
Operating Officer and was appointed Chief Executive Officer in October 1997.
Prior to joining the Company, he was employed for thirteen years at Merisel,
Inc., or its predecessors, an international distributor of computer accessories,
software and peripherals last holding the position of Senior Vice President,
Worldwide Operations. His prior experience includes senior management positions
with Vidal Sassoon, Inc, Max Factor, Cutter Labs and Mattel Toys.
JAMES N. CONTARDI joined the Company in May 1997. Prior to joining the Company,
he was Vice President - Sales and marketing for PC Services Source of Dallas,
Texas where he was employed for three years. His earlier experience included
nine years in various positions at IBM.
GEORGE M. KORCHINSKY joined Aurora in November 1996. From May 1991 to October
1996, Mr. Korchinsky served as Vice President & Managing Director - Europe,
Middle East, Africa for Symantec. From January 1989 to May 1991, Mr. Korchinsky
served as General Manager Northern & Central Europe from Cognos Ltd. From
January 1987 to January 1989, Mr. Korchinsky served as Managing Director Data
Communications Equipment for Paradyne Ltd. and from 1984 to 1987 held various
sales, marketing and technical management positions with Paradyne Ltd.
THOMAS M. PECK joined the Company with the acquisition of MicroLine, Inc. in
April 1997. Mr. Peck was a founder of and President of MicroLine since 1992.
Prior to founding MicroLine, he was an Account Manager with Computer Systems
Repair of Secaucas, New Jersey.
JAMES STAMENSON joined the Company in October 1997 after six years with
Aeroquip/Vickers Corporation of Los Angeles, California, lastly as Director of
Operations of the Vickers Fluid Control and Actuation Division. His prior
experience was with Parker Hannifin Corporation and Bertea Industries.
F. WAYNE WITHERS joined the Company in July 1997 following five years as Chief
Financial Officer of PrimeSource, Inc. a Dallas, Texas based privately-owned
wholesale distributor of building products and construction fasteners. His
earlier experience includes Chief Financial Officer positions at public
companies Naugles, Inc., Sav-On Drugs, Inc. and Denny's, Inc.
AMIR ASADI joined Aurora in April 1996 as Vice President - Information Systems.
From June 1990 to April 1996, Mr. Asadi served as Vice President, Information
Systems for Home Fashions Inc. From October 1987 to June 1990, Mr. Asadi served
as Director, Systems Development of Beech Street of California. From May 1986 to
October 1987, Mr. Asadi served as Information Systems Consultant, Project
Manager for Fremont Indemnity.
ERIC AUGUSTA joined the Company with the acquisition of Century in 1994 and has
served in various financial positions since then. Prior to Century, he was a
Senior Financial Analysts with Xerox Corporation.
33
<PAGE> 34
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth information with respect to the compensation paid
by the Company to the Named Executive Officers during fiscal 1997, 1996 and
1995:
<TABLE>
<CAPTION>
Long Term
Compensation
Awards
Securities
Fiscal Annual Compensation Underlying All Other
Year Salary Bonus Options (#) Compensation(1)
------ -------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
Jim C. Cowart(2) 1997 208,449
Chairman of the Board & 1996 190,631 10,534 1,334,954(4) 1,968
former Chief Executive Officer 1995 168,080 112,742(3) 66,000(5) 4,126
John P. Grazer(6) 1997 157,257 150,000 4,303
Former President and 1996 170,936 10,514 899,668(7) 3,963
Chief Financial Officer 1995 143,322 106,425(3) 66,000(5) 4,893
Richard A. Kain 1997 178,001 2,772
Senior Vice President, 1996 144,616 36,000 100,000(8) 4,726
North American Operations 1995 45,000 3,125 20,000(5)
Amir Asadi 1997 127,891
Vice President - 1996 55,289
Information Systems
Stephan F. Weber 1997 122,791
Vice President - 1996 39,570
Marketing
</TABLE>
(1) The amounts in this column consist only of Company contributions under
the Company's 401(k) plan.
(2) Mr. Cowart resigned as Chief Executive Officer of the Company on October
22, 1997. See - EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT
ARRANGEMENTS
(3) In connection with the Recapitalization, Messrs. Cowart and Grazer
received bonuses in the amounts of $112,000 and $105,000, respectively,
in respect of 1995 performance that became payable in the event that a
satisfactory recapitalization of the Company was obtained.
(4) During May 1996, Mr. Cowart surrendered for cancellation all of his
outstanding options to purchase shares of Common Stock, and he was issued
replacement options under the Company's 1996 Stock Option Plan (the "1996
Plan") to purchase an aggregate of 1,334,954 shares of Common Stock.
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<PAGE> 35
(5) During May 1995, the Compensation and Stock Option Committee of the Board
of Directors offered each optionee the opportunity to surrender for
cancellation his or her outstanding options and replace such outstanding
options with non-qualified stock options to acquire eighty percent (80%)
of the number of shares of the options as canceled, at a price per share
equal to twenty-five cents ($0.25) over the closing price of the Common
Stock on May 15, 1995.
(6) On October 22, 1996, the Company and Mr. Grazer entered into an
employment agreement concurrent with Mr. Grazer becoming President as
well as Chief Financial Officer that provided for a one-time bonus for
accepting the position of $150,000, annual base salary of $175,000 and
other provisions relating to stock options and severance benefits. Mr.
Grazer resigned from the Company effective in May of 1997 and the
agreement terminated. See - EMPLOYMENT AGREEMENTS AND TERMINATION OF
EMPLOYMENT ARRANGEMENTS
(7) During May 1996, Mr. Grazer surrendered for cancellation all of his
outstanding options to purchase shares of Common Stock, and he was issued
replacement options under the 1996 Plan to purchase an aggregate of
899,668 shares of Common Stock.
(8) During May 1996, Mr. Kain surrendered for cancellation all of his
outstanding options to purchase shares of Common Stock, and he was issued
replacement options under the 1996 Plan to purchase an aggregate of
100,000 shares of Common Stock.
COMPENSATION OF DIRECTORS
Each non-employee director receives $2,500 for each quarter that such person
serves as a director of the Company. Officers of the Company do not receive any
fees for serving on the Board of Directors. Non-employee directors are
automatically granted nonqualified stock options to purchase 25,000 shares of
Common Stock upon election to the Board of Directors and options to purchase
5,000 shares of Common Stock on the date of each annual meeting of the Company's
stockholders when such non-employee director has served on the Board of
Directors for the immediately preceding 181 consecutive days, has agreed to
serve as a director upon such re-election and is re-elected to the Board of
Directors. All directors are entitled to reimbursement for expenses incurred for
attendance at each meeting.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
Jim C. Cowart. Mr. Cowart and the Company entered into an employment letter
effective as of May 18, 1995, pursuant to which he served as Chairman of the
Board and Chief Executive Officer of the Company. Under the employment letter,
Mr. Cowart receives an annual base salary and an incentive bonus based upon
certain financial performance targets of the Company. If the Company terminates
Mr. Cowart's employment without cause (as defined in the letter), Mr. Cowart's
compensation and option vesting will continue for twelve (12) months. In the
event of a change of control of the Company, Mr. Cowart's stock options vest
immediately, and his compensation will continue for a period of two years. On
October 22, 1997 Mr. Cowart resigned as Chief Executive Officer and agreed to
continue as Chairman of the Board pursuant to the terms of the employment letter
until October 21, 1998.
John P. Grazer. Mr. Grazer and the Company entered into an employment letter
effective as of October 22, 1996, pursuant to which he served as President and
Chief Financial Officer of the Company. Under the employment letter, Mr. Grazer
received an annual base salary and an incentive bonus based upon certain
financial performance targets of the Company. If the Company terminates Mr.
Grazer's employment without cause (as defined in the letter), Mr. Grazer's
compensation will continue for fifteen (15) months. In the event of a change of
control of the Company that leads to Mr. Grazer's termination, Mr. Grazer's
compensation will continue for a period of fifteen (15) months, and his stock
options will vest immediately (unless otherwise determined by the Compensation
Committee). Mr. Grazer resigned from the Company effective in May of 1997 and
the agreement terminated.
35
<PAGE> 36
COMPENSATION AND STOCK OPTION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN
COMPENSATION DECISIONS
Harvey B. Cash, Thomas E. McInerney (Chairman) and Richard H. Stowe served on
the Compensation and Stock Option Committee of the Board of Directors during the
last fiscal year. Neither Mr. Cash, Mr. McInerney nor Mr. Stowe are current or
former officers or employees of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table and notes thereto set forth certain information with respect
to the beneficial ownership of the Company's Common Stock as of December 31,
1997 by (i) each of the "Named Executive Officers" (as defined in Regulation S-K
to the 1933 Securities Act, as amended), (ii) each director of the Company,
(iii) each beneficial owner of more than 5% of the Company's Common Stock and
(iv) all executive officers and directors of the Company as a group.
Except as otherwise indicated, each of the stockholders named below has sole
voting and investment power with respect to the shares of Common Stock
beneficially owned:
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENT
NAMES AND ADDRESSES CLASS OF BENEFICIAL OF OUTSTANDING
OF BENEFICIAL OWNERS STOCK OWNERSHIP (1) SHARES
-------------------- -------- ------------- --------------
<S> <C> <C> <C>
Harvey B. Cash (*) Common 164,712 (3) 0.46%
Jim C. Cowart (*)/(**) Common 688,834 (4) 1.91%
David A. Lahar (**) Common 671,546 (5) 1.86%
Thomas E. McInerney (*) Common 26,044,306 (6)(7) 72.10%
Richard H. Stowe (*) Common 26,027,330 (6)(8) 72.05%
John P. Grazer Common 158,418 (9) ***
Richard A. Kain Common 77,550 (10) ***
Amir Asadi Common 28,125 (11) ***
Stephan F. Weber Common 9,375 (12) ***
WCAS Capital Partners II, L.P. (2) Common 682,960 (13) 1.89%
Welsh, Carson, Anderson & Stowe VII, L.P. (2) Common 27,100,151 (14) 75.02%
WCAS Information Partners, L.P. (2) Common 340,096 (15) 0.94%
Directors and Executive Officers
as a group (5 persons) 27,569,398 (16) 76.32%
</TABLE>
* Director
** Named Executive Officer
*** Less than one percent (1)
(1) Sole voting and investment power unless otherwise indicated, subject to
community property laws where applicable. Shares of Common Stock that
can be acquired through the conversion of Convertible Preferred Stock
are deemed outstanding for the purpose of computing the percentage of
beneficial ownership. Shares of Common Stock that were not outstanding
but that could be acquired through the exercise of stock options,
warrants or the conversion of convertible debentures within 60 days of
January 31, 1997 are deemed outstanding for the purpose of computing
the percentage of outstanding shares beneficially owned by a particular
person. However, such shares are not deemed outstanding for the purpose
of computing the percentage of outstanding shares beneficially owned by
any other person.
36
<PAGE> 37
(2) Address at:
320 Park Avenue, Suite 2500
New York, NY 10022-6815
(3) Includes (i) currently exercisable stock options to purchase 40,000
shares of the Company's Common Stock, (ii) 2,000 shares of the
Company's Convertible Preferred Stock directly owned by Mr. Cash, which
if converted, represents 104,712 shares of Common Stock and (iii)
20,000 shares of Common Stock owned by Mr. Cash.
(4) Includes (i) currently exercisable stock options to purchase 688,834
shares of the Company's Common Stock, (ii) 2,000 shares of the
Company's Convertible Preferred Stock directly owned by Mr. Cowart,
which if converted, represents 104,714 shares of Common Stock and (iii)
47,729 shares of Common Stock owned by Mr. Cowart.
(5) Includes (i) currently exercisable stock options to purchase 676,546
shares of the Company's Common Stock and (ii) 21,287 shares of Common
Stock owned by Mr. Lahar.
(6) Messrs. McInerney and Stowe are general partners of the respective sole
general partners of WCAS Capital Partners II, L.P., Welsh, Carson,
Anderson & Stowe VII, L.P. and WCAS Information Partners, L.P., and may
be deemed to beneficially own the shares of Common Stock and
Convertible Preferred stock owned by such partnerships
(7) Includes (i) currently exercisable stock options to purchase 30,000
shares of the Company's Common Stock, (ii) 2,067 shares of the
Company's Convertible Preferred Stock owned directly by Mr. McInerney,
which if converted, represents 119,001 shares of Common Stock, (iii)
607,211 shares of the Company's Common Stock beneficially owned by WCAS
Capital Partners, II L.P., (iv) 433,319 shares of the Company's
Convertible Preferred Stock, which if converted, represents 24,947,998
shares of Common Stock beneficially owned by Welsh, Carson, Anderson &
Stowe VII, L.P. and (v) 5,907 shares of the Company's Convertible
Preferred Stock, which if converted, represents 340,096 shares of
Common Stock beneficially owned by WCAS Information Partners, L.P.
(8) Includes (i) currently exercisable stock options to purchase 30,000
shares of the Company's Common Stock, (ii) 1,772 shares of the
Company's Convertible Preferred Stock owned directly by Mr. Stowe,
which if converted, represents 102,024 shares of Common Stock, (iii)
607,211 shares of the Company's Common Stock beneficially owned by WCAS
Capital Partners, II L.P., (iv) 433,319 shares of the Company's
Convertible Preferred Stock, which if converted, represents 24,947,998
shares of Common Stock beneficially owned by Welsh, Carson, Anderson &
Stowe VII, L.P. and (v) 5,907 shares of the Company's Convertible
Preferred Stock, which if converted, represents 340,096 shares of
Common Stock beneficially owned by WCAS Information Partners, L.P. .
37
<PAGE> 38
(9) Includes (i) currently exercisable stock options to purchase 154,987
shares of the Company's Common Stock, and (ii) 3,431 shares of Common
Stock.
(10) Includes (i) currently exercisable stock options to purchase 154,987
shares of the Company's Common Stock.
(11) Includes (i) currently exercisable stock options to purchase 154,987
shares of the Company's Common Stock.
(12) Includes (i) currently exercisable stock options to purchase 154,987
shares of the Company's Common Stock.
(13) Reflects ownership of 607,211 shares of Common Stock beneficially owned
and warrants to purchase 75,749 shares of common stock.
(14) Reflects ownership of 433,319 shares of Convertible Preferred Stock,
which if converted, represents 24,947,998 shares of Common Stock and
warrants to purchase 2,152,153 shares of common stock.
(15) Reflects ownership of 5,907 shares of Convertible Preferred Stock, which
if converted, represents 340,096 shares of Common Stock.
(16) Includes (i) 92,447 shares of Common Stock, (ii) 1,755,367 shares of
Common Stock issuable upon exercise of stock options and (iii) 379,050
shares of Convertible Preferred Stock, which if converted, represents
17,837,647 shares of Common Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None
38
<PAGE> 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: January 12, 1998
AURORA ELECTRONICS, INC.
By: /s/ F. Wayne Withers
------------------------
F. Wayne Withers, Senior Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed on January 12, 1998 by the following persons on behalf of the
registrant and in the capacities indicated.
SIGNATURE TITLE
- --------- -----
/s/ John F. Thompson President and Chief Executive Officer
- --------------------------- (Principal Executive Officer)
John F. Thompson
/s/ Jim C. Cowart Chairman
- ---------------------------
Jim C. Cowart
/s/ Harvey B. Cash Director
- ---------------------------
Harvey B. Cash
/s/ David A. Lahar Director
- ---------------------------
David A. Lahar
/s/ Thomas E. McInerney Director
- ---------------------------
Thomas E. McInerney
/s/ Richard H. Stowe Director
- ---------------------------
Richard H. Stowe
39
<PAGE> 40
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibits
- ------ -----------------------
3.1 The Restated Certificate of Incorporation of the Company, as
amended (incorporated by reference from Exhibit 3.1 to the
Company's Transition Report on Form 10-K for the transition
period from December 31, 1991 to September 30, 1992).
3.2 Bylaws of the Company, as amended (incorporated by reference
from Exhibit 4.2 to the Company's Registration Statement on
Form S-8 (Registration No. 33-79426)).
4.1 Indenture between the Company and MBank Dallas, National
Association relating to the Company's 7-3/4% Convertible
Subordinated Debentures due 2001, including form of
Debenture (incorporated by reference from Exhibit 4.1 to
the Company's Registration Statement on Form S-2
(Registration No. 33-4276)).
4.2 First Supplemental Indenture relating to the Company's 7-3/4%
Convertible Subordinated Debentures, dated December 1, 1987,
between the Company and MTrust Corp., National Association,
appointing MTrust Corp. as successor trustee to MBank Dallas
(incorporated by reference from Exhibit 4.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended September
30, 1993).
4.3 Tripartite Agreement relating to the Company's 7-3/4%
Convertible Subordinated Debentures, dated as of January 7,
1990, by and among MTrust Corp., National Association,
Ameritrust Texas N.A., and the Company (incorporated by
reference from Exhibit 4.3 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1989).
4.4 Second Supplemental Indenture relating to the Company's 7-3/4%
Convertible Subordinated Debentures, dated to be effective as
of November 30, 1992, between the Company and Society National
Bank (incorporated by reference from Exhibit 4.4 to the
Company's Post-Effective Amendment No. 1 to Registration
Statement on Form S-3 (No. 33-32377)).
4.5 Certificate of Designations, Preferences and Rights of
Convertible [__] Preferred Stock dated March 1996 relating to
400,000 shares of Preferred Stock.
4.6 Common Stock Purchase Warrant (Paribas), Form of Warrant to
Purchase 94,903 Shares of Common Stock of Aurora Electronics,
Inc., dated May 12, 1994, issued to each of Banque Paribas and
Banque Indosuez (incorporated by reference from Exhibit 4.2 to
the Company's Report on Form 8-K dated May 26, 1994).
4.7 Common Stock Warrant (Lender) Banque Indosuez, Form of
Warrant to Purchase Shares of Common Stock of Aurora
40
<PAGE> 41
Electronics, Inc., dated May 12, 1994, issued to each of Banque
Paribas, Banque Indosuez and Union Bank (incorporated by
reference from Exhibit 4.3 to the Company's Report on Form 8-K
dated May 26, 1994).
4.8 Aurora Electronics, Inc. Common Stock Purchase Warrant, dated
September 30, 1996, issued to Welsh, Carson, Anderson & Stowe
VII, L.P.
4.9 Aurora Electronics, Inc. Common Stock Purchase Warrant, dated
September 30, 1996, issued to WCAS Capital Partners II, L.P.
4.10 Form of Aurora Electronics, Inc. Common Stock Purchase Warrant,
issued to Welsh, Carson, Anderson & Stowe VII, L.P.
4.11 Form of Aurora Electronics, Inc. Common Stock Purchase Warrant,
issued to WCAS Capital Partners II, L.P.
*4.12 Welsh, Carson, Anderson & Stowe January 6, 1998 Waiver of Right
to Receive Warrants under Financial Support Agreement, dated as
of September 30, 1996, as amended.
*4.13 Certificate of Designations, Preferences and Relative Rights of
Series B Preferred Stock dated August 14, 1997 relating to
25,000 shares of Series B Preferred Stock.
*4.14 Certificate of Designations, Preferences and Relative Rights of
Series C Preferred Stock dated October 2, 1997 relating to
25,000 shares of Series C Preferred Stock.
*4.15 Certificate of Designations, Preferences and Relative Rights
Regarding Series D Preferred Stock dated October 2, 1997
relating to 20,000 shares of Series D Preferred Stock.
10.1 Aurora Electronics, Inc. 1993 Stock Option Plan, as amended by
Amendment No. 1 dated to be effective as of March 1, 1994 and
by Amendment No. 2 dated to be effective as of March 1, 1994
(incorporated by reference from Exhibit 4.3 to the Company's
Registration Statement on Form S-8 (Registration No.
33-79426)).
10.2 Aurora Electronics, Inc. 1996 Stock Option Plan (incorporated
by reference from Exhibit 10.19 to the Company's Form 10-Q for
the quarter ended June 30, 1996).
10.3 Form of Indemnification Agreement entered into between the
Company and each of the directors of the Company (incorporated
by reference from Exhibit 10.3 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1991).
10.4 Letter Agreement, dated October 22, 1996, between the Company
and John P. Grazer relating to employment.
10.5 Letter Agreement, dated March 1, 1994, between the Company and
Jim C. Cowart relating to employment (incorporated by reference
from Exhibit 10.5 to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1994).
10.5.1 Letter Agreement, dated May 18, 1995, between the Company and
Jim C. Cowart relating to employment (incorporated by reference
from Exhibit 10.5.1 to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1995)
10.8 Standard Multi-Tenant Net Lease, dated November 3, 1992, by and
between Sorrento Mesa Properties, Inc. and Micro-C Corporation
(now Aurora Electronics Group, Inc.) (incorporated by reference
from Exhibit 10.7 to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1993).
10.9 Standard Industrial Lease - Net, dated March 27, 1984, by and
between Northgate Investment Company (now David Pick) and
41
<PAGE> 42
Repair Services, Inc. (now Aurora Electronics Group, Inc.)
(incorporated by reference from Exhibit 10.8 to the Company's
Annual Report on Form 10-K for the fiscal year ended September
30, 1993).
10.10 Standard Industrial / Commercial Single Tenant Lease - Net
dated November 30, 1994, by and between The Equitable Life
Assurance Society of the United States and Aurora Electronics
Group, Inc. (incorporated by reference from Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1994).
10.11 Standard Lease Agreement dated October 27, 1992, by and between
Crow-Brindell-Mitchell and Aurora Electronics Group, Inc. as
Assignee of CCB Computer Brokers, Inc. d/b/a Century Computer
Services, Inc. (incorporated by reference from Exhibit 10.10 to
the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1994).
10.12 Lease Agreement Shelby Distribution Center dated November 11,
1994 by and between J. Shea Leatherman, William A. Leatherman,
Jr., Irwin L. Zanone and Aurora Electronics Group, Inc.
(incorporated by reference from Exhibit 10.11 to the Company's
Annual Report on Form 10-K for the fiscal year ended September
30, 1994).
10.13 Lease dated July 14, 1988, by and between American National
Bank and Trust Company of Chicago and BSN Corp. (now Aurora
Electronics, Inc.) (incorporated by reference from Exhibit
10.12 to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1994).
10.14 Form of Tax Indemnity Agreement by and between the Company
and SSG (incorporated by reference from Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991).
10.15 Stock Purchase Agreement, dated as of September 30, 1992, by
and among the Company, Robert E. Morris and Norma J. Morris,
Trustees of the Robert and Norma Morris Family Trust and The
Robert and Norma Morris Charitable Remainder Unitrust
(incorporated by reference from Exhibit 2.1 to Form 8-K filed
on October 19, 1992).
10.16 Merger Agreement and Plan of Reorganization, dated September
12, 1993, by and between the Company and FRS, Inc.
(incorporated by reference from Exhibit 2.1 to the Company's
Current Report on Form 8-K, dated October 15, 1993).
10.17 Asset Purchase Agreement, dated March 15, 1994 to be effective
as of March 1, 1994, as amended, by and among the Company,
Aurora Electronics Group, Inc. and CCB Computer Brokers, Inc.
and CCM Computers International, Ltd. (incorporated by
reference from Exhibit (b)(1) to the Company's Quarterly Report
on Form 10-Q for
42
<PAGE> 43
the quarter ended March 31, 1994).
10.18 Aurora Electronics, Inc. 401-K Plan (incorporated by reference
from Exhibit 10.13 to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1993).
10.19 Securities Purchase Agreement among Aurora Electronics, Inc.,
Welsh, Carson, Anderson & Stowe VII, L.P., WCAS Capital
Partners II, L.P. and the Several Purchasers Named Therein,
dated February 21, 1996, incorporated by reference from Exhibit
(b)(2) of the Company's Issuer Tender Offer Statement on
Schedule 13E-4, which was filed with the Securities and
Exchange Commission on February 23, 1996.
10.20 Aurora Electronics Inc. Offer to Purchase for Cash up to
6,500,000 Shares of Its Common Stock at $2.875 Per Share, dated
February 23, 1996, incorporated by reference from Exhibit
(a)(1) of the Company's Issuer Tender Offer Statement on
Schedule 13E-4, which was filed with the Securities and
Exchange Commission on February 23, 1996.
10.21 Credit Agreement among Aurora Electronics Group, Inc., as
Borrower, the Guarantors Named Therein, the Lenders Named
therein and Chemical Bank, N.A., as Agent, dated March 29, 1996
(incorporated by reference from Exhibit 10.21 to the Company's
Report on Form 8-K dated March 29, 1996).
10.22 $15,000,000 Tranche A Note between Aurora Electronics Group,
Inc., as Maker, and Chemical Bank, N.A., as Lender, dated March
29, 1996 (incorporated by reference from Exhibit 10.22 to the
Company's Report on Form 8-K dated March 29, 1996).
10.23 $20,000,000 Tranche B Note between Aurora Electronics Group,
Inc., as Maker, and Chemical Bank, N.A., as Lender, dated March
29, 1996 (incorporated by reference from Exhibit 10.23 to the
Company's Report on Form 8-K dated March 29, 1996).
10.24 Pledge Agreement among Aurora Electronics Group, Inc.,
Aurora Electronics, Inc. and Chemical Bank, N.A., dated March
29, 1996 (incorporated by reference from Exhibit 10.24
to the Company's Report on Form 8-K dated March 29, 1996).
10.25 Security Agreement among Aurora Electronics Group, Inc.,
Aurora Electronics, Inc. and Chemical Bank, N.A., dated March
29, 1996 (incorporated by reference from Exhibit 10.25
to the Company's Report on Form 8-K dated March 29, 1996).
10.26 Security Agreement and Mortgage -- Patents and Trademarks
among Aurora Electronics Group, Inc., Aurora Electronics, Inc.
and Chemical Bank, N.A., dated March 29, 1996
(incorporated by reference from Exhibit 10.26 to the
Company's Report on Form 8-K dated March 29, 1996).
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<PAGE> 44
10.27 Assignment for Security (Patents) among Aurora Electronics
Group, Inc., as Assignor, and Chemical Bank, as Assignee,
dated March 29, 1996 (incorporated by reference from
Exhibit 10.27 to the Company's Report on Form 8-K dated
March 29, 1996).
10.28 Assignment for Security (Patents) among Aurora Electronics,
Inc., as Assignor, and Chemical Bank, as Assignee, dated March
29, 1996 (incorporated by reference from Exhibit 10.28
to the Company's Report on Form 8-K dated March 29, 1996).
10.29 Assignment for Security (Trademarks) among Aurora
Electronics Group, Inc., as Assignor, and Chemical Bank, as
Assignee, dated March 29, 1996 (incorporated by reference from
Exhibit 10.29 to the Company's Report on Form 8-K dated
March 29, 1996).
10.30 Assignment for Security (Trademarks) among Aurora Electronics,
Inc., as Assignor, and Chemical Bank, as Assignee, dated March
29, 1996 (incorporated by reference from Exhibit 10.30 to the
Company's Report on Form 8-K dated March 29, 1996).
10.31 Registration Rights Agreement, among Aurora Electronics, Inc.,
Welsh, Carson, Anderson & Stowe VII, L.P., and WCAS Capital
Partners II, L.P., dated March 29, 1996.
10.32 Aurora Electronics, Inc. 10% Senior Subordinated Note due
September 30, 2001, by Aurora Electronics, Inc. as payor to
WCAS Capital Partners II, L.P., as payee, dated March 29, 1996.
10.33 Financial Support Agreement, among Aurora Electronics, Inc.,
Aurora Electronics Group, Inc., Welsh, Carson, Anderson & Stowe
VII, L.P., and WCAS Capital Partners II, L.P., dated as of
September 30, 1996.
10.34 Limited (Overadvance) Guarantee, made by Welsh, Carson,
Anderson & Stowe, VII, L.P. and WCAS Capital Partners II, L.P.,
each a Guarantor, and collectively, the Guarantors, in favor of
The Chase Manhattan Bank (formerly known as Chemical Bank), as
Agent for the Lenders, dated as of September 30, 1996.
10.35 Limited (Acquisition) Guarantee, made by Welsh, Carson,
Anderson & Stowe, VII, L.P. and WCAS Capital Partners II, L.P.,
each a Guarantor, and collectively, the Guarantors, in favor of
The Chase Manhattan Bank (formerly known as Chemical Bank), as
Agent for the Lenders, dated as of September 30, 1996.
10.36 Form of Note, Aurora Electronics Group, Inc. 10% Senior
Subordinated Note due September 30, 2001, by Aurora Electronics
Group, Inc. as payor.
44
<PAGE> 45
10.37 Amendment No. 1 to Registration Rights Agreement, among Aurora
Electronics, Inc. and the parties listed on Schedule I thereto,
dated as of September 30, 1996.
*10.38 Letter Agreement, dated November 21, 1997, between the
Company and John F. Thompson relating to employment.
*10.39 Amended and Restated Financial Support Agreement, among Aurora
Electronics, Inc., Aurora Electronics Group, Inc., Welsh,
Carson, Anderson & Stowe VII, L.P., and WCAS Capital Partners
II, L.P., dated as of , 1997.
*10.40 Securities Purchase Agreement dated August 14, 1997 between
Aurora Electronics, Inc. and Welsh, Carson, Anderson & Stowe
VII, L.P. for the purchase of Aurora Electronics, Inc. Series
B Preferred Stock.
*10.41 Securities Purchase Agreement dated October 2, 1997 between
Aurora Electronics, Inc. and Welsh, Carson, Anderson & Stowe
VII, L.P. for the purchase of Aurora Electronics, Inc. Series C
Preferred Stock.
*10.42 Securities Purchase Agreement dated October 24, 1997 between
Aurora Electronics, Inc. and Welsh, Carson, Anderson & Stowe
VII, L.P. for the purchase of Aurora Electronics, Inc. Series D
Preferred Stock.
*10.43 Senior Subordinated Note Purchase Agreement among Aurora
Electronics, Inc. and Welsh, Carson, Anderson & Stowe VII, L.P.
*10.44 Form of $2,800,000 10% Senior Subordinated Demand Note dated
December 5, 1997 between Aurora Electronics, Inc., as payor,
and Welsh, Carson, Anderson & Stowe VII, L.P., as payee.
*11 Computation of Earnings Per Share
21.1 Subsidiaries of the Company:
21.2
<TABLE>
<CAPTION>
JURISDICTION
NAME OF INCORPORATION
<S> <C>
Aurora Electronics Group, Inc. California
Aurora Electronics Limited United Kingdom
</TABLE>
*23.1 Consent of Arthur Andersen LLP
*27 Financial Data Schedule
*Filed herewith.
45
<PAGE> 1
EXHIBIT 4.12
WELSH, CARSON, ANDERSON & STOWE
320 PARK AVENUE
Suite 2500
New York, New York 100222-6615
January 6, 1998
Aurora Electronics. Inc.
9477 Waples Street, Suite 150
San Diego, CA 92121
Attn: Wayne Withers, Chief Financial Officer
SUBJECT Financial Support Agreement, dated as of September 30, 1996, as
amended, (the "Agreement"), among Aurora Electronics, Inc., a Delaware
corporation (the "Company"), Aurora Electronics Group, Inc., a
California corporation and wholly owned subsidiary of the Company
("AEG"), Welsh, Carson, Anderson & Stowe VII, L.P., a Delaware limited
partnership ("WCAS VII"), and WCAS Capital Partners II, L.P., a
Delaware limited partnership ("WCAS CP II" and together with WCAS VII
being hereinafter collectively referred to as the "Guarantors").
Pursuant to the Agreement, the Guarantors were to receive Warrants to
purchase common shares of the Company (the "Warrants") as recognition of the
financial risk of guaranteeing certain amounts owed by AEG for loans pursuant to
the Credit Agreement (the "Credit Agreement") among the Company, AEG and Chase
Manhattan Bank as a lender and agent for the lenders. The following warrants
have been issued as of this date:
<TABLE>
<CAPTION>
DATE WCAS VII WCAS CP II TOTAL EXERCISE PRICE
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
9/30/96 276,000 9,714 285,714 $2.100
6/01/97 340,941 12,000 352,941 1.700
6/06/97 43,909 1,546 45,455 1.650
1/27/97 548,864 19,318 568,182 1.760
10//28/97 942,439 33,171 975,610 1.025
</TABLE>
<PAGE> 2
-2-
Although the terms of the Agreement provide for WCAS VII and WCAS CP II
to be issued additional Warrants, WCAS VII and WCAS CP II do hereby waive and
forego the right to receive the additional Warrants due by reason of additional
guarantees issued or outstanding at this time.
/s/ Thomas E. McInerney
-------------------
By: Thomas McInerney, General Partner
WCAS VII
/s/ Thomas E. McInerney
-------------------
By: Thomas McInerney, General Partner
WCAS CP II Partners
<PAGE> 1
EXHIBIT 4.13
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS
OF
SERIES B 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 August 13, 1997 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 25,000 shares which shall be
issued in and constitute a single series to be known as "Series B Convertible
Preferred Stock" (hereinafter called the "Series B Convertible Preferred
Stock"). The shares of Series B Convertible Preferred Stock shall have the
voting powers, designations, preferences and other special rights, and
qualifications, limitations and restrictions thereof set forth below:
<PAGE> 2
1. Dividends. (a) The holders of shares of Series B 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 dividends shall not bear interest. The Board of
Directors of the Corporation may fix a record date for the determination of
holders of Series B 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 Series B 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 Series B Convertible Preferred Stock
shall have been declared and paid and (ii) any arrears or defaults in any
redemption of shares of Series B 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
Series B Convertible Preferred Stock pursuant to Section 6 hereof.
2. Redemption. The shares of Series B 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
2
<PAGE> 3
March 29, 1996 (as amended, the "Credit Agreement"), among Aurora Electronics
Group, Inc., the Corporation and the Guarantors named therein, the Lenders named
therein and The Chase Manhattan Bank (formerly known as Chemical Bank, N.A.), as
Agent, the Corporation shall redeem (the "Mandatory Redemption") all of the
shares of Series B 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 Series B 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
(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 Series B 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 Series
B 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 Series B
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.
3
<PAGE> 4
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 Series B Convertible Preferred
Stock are to be redeemed as herein provided is hereinafter called a "Redemption
Date." The price at which any shares of Series B 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 registered mail, postage
prepaid, to each holder of record of Series B Convertible Preferred Stock, at
his, her or its address last shown on the records of the transfer agent of the
Series B 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
4
<PAGE> 5
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 Series B 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 Series B 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 Series B Convertible Preferred Stock as holders of such
shares of Series B 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 Series B 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 Series B
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 Series B 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 Series B Convertible Preferred Stock, such funds will be used, at the end of
the next succeeding fiscal quarter, to redeem the balance of the shares which
the Corporation was theretofore
5
<PAGE> 6
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 Series B Convertible Preferred Stock then
outstanding shall be entitled to be paid out of the assets of the Corporation
avail- able 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 Series B Convertible
Preferred Stock, plus all accrued but unpaid dividends to which the holders of
the Series B Convertible Preferred Stock are then entitled pursuant to Section 1
above as of such date, and no more. If upon any such liquida- tion, 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 Series B Convertible
Pre- ferred Stock shall be entitled) shall be insufficient to pay the holders of
shares of Series B Convertible Preferred Stock the full amount to which they
shall be entitled pursuant to this Section 3(a), the holders of shares of
Series B Convertible Pre- ferred 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 Series B 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 Series B 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.
6
<PAGE> 7
(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 Series B 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 Series B Convertible
Preferred Stock shall have the right, at his, her or its option at any time, to
convert any such shares of Series B 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 Series B 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
Series B 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 $1.60 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 Series B 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 Series B
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 Series B 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.
7
<PAGE> 8
(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 Series B 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 Series B
Convertible Preferred Stock. To the extent permitted by law, such conversion
shall be deemed to have been effected and the Conversion 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 Series B Convertible
Preferred Stock shall cease, and the person or persons in whose name or names
any certificate or certificates for shares of 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
Series B 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
Series B 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 Series B Convertible
Preferred Stock, the Corporation will pay the holder thereof, out of
funds legally available for such
8
<PAGE> 9
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 Series B Convertible
Preferred Stock so converted or the Common Stock issued upon such
conversion.
(iii) In case the number of shares of Series B 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 Series B
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 Series B 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 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 Series B
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 Series B Convertible
Preferred Stock without giving effect to any adjustment in
9
<PAGE> 10
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 Series B 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 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
10
<PAGE> 11
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
11
<PAGE> 12
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 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
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<PAGE> 13
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, and the Conversion Price
shall be reduced as if the Corporation had subdivided its outstanding
shares of Common Stock into a greater number of shares, as provided in
subparagraph (v).
(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 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
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<PAGE> 14
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 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 Series B
Convertible Preferred Stock pursuant to that certain Series B Convertible
Preferred Stock Purchase Agreement, dated as of August 14, 1997, as amended,
among the Corporation, WCAS VII and the several persons named on Schedule I
thereto; (ii) the issuance of shares of Common Stock upon conversion of Series B
Convertible Preferred Stock; (iii) the issuance of up to 5,559,887 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
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<PAGE> 15
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 Series B Convertible Preferred Stock) shall be made
whereby each holder of a share or shares of Series B 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 Series B 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 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.
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<PAGE> 16
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 Series B Convertible Preferred Stock at the time outstanding)
executed and mailed or delivered to each holder of a share or shares of Series B
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 Series B 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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<PAGE> 17
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 Series B
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 Series B 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 Series B
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
Series
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<PAGE> 18
B 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 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 Series B Convertible Preferred Stock, would exceed the total number of
shares of Common Stock then authorized by the Corporation's Restated Certificate
of Incorporation.
(k) No Reissuance of Series B Convertible Preferred Stock.
Shares of Series B 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 Series B 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 Series B 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 Series B Convertible Preferred Stock
or of any shares of Common Stock issued or issuable upon the conversion of any
shares of Series B Convertible Preferred Stock in any manner which interferes
with
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<PAGE> 19
the timely conversion of such Series B 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 Series B 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 reorganization 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 Series B 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 Series B 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
Series B 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 Series B Convertible
Preferred Stock are outstanding, without the consent of the holders of a
majority of the Series B 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 Series B 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
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<PAGE> 20
hereof which would amend or repeal the dividend, voting, conversion, redemption
or liquidation rights of the Series B 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 Series B 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 Series B
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 Series B 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 Series B 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 Series B Convertible
Preferred Stock shall be reduced accordingly.
8. Pari Passu Treatment. Except as and to the extent expressly
set forth hereinabove, each of the Series B Convertible Preferred Stock and the
Convertible Preferred Stock, par value $.01 per share (the "Convertible
Preferred Stock"), of the Corporation shall be pari passu to the other in all
respects, including without limitation with respect to voting rights (and which
the holders of Convertible Preferred Stock and Series B Convertible Preferred
Stock shall vote as a single class on all matters for which such holders are
entitled to vote, including any vote required by law, the Restated Certificate
of Incorporation of the Corporation, any Certificates of Designations of the
Corporation or otherwise), liquidation preference, redemption rights and
preference and rights to receive dividends.
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<PAGE> 21
IN WITNESS WHEREOF, this Certificate of Designations has been
executed by the Corporation by its Chairman and Chief Executive Officer this
14th day of August, 1997.
AURORA ELECTRONICS, INC.
By
--------------------------------------
Jim C. Cowart
Chairman and Chief
Executive Officer
<PAGE> 1
EXHIBIT 4.14
EXHIBIT A
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS
OF
SERIES C 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 October 1, 1997 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 25,000 shares which shall be
issued in and constitute a single series to be known as "Series C Convertible
Preferred Stock" (hereinafter called the "Series C Convertible Preferred
Stock"). The shares of Series C Convertible Preferred Stock shall have the
voting powers, designations, preferences and other special rights, and
qualifications, limitations and restrictions thereof set forth below:
<PAGE> 2
1. Dividends. (a) The holders of shares of Series C 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 dividends shall not bear interest. The Board of
Directors of the Corporation may fix a record date for the determination of
holders of Series C 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 Series C 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 Series C Convertible Preferred Stock
shall have been declared and paid and (ii) any arrears or defaults in any
redemption of shares of Series C 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
Series C Convertible Preferred Stock pursuant to Section 6 hereof.
2. Redemption. The shares of Series C 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
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<PAGE> 3
March 29, 1996 (as amended, the "Credit Agreement"), among Aurora Electronics
Group, Inc., the Corporation and the Guarantors named therein, the Lenders named
therein and The Chase Manhattan Bank (formerly known as Chemical Bank, N.A.), as
Agent, the Corporation shall redeem (the "Mandatory Redemption") all of the
shares of Series C 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 Series C 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
(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 Series C 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 Series
C 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 Series C
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.
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<PAGE> 4
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, and any general partners
thereof.
Any date on which any shares of Series C Convertible Preferred
Stock are to be redeemed as herein provided is hereinafter called a "Redemption
Date." The price at which any shares of Series C 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 registered mail, postage
prepaid, to each holder of record of Series C Convertible Preferred Stock, at
his, her or its address last shown on the records of the transfer agent of the
Series C 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
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<PAGE> 5
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 Series C 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 Series C 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 Series C Convertible Preferred Stock as holders of such
shares of Series C 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 Series C 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 Series C
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 Series C Convertible Preferred Stock ratably from each holder whose
shares are otherwise re- quired to be redeemed. At any time thereafter when
additional funds of the Corporation become legally available for the redemption
of Series C Convertible Preferred Stock, such funds will be used, at the end of
the next succeeding fiscal quarter, to redeem the balance of the shares which
the Corporation was theretofore
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<PAGE> 6
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, dissolu- tion or winding up of the
Corporation, the holders of shares of Series C Convertible Preferred Stock then
outstanding shall be entitled to be paid out of the assets of the Corporation
avail- able 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 Series C Convertible
Preferred Stock, plus all accrued but unpaid dividends to which the holders of
the Series C Convertible Preferred Stock are then entitled pursuant to Section 1
above as of such date, and no more. If upon any such liquida- tion, 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 Series C Convertible
Pre- ferred Stock shall be entitled) shall be insufficient to pay the holders of
shares of Series C Convertible Preferred Stock the full amount to which they
shall be entitled pursuant to this Sec- tion 3(a), the holders of shares of
Series C Convertible Pre- ferred 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 Series C 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 Series C 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.
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<PAGE> 7
(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 Series C 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 Series C Convertible Preferred
Stock shall have the right, at his, her or its option at any time, to convert
any such shares of Series C 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 Series C 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 Series C
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 $1.09 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 Series C 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 Series C
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 Series C 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.
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<PAGE> 8
(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 Series C 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 Series C
Convertible Preferred Stock. To the extent permitted by law, such conversion
shall be deemed to have been effected and the Conversion 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 Series C Convertible
Preferred Stock shall cease, and the person or persons in whose name or names
any certificate or certificates for shares of 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
Series C 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
Series C 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 Series C 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
8
<PAGE> 9
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 Series C
Convertible Preferred Stock so converted or the Common Stock issued upon
such conversion.
(iii) In case the number of shares of Series C 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 Series C 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 Designations and whether or not any shares
of Series C 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 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 Series C
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 Series C Convertible
Preferred Stock without giving effect to any adjust-
9
<PAGE> 10
ment 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 sub-paragraphs
(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 Series C 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 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
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<PAGE> 11
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
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<PAGE> 12
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 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
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<PAGE> 13
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 Con- vertible 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, and the Conversion
Price shall be reduced as if the Corporation had subdivided its
outstanding shares of Common Stock into a greater number of shares, as
provided in subparagraph (v).
(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 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
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<PAGE> 14
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 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 Series C
Convertible Preferred Stock pursuant to that certain Series C Convertible
Preferred Stock Purchase Agreement, dated as of October 2, 1997, among the
Corporation, WCAS VII and the several other persons named on Schedule I thereto;
(ii) the issuance of shares of Common Stock upon conversion of Series C
Convertible Preferred Stock; (iii) the issuance of up to 5,559,887 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
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<PAGE> 15
Securities issued by the Corporation prior to the date of said Series C
Convertible Preferred Stock 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 Series C Convertible Preferred Stock) shall be made
whereby each holder of a share or shares of Series C 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 Series C 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 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.
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<PAGE> 16
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 Series C Convertible Preferred Stock at the time outstanding)
executed and mailed or delivered to each holder of a share or shares of Series C
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 Series C 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;
16
<PAGE> 17
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 Series C
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
Series C 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 unis- sued Common Stock,
solely for the purpose of issuance upon the conversion of the Series C
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
Series
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<PAGE> 18
C 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 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 Series C Convertible Preferred Stock, would exceed the total number of
shares of Common Stock then authorized by the Corporation's Restated Certificate
of Incorporation.
(k) No Reissuance of Series C Convertible Preferred Stock. Shares
of Series C 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 Series C 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 Series C 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 Series C Convertible Preferred Stock
or of any shares of Common Stock issued or issuable upon the conversion of any
shares of Series C Convertible Preferred Stock in any manner which interferes
with
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<PAGE> 19
the timely conversion of such Series C 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 Designations 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 Series C 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
reorganization 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 Series C 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 Series C 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
Series C 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 Series C Convertible
Preferred Stock are outstanding, without the consent of the holders of a
majority of the Series C 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 Series C 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
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<PAGE> 20
hereof which would amend or repeal the dividend, voting, conversion, redemption
or liquidation rights of the Series C 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 Series C 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 Series C
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 Series C 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 Designations or
amendment thereof, merger, consolidation or otherwise.
7. Reacquired Shares. Any shares of Series C 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 Series C Convertible
Preferred Stock shall be reduced accordingly.
8. Pari Passu Treatment. Except as and to the extent expressly
set forth hereinabove, each of the Series C Convertible Preferred Stock and the
Series B Convertible Preferred Stock, par value $.01 per share (the "Series B
Convertible Preferred Stock"), of the Corporation and the Convertible Preferred
Stock, par value $.01 per share (the "Convertible Preferred Stock"), of the
Corporation shall be pari passu to the other in all respects, including without
limitation with respect to voting rights (and which the holders of Convertible
Preferred Stock, Series B Convertible Preferred Stock and Series C Convertible
Preferred Stock shall vote as a single class on all matters for which such
holders are entitled to vote, including any vote required by law, the Restated
Certificate of Incorporation of the Corporation, any Certificates of
Designations of the Corporation or otherwise), liquidation preference,
redemption rights and preference and rights to receive dividends.
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<PAGE> 21
IN WITNESS WHEREOF, this Certificate of Designations has been
executed by the Corporation by its Chairman and Chief Executive Officer this 2nd
day of October, 1997.
AURORA ELECTRONICS, INC.
By /s/ Jim C. Cowart
--------------------------------
Jim C. Cowart
Chairman and Chief
Executive Officer
<PAGE> 1
EXHIBIT 4.15
EXHIBIT A
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS
OF
SERIES D 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 October 24, 1997 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 20,000 shares which shall be
issued in and constitute a single series to be known as "Series D Convertible
Preferred Stock" (hereinafter called the "Series D Convertible Preferred
Stock"). The shares of Series D Convertible Preferred Stock shall have the
voting powers, designations, preferences and other special rights, and
qualifications, limitations and restrictions thereof set forth below:
<PAGE> 2
1. Dividends. (a) The holders of shares of Series D
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 dividends shall not bear interest.
The Board of Directors of the Corporation may fix a record date for the
determination of holders of Series D 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 Series D 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 Series D
Convertible Preferred Stock shall have been declared and paid and (ii) any
arrears or defaults in any redemption of shares of Series D 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 Series D Convertible Preferred Stock pursuant to
Section 6 hereof.
2. Redemption. The shares of Series D 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
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March 29, 1996 (as amended, the "Credit Agreement"), among Aurora Electronics
Group, Inc., the Corporation and the Guarantors named therein, the Lenders
named therein and The Chase Manhattan Bank (formerly known as Chemical Bank,
N.A.), as Agent, the Corporation shall redeem (the "Mandatory Redemption") all
of the shares of Series D 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 Series D 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
(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 Series D 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
Series D 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 Series D
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.
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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, and any general
partners thereof.
Any date on which any shares of Series D Convertible
Preferred Stock are to be redeemed as herein provided is hereinafter called a
"Redemption Date." The price at which any shares of Series D 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
registered mail, postage prepaid, to each holder of record of Series D
Convertible Preferred Stock, at his, her or its address last shown on the
records of the transfer agent of the Series D 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
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<PAGE> 5
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 Series D 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 Series D 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 Series D Convertible Preferred Stock as holders of such
shares of Series D 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 Series D 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
Series D 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 Series D 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 Series D Convertible Preferred Stock, such funds will be used, at
the end of the next succeeding fiscal quarter, to redeem the balance of the
shares which the Corporation was theretofore
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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 Series D 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 Series D
Convertible Preferred Stock, plus all accrued but unpaid dividends to which the
holders of the Series D 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 Series D
Convertible Preferred Stock shall be entitled) shall be insufficient to pay the
holders of shares of Series D Convertible Preferred Stock the full amount to
which they shall be entitled pursuant to this Section 3(a), the holders of
shares of Series D 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 Series D
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 Series D 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.
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(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 Series D 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 Series D
Convertible Preferred Stock shall have the right, at his, her or its option at
any time, to convert any such shares of Series D 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 Series D 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 Series D 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
$1.05 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 Series D 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 Series D 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
Series D 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.
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<PAGE> 8
(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 Series D 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
Series D Convertible Preferred Stock. To the extent permitted by law, such
conversion shall be deemed to have been effected and the Conversion 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 Series D
Convertible Preferred Stock shall cease, and the person or persons in whose
name or names any certificate or certificates for shares of 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 Series D 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 Series D 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 Series D
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
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<PAGE> 9
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 Series
D Convertible Preferred Stock so converted or the Common Stock issued
upon such conversion.
(iii) In case the number of shares of Series D 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 Series D
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 Designations and whether or not any shares
of Series D 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 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 Series D 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
Series D Convertible Preferred Stock without giving effect to any adjust-
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<PAGE> 10
ment 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 Series D
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 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
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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
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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 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
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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, and
the Conversion Price shall be reduced as if the Corporation had
subdivided its outstanding shares of Common Stock into a greater
number of shares, as provided in subparagraph (v).
(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 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
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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 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 Series D
Convertible Preferred Stock pursuant to that certain Series D Convertible
Preferred Stock Purchase Agreement, dated as of October 24, 1997, among the
Corporation, WCAS VII and the several other persons named on Schedule I
thereto; (ii) the issuance of shares of Common Stock upon conversion of Series
D Convertible Preferred Stock; (iii) the issuance of up to 5,559,887 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
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Securities issued by the Corporation prior to the date of said Series D
Convertible Preferred Stock 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 Series D Convertible Preferred Stock) shall be
made whereby each holder of a share or shares of Series D 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 Series D 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 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.
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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 Series D Convertible Preferred Stock at the time
outstanding) executed and mailed or delivered to each holder of a share or
shares of Series D 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 Series D 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 Series D
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 Series D 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 Series D
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 Series
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D 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 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 Series D Convertible Preferred Stock, would exceed the
total number of shares of Common Stock then authorized by the Corporation's
Restated Certificate of Incorporation.
(k) No Reissuance of Series D Convertible Preferred
Stock. Shares of Series D 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 Series D 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
Series D 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 Series D Convertible
Preferred Stock or of any shares of Common Stock issued or issuable upon the
conversion of any shares of Series D Convertible Preferred Stock in any manner
which interferes with
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the timely conversion of such Series D 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 Designations 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 Series D 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
reorganization 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 Series D 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 Series D 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
Series D 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 Series D
Convertible Preferred Stock are outstanding, without the consent of the holders
of a majority of the Series D 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 Series D
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
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hereof which would amend or repeal the dividend, voting, conversion, redemption
or liquidation rights of the Series D 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 Series D 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 Series D
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 Series D 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 Designations or
amendment thereof, merger, consolidation or otherwise.
7. Reacquired Shares. Any shares of Series D 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 Series D Convertible
Preferred Stock shall be reduced accordingly.
8. Pari Passu Treatment. Except as and to the extent
expressly set forth hereinabove, each of the Series D Convertible Preferred
Stock, the Series C Convertible Preferred Stock, par value $.01 per share (the
"Series C Convertible Preferred Stock"), the Series B Convertible Preferred
Stock, par value $.01 per share (the "Series B Convertible Preferred Stock"),
of the Corporation and the Convertible Preferred Stock, par value $.01 per
share (the "Convertible Preferred Stock"), of the Corporation shall be pari
passu to the other in all respects, including without limitation with respect
to voting rights (and which the holders of Convertible Preferred Stock, Series
B Convertible Preferred Stock, Series C Convertible Preferred Stock and Series
D Convertible Preferred Stock shall vote as a single class on all matters for
which such holders are entitled to vote, including any vote required by law,
the Restated Certificate of Incorporation of the Corporation, any Certificates
of Designations of
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the Corporation or otherwise), liquidation preference, redemption rights and
preference and rights to receive dividends.
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IN WITNESS WHEREOF, this Certificate of Designations has been
executed by the Corporation by its Chairman and Chief Executive Officer this
day of October, 1997.
AURORA ELECTRONICS, INC.
By_____________________________________
Jim C. Cowart
Chairman and Chief
Executive Officer
<PAGE> 1
EXHIBIT 10.38
WELSH, CARSON, ANDERSON & STOWE
320 PARK AVENUE
SUITE 2500
NEW YORK, NEW YORK 10022-6815
November 21, 1997
Mr. John F. Thompson
16692 Baruna Lane
Huntington Beach, CA 92649
Dear John:
On behalf of the Board of Directors of Aurora Electronics, Inc., this
will confirm our agreement regarding your employment letter.
You have agreed to continue as CEO until May 1, 1998 and, until that
tinie, to attempt to execute the "get well" plans for Aurora. On a personal
note, I very much appreciate your commitment and the energy and judgment that
you bring to the task. lii return, we agree that if you decide to leave on or
after that date, the Company will provide salary continuation to you for a
period of up to twelve months, or until you are re-employed, whichever comes
first. In addition, on May 1, 1998 or at such later date that you resign, you
will be entitled to the pro-rata share of your guaranteed bonus as described on
page one of your employment letter.
If Aurora (or any successor to Aurora) is unable to provide for that
salary continuation or bonus payment, Welsh, Carson, Anderson & Stowe VII, L.P.
will provide that benefit to you
John, I believe this letter covers the issues we discussed. Please let
me Imow if you have any questions or comments. Again, thanks for your
willingness to work with all of the Aurora stakeholders in improving the
situation.
Sincerely,
/s/ Thomas E. McInerney
Thomas E. McInerney
General Partner
<PAGE> 1
EXHIBIT 10.39
AMENDED AND RESTATED FINANCIAL SUPPORT AGREEMENT
AMENDED AND RESTATED FINANCIAL SUPPORT AGREEMENT, dated as of
July 31, 1997 (the "Agreement"), among Aurora Electronics, Inc., a Delaware
corporation (the "Company"), Aurora Electronics Group, Inc., a California
corporation and wholly-owned subsidiary of the Company ("AEG"), Welsh, Carson,
Anderson & Stowe VII, L.P., a Delaware limited partnership ("WCAS VII"), and
WCAS Capital Partners II, L.P., a Delaware limited partnership ("WCAS CP II" and
collectively with WCAS VII, the "Guarantors").
WHEREAS, pursuant to the Credit Agreement, dated as of March 29,
1996 (the "Credit Agreement"), as amended, among AEG, the guarantors named
therein, the lenders named therein (collectively, the "Lenders"), and The Chase
Manhattan Bank (formerly known as Chemical Bank, N.A.) as a Lender and as agent
for the Lenders (in such capacity, "Agent"), AEG is indebted to the Lenders and
the Company is a guarantor of the obligations of AEG to the Lenders thereunder;
WHEREAS, various defaults existed under the Credit Agreement,
which defaults gave the Lenders the right to accelerate the maturity of AEG's
indebtedness thereunder;
WHEREAS, in order to enhance and protect their existing
substantial equity investments in the Company and to facilitate the waiver of
such defaults and the amendment of certain provisions of the Credit Agreement by
the Lenders in various respects beneficial to the Company in accordance with the
Waiver and Amendment Agreement No. 3 to the Credit Agreement, dated as of
September 30, 1996, the Guarantors agreed to assume additional financial risk in
their roles as shareholders by issuing the Limited (Overadvance) Guarantee and
the Limited (Acquisition) Guarantee (each as hereinafter defined) pursuant to
the Financial Support Agreement, dated as of September 30, 1996 (the "Financial
Support Agreement"), among the Company, AEG and the Guarantors;
WHEREAS, in giving the Limited (Overadvance) Guarantee and the
Limited (Acquisition) Guarantee (collectively, the
<PAGE> 2
"Original Guarantees"), the Guarantors would make additional contributions to
the capital of the Company;
WHEREAS, in recognition of the additional financial risk that
each of the Guarantors assumed by agreeing to give the Original Guarantees (and
not as compensation or a payment (x) for any services or (y) otherwise in
connection with the carrying on of a trade or business) and for the other
consideration set forth in the Financial Support Agreement, and in respect of
the execution and delivery by the Guarantors of the Limited (Overadvance)
Guarantee, dated as of September 30, 1996 (the "Limited (Overadvance)
Guarantee"), among the Guarantors and the Agent, (i) the Company issued to the
Guarantors the Warrants, dated as of September 30, 1996 (collectively, the
"Original Overadvance Warrants"), to purchase up to the number of shares of
Common Stock, $.03 par value ("Common Stock"), of the Company set forth in each
Original Overadvance Warrant, and (ii) AEG agreed to issue one or more 10%
Senior Subordinated Notes of AEG due 2001 substantially in the form of Exhibit A
hereto ("Notes") to each Guarantor in the event that such Guarantor shall be
required to make any payment on its respective Limited (Overadvance) Guarantee;
WHEREAS, pursuant to the Amendment No. 1 to Financial Support
Agreement, dated as of January 27, 1997, and in connection with Amendment
Agreement No. 5 to the Credit Agreement, dated as of January 27, 1997, and
Amendment Agreement No. 6 to the Credit Agreement, dated as of February 13,
1997, (i) the Guarantors agreed to (A) amend the Limited (Overadvance) Guarantee
to increase the aggregate amount of indebtedness guaranteed thereby from
$3,000,000 to $8,000,000, and (B) amend the form of the Limited (Acquisition)
Guarantee attached to the Financial Support Agreement to reduce the aggregate
amount of indebtedness to be guaranteed thereby upon issuance from $9,000,000 to
$4,000,000; and (ii) the Company (A) issued to the Guarantors the Warrants,
dated as of January 27, 1997 (collectively, the "Supplemental (Overadvance)
Warrants"), to purchase up to the number of shares of Common Stock of the
Company set forth in each Supplemental (Overadvance) Warrant, and (B) agreed to
amend the form of warrant to be issued to the Guarantors pursuant to the
Financial Support Agreement upon execution and delivery by the Guarantors of the
Limited (Acquisition) Guarantee to reflect the decreased indebtedness to be
guaranteed upon the execution and
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delivery by the Guarantors of the Limited (Acquisition) Guarantee, as amended;
WHEREAS, pursuant to the Amended and Restated Financial Support
Agreement, dated as of June 6, 1997 (the "First Amended and Restated Financial
Support Agreement"), in connection with the Waiver and Amendment Agreement No. 7
to the Credit Agreement, dated as of June 6, 1997, and in respect of the
execution and delivery by the Guarantors of the Limited (Microline) Guarantee,
dated as of June 6, 1997 (the "Limited (Microline) Guarantee"), among the
Guarantors and the Agent (which Limited (Microline) Guarantee is the "Limited
(Acquisition) Guarantee" contemplated by the Financial Support Agreement, as
amended), (i) the Company issued to the Guarantors the Warrants dated as of June
6, 1997 (collectively, the "Microline Acquisition Warrants", and collectively
with the Original Overadvance Warrants and the Supplemental (Overadvance)
Warrants, the "Outstanding Warrants"), to purchase up to the number of shares of
Common Stock of the Company set forth in each Microline Acquisition Warrant, and
(ii) AEG agreed to issue one or more Notes to each Guarantor in the event that
such Guarantor shall be required to make any payment on its respective Limited
(Microline) Guarantee;
WHEREAS, in connection with the Waiver and Amendment Agreement
No. 8 to the Credit Agreement, dated as of July 1, 1997, among the Company, AEG,
the Lenders and the Agent, the Guarantors have agreed to make the Guarantee,
substantially in the form of Exhibit B hereto (the "Final Guarantee");
WHEREAS, in recognition of the additional financial risk that
each of the Guarantors is assuming by agreeing to give the Final Guarantee (and
not as compensation or a payment (x) for any services or (y) otherwise in
connection with the carrying on of a trade or business) and for the other
consideration set forth in the Financial Support Agreement, and in respect of
the execution and delivery by the Guarantors of the Final Guarantee, (i) the
Company wishes to issue to the Guarantors the Warrants substantially in the form
of Exhibits C-1 and C-2 hereto (collectively, the "Final Warrants"), to purchase
up to the number of shares of Common Stock of the Company set forth in each
Final Warrant to reflect (together with the Outstanding Warrants) the full
amount of indebtedness to be guaranteed by the Final Guarantee, and (ii) AEG has
agreed to issue one or more Notes to each
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Guarantor in the event that such Guarantor shall be required to make any payment
on its respective Final Guarantee; and
WHEREAS, the Boards of Directors of the Company and AEG,
including a majority of disinterested directors in accordance with Section 144
of the General Corporation Law of the State of Delaware, have determined that
the transactions contemplated by this Agreement are in the best interests of the
Company and AEG, respectively, and their respective shareholders and creditors;
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements contained herein, the parties hereby amend and restate their
agreement as follows:
I.
ISSUANCE OF WARRANTS AND NOTES
SECTION 1.01 Issuance of Final Warrants. Upon execution and
delivery by each of the Guarantors of the Final Guarantee, the Company shall
issue and deliver the Final Warrants, it being understood and agreed that the
number of shares of Common Stock into which the Final Warrants are exercisable
shall be allocated among the Guarantors in accordance with each Guarantor's
Fractional Share (as defined in the Final Guarantee).
SECTION 1.02 Allocation of Final Guarantee. Schedule I hereto
sets forth the aggregate amount of indebtedness guaranteed by each of the
Guarantors under the Final Guarantee, in each case after giving effect to the
transactions contemplated by this Agreement.
SECTION 1.03 Issuance of Notes. Subject to Article IV hereof, in
the event that at any time either Guarantor shall make a payment on its
respective Final Guarantee pursuant to a demand by the Agent, AEG shall
concurrently with such Guarantor's payment to the Agent issue and deliver to
such Guarantor Notes in an aggregate principal amount equal to the amount paid
by such Guarantor to the Agent.
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<PAGE> 5
SECTION 1.04 Tax and Accounting Treatment. The Company, AEG and
the Guarantors agree that for federal, state and local income tax purposes, as
well as for financial accounting purposes: (i) they will treat the Guarantors as
having paid (x) cash consideration for the Final Warrants and (y) an amount
equal to the amount paid by the Guarantors pursuant to Section 1.03 of this
Agreement for the Notes; (ii) the issuance of the Final Warrants and the Notes
and the issuance of any shares of Common Stock upon the exercise of the
Outstanding Warrants and/or the Final Warrants (the "Warrant Shares" and
collectively with the Outstanding Warrants, the Final Warrants and the Notes,
the "Securities") is and shall be in the nature of a capital transaction; and
(iii) in no event will they treat the issuance of any of the Securities as
compensation or a payment (x) for any services or (y) otherwise in connection
with the carrying on of a trade or business, and in no event shall the Company
claim any tax deduction with respect to such issuance, exercise or conversion.
II.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND AEG
The Company and AEG represent and warrant to the Guarantors as
follows:
SECTION 2.01 Organization. Each of the Company and AEG is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware and the State of California, respectively, and is
duly licensed or qualified to do business as a foreign corporation and is in
good standing in each of the jurisdictions in which it owns or leases any real
property or in which the nature of business transacted by it makes such
licensing or qualification necessary except where the failure to be so licensed
or qualified would not have a material adverse affect on the business,
operations or financial condition of the Company or AEG. Each of the Company and
AEG has the corporate power and authority to own and hold its properties and to
carry on its business as currently conducted, to execute, deliver and perform
this Agreement and to issue, sell and deliver its respective Securities.
5
<PAGE> 6
SECTION 2.02 Authorization of Agreement, Etc. (a) Each of (i) the
execution, delivery and performance by the Company and AEG of this Agreement,
the Final Warrants and the Notes, (ii) the performance by the Company and AEG of
their respective obligations hereunder and thereunder, and (iii) the issuance
and delivery by the Company of the Warrant Shares upon exercise of the
Outstanding Warrants and/or the Final Warrants has 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 AEG, as the case may be, or any provision of any
indenture, agreement or other instrument by which the Company, AEG, or any of
their subsidiaries or any of their respective properties or assets is bound or
affected, 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, charge or
encumbrance of any nature upon any of the properties or assets of the Company,
AEG, or any of their subsidiaries.
(b) The Warrant Shares have been duly reserved by the Company for
issuance upon exercise of the Warrants and, when so issued and delivered, will
be duly authorized, validly issued and outstanding, fully paid and nonassessable
shares of the Common Stock of the Company. The issuance and delivery of the
Warrant Shares upon exercise of the Outstanding Warrants and/or the Final
Warrants are not subject to any preemptive rights of stockholders of the Company
or any subsidiary of the Company or to any right of first refusal or other
similar right in favor of any person.
SECTION 2.03 Validity. This Agreement has been duly executed and
delivered by the Company and AEG and constitutes the legal, valid and binding
obligation of the Company and AEG, enforceable in accordance with its terms.
SECTION 2.04 Authorized Capital Stock. (a) The authorized capital
stock of the Company consists of 50,000,000 shares of Common Stock and 1,000,000
shares of Preferred Stock (of which 400,000 shares have been designated as
Convertible Preferred Stock), par value $.01 per share (the "Preferred Stock"),
of the Company. As of the date hereof, shares of Common Stock are
validly issued and outstanding, fully paid and
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<PAGE> 7
nonassessable (of which shares constitute treasury shares), and
400,000 shares of Preferred Stock are issued and outstanding.
(b) Except as set forth on Schedule 2.04 hereto, (i) no
subscription, warrant, option, convertible security or other right (contingent
or other) to purchase or acquire any shares of any class of capital stock of the
Company is authorized or outstanding, (ii) there is no commitment of the Company
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, and (iii) the Company has no 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.
III.
REPRESENTATIONS AND WARRANTIES OF THE GUARANTORS
The Guarantors represent and warrant to the Company that they are
acquiring the Securities for their own respective accounts for purposes of
investment and not with a view to or for sale in connection with any
distribution thereof. The Guarantors further represent that they understand (i)
that the Securities have not been registered under the Securities Act by reason
of their issuance in transactions exempt from the registration requirements of
the Securities Act pursuant to Section 4(2) thereof, (ii) the Securities must be
held indefinitely unless a subsequent disposition thereof is registered under
the Securities Act or is otherwise exempt from such registration, (iii) the
Securities will bear a legend to such effect, and (iv) the Company will make a
notation on its transfer books to such effect. The Guarantors further understand
that the exemption from registration afforded by Rule 144 under the Securities
Act depends on the satisfaction of various conditions and that, if applicable,
affords the basis of sales of the Securities in limited amounts under certain
conditions. The Guarantors acknowledge that they have had a full opportunity to
request from the Company to review, and have received, all information deemed
relevant in making a decision to enter into this Agreement and consummate the
transactions contemplated hereby. The Guarantors
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<PAGE> 8
are "Accredited Investors" within the meaning of Rule 501(a) of the Securities
Act.
IV.
COVENANTS OF THE COMPANY AND AEG
SECTION 4.01 Convertible Preferred Stock. The Company and AEG
covenant and agree that the Notes or any right to payment received by the
Guarantors in respect of the loans made under the Credit Agreement and their
guarantees thereof, whether by way of purchase, subrogation or otherwise, and
regardless whether and to what extent the same shall be subordinated to other
indebtedness to the Lenders or shall have been waived pending certain events,
may be applied, both as to principal and accrued and unpaid interest, dollar for
dollar, by the Guarantors as the purchase price at the option of the Guarantors
for Convertible Preferred Stock of the Company, substantially in the form of the
Company's Convertible Preferred Stock, $.01 par value (the "Convertible
Preferred Stock"), outstanding on the date hereof. In addition, in the event
that the Company or AEG shall be unable to make a payment under the Credit
Agreement, as amended, the Guarantors shall have the right (but not the
obligation) (i) to purchase additional Convertible Preferred Stock and (ii) to
require the Company to use the net proceeds of such purchase to make such
payment of its or AEG's obligations under the Credit Agreement, as amended. Each
share of Convertible Preferred Stock so purchased at $100 per share shall be
convertible into a number of shares of Common Stock at a conversion price equal
to the lower of Fair Market Value of the Common Stock as of the date hereof or
Fair Market Value of the Common Stock as of the date of the issuance of the
Notes. The Company and AEG shall use their best efforts to provide the
Guarantors with sufficient notice in advance of a payment default under the
Credit Agreement, as amended, to enable the Guarantors to exercise their
respective rights under this Article IV.
SECTION 4.02 Further Assurances. Subject to the prior written
consent of the Agent on behalf of the Lenders, upon the making of a payment by
the Guarantors on any of the Guarantees, AEG agrees to take all reasonable
actions necessary to grant a security interest in its assets to the Guarantors
(which security
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<PAGE> 9
interest will be subordinate to the security interest of the Agent) as
collateral security for the payments that are made by the Guarantors with
respect to the Guarantees, including without limitation the execution and
delivery of a security agreement, financing statements and such other documents
as the Guarantors may reasonably request, and the making of all filings to
perfect such security interest as may be required under the provisions of the
Uniform Commercial Code or other applicable law or regulation in effect in each
state and Canadian province in which assets of AEG are located.
V.
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE GUARANTORS
The obligations of the Guarantors hereunder are subject, at the
option of the Guarantors, to the satisfaction of each of the following
conditions:
(a) Amendments to Warrants. The Company shall have executed and
delivered to the Guarantors an amendment to each of the Outstanding Warrants,
substantially in the respective forms attached as Exhibits D-1, D-2, D-3, D-4,
D-5 and D-6 hereto.
(b) Opinion of Counsel to the Company. The Guarantors shall have
received from Hughes & Luce L.L.P., counsel for the Company, an opinion dated
the date hereof, substantially in the form of Annex I attached hereto.
VI.
MISCELLANEOUS
SECTION 6.01 Expenses. Each party hereto will pay its own
expenses in connection with the transactions contemplated hereby, whether or not
such transactions shall be consummated.
SECTION 6.02 Survival of Agreements. All covenants, agreements,
representations and warranties made herein shall survive the execution and
delivery of this Agreement and the
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Final Warrants and the issuance, sale and delivery of the Notes, if any.
SECTION 6.03 Parties in Interest. 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.
SECTION 6.04 Consent of WCAS CP II. WCAS CP II, in its capacity
as the holder of the 10% Senior Subordinated Note Due September 30, 2001 of the
Company in the principal amount of $10,000,000, hereby consents to the issuance
of the Notes as contemplated by this Agreement.
SECTION 6.04 Confirmation of Warrants. Each of the Outstanding
Warrants is hereby ratified and confirmed in all respects and shall remain in
full force and effect in accordance with its terms.
SECTION 6.05 Notices. All notices, requests, consent and other
communications hereunder shall be in writing and shall be mailed by first class
registered mail, postage prepaid, or sent by a recognized courier service
addressed as follows:
If to the Company to it at:
9477 Waples Street
San Diego, California 92121
Attention: President
If to the Guarantors to them at:
320 Park Avenue
Suite 2500
New York, New York 10022
Attention: Richard H. Stowe
Thomas E. McInerney
or, in any such case, at such other address or addresses as shall have been
furnished in writing by such party to the other.
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SECTION 6.06 Law Governing. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York.
SECTION 6.07 Entire Agreement. This Agreement together with the
exhibits hereto and the Waiver and Amendment Agreement constitutes the entire
Agreement of the parties with respect to the subject matter hereof and may not
be modified or amended except in writing.
SECTION 6.08 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 in and the same instrument.
11
<PAGE> 12
IN WITNESS WHEREOF, the Company, AEG and the Guarantors have
executed this Agreement as of this 31st day of July, 1997.
AURORA ELECTRONICS, INC.
By
----------------------------------
Name:
Title:
AURORA ELECTRONICS GROUP, INC.
By
----------------------------------
Name:
Title:
WELSH, CARSON, ANDERSON &
STOWE VII, L.P.
By WCAS VII Partners,
General Partner
By
----------------------------------
General Partner
WCAS CAPITAL PARTNERS II, L.P.
By
----------------------------------
Attorney-in-Fact
<PAGE> 13
SCHEDULE I
<TABLE>
<CAPTION>
Final
Guarantor Guarantee
--------- ---------
<S> <C>
WCAS VII $11,592,000
WCAS CP II $ 408,000
-----------
Total $12,000,000
</TABLE>
<PAGE> 14
SCHEDULE 2.04
None.
<PAGE> 1
EXHIBIT 10.40
EXECUTION COPY
================================================================================
SERIES B CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT
Among
AURORA ELECTRONICS, INC.
WELSH, CARSON, ANDERSON & STOWE VII, L.P.
and
The Several Other Persons Named
In Schedule I Hereto
Dated as of August 14, 1997
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
I. PURCHASE AND SALE OF THE SERIES B PREFERRED SHARES................................. 1
SECTION 1.01. Issuance and Sale of the Series B
Preferred Shares.................................................... 1
SECTION 1.02. Closing Date........................................................ 2
II. REPRESENTATIONS AND WARRANTIES OF THE COMPANY...................................... 2
SECTION 2.01. Organization and Qualification...................................... 2
SECTION 2.02. Subsidiaries........................................................ 2
SECTION 2.03. Capitalization...................................................... 3
SECTION 2.04. Authorization of Agreements, Etc.................................... 4
SECTION 2.05. Validity............................................................ 5
SECTION 2.06. Governmental Approvals.............................................. 5
SECTION 2.07. Financial Statements, Etc........................................... 5
SECTION 2.08. SEC Filings......................................................... 6
SECTION 2.09. Absence of Certain Changes or Events................................ 7
SECTION 2.10. Actions Pending..................................................... 7
SECTION 2.11. Compliance with Law................................................. 8
SECTION 2.12. Offering of the Securities.......................................... 8
SECTION 2.13. Brokers............................................................. 8
III. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS................................... 9
SECTION 3.01. Authorization....................................................... 9
SECTION 3.02. Validity............................................................ 9
SECTION 3.03. Investment Representations.......................................... 9
SECTION 3.04. Government Approvals................................................ 10
IV. CONDITIONS PRECEDENT............................................................... 10
SECTION 4.01. Conditions Precedent to the Obligations
of the Purchasers............................................. 10
SECTION 4.02. Condition Precedent to the Obligations
of the Company................................................ 12
V. SURVIVAL OF REPRESENTATIONS; INDEMNITY............................................. 12
SECTION 5.01. Survival of Representations......................................... 12
SECTION 5.02. General Indemnity................................................... 12
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
SECTION 5.03. Conditions of Indemnification....................................... 13
VI. CERTAIN REGISTRATION RIGHTS........................................................ 14
VII. MISCELLANEOUS...................................................................... 14
SECTION 7.01. Expenses, Etc....................................................... 14
SECTION 7.02. Survival of Agreements.............................................. 14
SECTION 7.03. Parties in Interest................................................. 14
SECTION 7.04. Notices............................................................. 15
SECTION 7.05. Entire Agreement; Assignment........................................ 16
SECTION 7.06. Counterparts........................................................ 16
SECTION 7.07. Governing Law....................................................... 16
</TABLE>
INDEX TO EXHIBITS, SCHEDULES AND ANNEX
Exhibit Description
- ------- -----------
A Form of Certificate of Designations
Schedule Description
- -------- -----------
I Purchasers and Securities
ii
<PAGE> 4
SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT dated as
of August 14, 1997, among AURORA ELECTRONICS, INC., a Delaware corporation (the
"Company"), WELSH, CARSON, ANDERSON & STOWE VII, L.P., a Delaware limited
partnership ("WCAS VII") and the several other persons named in Schedule I
hereto (such persons, together with WCAS VII, being hereinafter called
individually a "Purchaser" and collectively the "Purchasers").
WHEREAS, the Company desires to sell to the Purchasers, and the
Purchasers desire to purchase from the Company, on the terms and subject to the
conditions set forth herein, an aggregate 25,000 shares of Series B Convertible
Preferred Stock, $.01 par value ("Series B Preferred Stock"), of the Company at
a purchase price of $100 per share; and
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 the shares of Common
Stock, $.03 par value ("Common Stock"), of the Company that will be issuable
upon the conversion of the Series B Preferred Stock being 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
THE SERIES B PREFERRED SHARES
SECTION 1.01. Issuance and Sale of the Series B
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 each Purchaser, and each Purchaser shall purchase from the Company, the
number of shares of Series B Preferred Stock set forth opposite the name of such
Purchaser on Schedule I hereto under the caption "Series B Preferred Shares"
(the aggregate number of shares of Series B
<PAGE> 5
Preferred so purchased are referred to herein as the "Series B Preferred
Shares"), for a purchase price of $100 per share. On the Closing Date, the
Company shall issue a certificate or certificates in definitive form, registered
in the name of each Purchaser, representing the number of Series B Preferred
Shares being purchased by it hereunder.
(b) As payment in full for the Series B Preferred Shares being
purchased by it hereunder, and against delivery of the certificate or
certificates therefor as aforesaid, on the Closing Date each Purchaser shall
transfer immediately available funds by wire transfer to an account designated
by the Company, an amount equal to $100 multiplied by the number of Series B
Preferred Shares to be purchased by such Purchaser in accordance with paragraph
(a) above.
SECTION 1.02. Closing Date. The transfer, sale and delivery of
the Series B Preferred Shares (the "Closing") shall take place at the offices of
Reboul, MacMurray, Hewitt, Maynard & Kristol, 45 Rockefeller Plaza, New York,
New York, on August 14, 1997 (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
2
<PAGE> 6
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").
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 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
3
<PAGE> 7
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 (i)
50,000,000 shares of Common Stock and (ii) 1,000,000 shares of Preferred Stock,
$.01 par value ("Preferred Stock"), of the Company of which 400,000 shares have
been designated Convertible Preferred Stock. As of the date hereof, 6,847,563
shares of Common Stock and 400,000 shares of Convertible Preferred Stock are
issued and outstanding, all of which were duly authorized and validly issued and
are fully paid and nonassessable.
(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 A (the "Certificate of Designations"), 25,000 shares of
Preferred Stock shall be designated as authorized Series B Preferred Stock.
(c) Except as set forth in the Company SEC Filings or on Schedule
2.03 hereof, as of the date 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
4
<PAGE> 8
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, (ii) the
performance by the Company of its obligations hereunder, (iii) the issuance,
sale and delivery by the Company of the Series B Preferred Shares, and (iv) the
issuance and delivery of the shares of Common Stock issuable upon the conversion
of the Series B Preferred Shares (collectively, the "Conversion Shares") 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 any provision 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 Series B Preferred 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 Series B Preferred
Stock. The Conversion Shares, when issued and delivered upon the conversion of
the Series B Preferred Shares, will be duly authorized, validly issued, fully
paid and nonassessable shares of Common Stock. Neither the issuance, sale and
delivery of the Series B Preferred Shares to the Purchasers hereunder, nor the
issuance and delivery of the Conversion Shares, is subject to any
5
<PAGE> 9
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.
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 issuance, sale and delivery of the Series B Preferred Shares or
the issuance and delivery of the Conversion Shares upon the conversion of the
Series B Preferred Shares, other than (i) the filing of the Certificate of
Designations 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 Series B Preferred Stock, and (ii) 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 transactions
contemplated herein.
SECTION 2.07. Financial Statements, Etc. (a) The Company has
furnished to the Purchasers: (i) the audited consolidated balance sheet of the
Company and its subsidiaries as of September 30, 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the fiscal year then ended 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 June 30,
1997 and the related consolidated statements of operations and cash flows for
the nine 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
6
<PAGE> 10
("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, 1996 (the
"September 30, 1996 Balance Sheet"), (ii) incurred since September 30, 1996 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. Since
September 30, 1996, 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, 1996, 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
7
<PAGE> 11
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 nine months ended June 30, 1997 referred to above, and except as
otherwise expressly contemplated by this Agreement, since September 30, 1996,
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, 1996
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, assigned or transferred any 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 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
8
<PAGE> 12
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. 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 2.10 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 board or tribunal. Except as set forth on Schedule 2.10 hereto,
there is no judgment, decree, injunction or order of any court, governmental
department, commission, agency, instrumentality or arbitrator outstanding
against the Company.
SECTION 2.11. Compliance with Law. 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.
SECTION 2.12. Offering of the Securities. Neither the Company nor
any person authorized or employed by the Company as
9
<PAGE> 13
agent, broker, dealer or otherwise in connection with the offering or sale of
the Series B Preferred Shares 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 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 Series B
Preferred Shares under the Securities Act or the rules and regulations of the
SEC thereunder) which would subject the offering, issuance or sale of the Series
B Preferred Shares to the Purchasers to the registration provisions of the
Securities Act.
SECTION 2.13. Brokers. All negotiations relative to this
Agreement and the transactions contemplated hereby have been carried on by the
Company directly with the Purchasers, 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 purchase and receipt by
such Purchaser of the Series B Preferred Shares being acquired by it hereunder,
have been duly authorized by all requisite action on the part of such Purchaser,
and will
10
<PAGE> 14
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.
SECTION 3.03. Investment Representations.
(a) Such Purchaser is acquiring the Series B Preferred Shares
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 Series B Preferred Shares 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 (as defined below), as amended herein, 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 Series B Preferred Shares.
(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 Series B Preferred Shares being
purchased hereunder for an indefinite period of time. Such Purchaser further
acknowledges
11
<PAGE> 15
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
Series B Preferred Shares 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 Series B Preferred Shares. 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 Series B Preferred Shares,
and that any such Purchaser that is a limited partnership has not been formed
solely for the purpose of purchasing the Series B Preferred Shares.
(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 such Purchaser
for the valid execution, delivery and performance of this Agreement.
IV.
CONDITIONS PRECEDENT
SECTION 4.01. 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) Certificate of Designations. The Certificate of Designations
shall have been duly filed with the Secretary of
12
<PAGE> 16
State of the State of Delaware and shall have become legally effective.
(b) Opinion of Counsel. The Purchasers shall have received from
Hughes & Luce L.L.P., counsel for the Company, an opinion dated the Closing
Date, satisfactory in form and substance to the Purchasers and their counsel.
(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, (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
13
<PAGE> 17
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, the designation, issuance,
sale and delivery of the Series B Preferred Shares, the reservation,
issuance and delivery of the Conversion Shares 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 stock certificates representing the Series
B Preferred 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.
SECTION 4.02. Condition Precedent to the Obligations of the
Company. The obligations of the Company hereunder are subject to the due filing
with the Secretary of State of the State of Delaware and the legal effectiveness
of the Certificate of Designations on or prior to the Closing Date.
V.
SURVIVAL OF REPRESENTATIONS; INDEMNITY
SECTION 5.01. Survival of Representations. Subject as set forth
below, all representations and warranties made by any party hereto in this
Agreement or pursuant hereto shall survive for a period of one year after the
Closing Date.
SECTION 5.02. General Indemnity.
14
<PAGE> 18
(a) Subject to the terms and conditions of this Article V, 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 Series B Preferred Shares),
damages, liabilities, costs and expenses, including, without limitation,
interest, penalties and reasonable attorneys' fees and expenses (collectively,
"Damages"), 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 V, the
Purchasers hereby agree 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 5.03. 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 5.02 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
15
<PAGE> 19
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 5.03 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 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.
VI.
CERTAIN REGISTRATION RIGHTS
The Company hereby affirms and agrees that the registration
rights granted to the Purchasers and certain other stockholders of the Company
as set forth in the Registration Rights Agreement dated as of March 29, 1996
(the "Registration Rights Agreement"), among the Company, the Purchasers and the
other parties named therein, shall continue in full force and effect, provided,
however, that the Company and the Purchasers
16
<PAGE> 20
acknowledge and agree (i) that the term "Convertible Preferred Stock" shall be
deemed to refer to and include the Series B Preferred Stock and (ii) the term
"Preferred Shares" shall be deemed to refer to and include the Series B
Preferred Shares.
VII.
MISCELLANEOUS
SECTION 7.01. 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 contemplated hereby. 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.
SECTION 7.02. 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 Series B
Preferred Shares 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 7.03. 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 7.04. 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 pre-
17
<PAGE> 21
paid, 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.
9477 Waples Street, Suite 150
San Diego, California 92121
Telecopy Number: (619) 552-8942
Attention: President
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
320 Park Avenue, Suite 2500
New York, New York 10022-6815
Telecopy Number: (212) 893-9575
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.
18
<PAGE> 22
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 7.05. Entire Agreement; Assignment. This Agreement
(including the Schedules, Exhibits and Annexes thereto) and the Registration
Rights Agreement constitute 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.
SECTION 7.06. 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 7.07. Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York.
19
<PAGE> 23
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
------------------------------------------
Jim C. Cowart
Chairman and
Chief Executive Officer
WELSH, CARSON, ANDERSON & STOWE VII, L.P.
By WCAS VII Partners, L.P.,
General Partner
By
------------------------------------------
General Partner
WCAS INFORMATION PARTNERS, L.P.
By WCAS Info Partners,
General Partner
By
------------------------------------------
General Partner
Bruce K. Anderson
Russell L. Carson
Anthony J. de Nicola
Thomas E. McInerney
James B. Hoover
Robert A. Minicucci
Andrew M. Paul
Paul B. Queally
Richard H. Stowe
Laura M. VanBuren
Patrick J. Welsh
20
<PAGE> 24
By
------------------------------------------
Laura M. VanBuren
Individually and
as Attorney-in-Fact
21
<PAGE> 25
Schedule I
<TABLE>
<CAPTION>
Name of Purchaser Series B Preferred Shares
- ----------------- -------------------------
<S> <C>
Welsh, Carson, Anderson &
Stowe VII, L.P. 23,757
WCAS Information Partners, L.P. 324
Patrick J. Welsh 130
Russell L. Carson 194
Bruce K. Anderson 194
Richard H. Stowe 97
Andrew M. Paul 65
Thomas E. McInerney 113
Laura VanBuren 6
James B. Hoover 32
Robert A. Minicucci 52
Anthony J. de Nicola 26
Paul B. Queally 10
------
Total 25,000
</TABLE>
22
<PAGE> 1
EXHIBIT 10.41
================================================================================
SERIES C CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT
Among
AURORA ELECTRONICS, INC.
WELSH, CARSON, ANDERSON & STOWE VII, L.P.
and
The Several Other Persons Named
In Schedule I Hereto
Dated as of October 2, 1997
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
I. PURCHASE AND SALE OF THE SERIES C PREFERRED SHARES............. 1
SECTION 1.01. Issuance and Sale of the Series C
Preferred Shares................................ 1
SECTION 1.02. Closing Date.................................... 2
II. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.................. 2
SECTION 2.01. Organization and Qualification.................. 2
SECTION 2.02. Subsidiaries.................................... 2
SECTION 2.03. Capitalization.................................. 3
SECTION 2.04. Authorization of Agreements, Etc................ 4
SECTION 2.05. Validity........................................ 5
SECTION 2.06. Governmental Approvals.......................... 5
SECTION 2.07. Financial Statements, Etc....................... 5
SECTION 2.08. SEC Filings..................................... 6
SECTION 2.09. Absence of Certain Changes or Events............ 7
SECTION 2.10. Actions Pending................................. 7
SECTION 2.11. Compliance with Law............................. 8
SECTION 2.12. Offering of the Securities...................... 8
SECTION 2.13. Brokers......................................... 8
III. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS............... 9
SECTION 3.01. Authorization................................... 9
SECTION 3.02. Validity........................................ 9
SECTION 3.03. Investment Representations...................... 9
SECTION 3.04. Government Approvals............................ 10
IV. CONDITIONS PRECEDENT .......................................... 10
SECTION 4.01. Conditions Precedent to the Obligations
of the Purchasers............................... 10
SECTION 4.02. Condition Precedent to the Obligations
of the Company.................................. 12
V. SURVIVAL OF REPRESENTATIONS; INDEMNITY......................... 12
SECTION 5.01. Survival of Representations..................... 12
SECTION 5.02. General Indemnity............................... 12
</TABLE>
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 5.03. Conditions of Indemnification................... 13
VI. CERTAIN REGISTRATION RIGHTS.................................... 14
VII. MISCELLANEOUS ................................................. 14
SECTION 7.01. Expenses, Etc................................... 14
SECTION 7.02. Survival of Agreements.......................... 14
SECTION 7.03. Parties in Interest............................. 14
SECTION 7.04. Notices......................................... 15
SECTION 7.05. Entire Agreement; Assignment.................... 16
SECTION 7.06. Counterparts.................................... 16
SECTION 7.07. Governing Law................................... 16
</TABLE>
INDEX TO EXHIBITS, SCHEDULES AND ANNEX
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
A Form of Certificate of Designations
Schedule Description
I Purchasers and Shares of Series C
Convertible Preferred Stock
</TABLE>
ii
<PAGE> 4
SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT dated as
of October 2, 1997, among AURORA ELECTRONICS, INC., a Delaware corporation (the
"Company"), WELSH, CARSON, ANDERSON & STOWE VII, L.P., a Delaware limited
partnership ("WCAS VII") and the several other persons named in Schedule I
hereto (such persons, together with WCAS VII, being hereinafter called
individually a "Purchaser" and collectively the "Purchasers").
WHEREAS, the Company desires to sell to the Purchasers, and the
Purchasers desire to purchase from the Company, on the terms and subject to the
conditions set forth herein, an aggregate 25,000 shares of Series C Convertible
Preferred Stock, $.01 par value ("Series C Preferred Stock"), of the Company at
a purchase price of $100 per share; and
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 the shares of Common
Stock, $.03 par value ("Common Stock"), of the Company that will be issuable
upon the conversion of the Series C Preferred Stock being 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
THE SERIES C PREFERRED SHARES
SECTION 1.01. Issuance and Sale of the Series C 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 each Purchaser, and each Purchaser shall purchase from the Company, the
number of shares of Series C Preferred Stock set forth opposite the name of such
Purchaser on Schedule I hereto under the caption "Series C Preferred Shares"
(the aggregate number of shares of Series C
<PAGE> 5
Preferred Stock so purchased are referred to herein as the "Series C Preferred
Shares"), for a purchase price of $100 per share. On the Closing Date, the
Company shall issue a certificate or certificates in definitive form, registered
in the name of each Purchaser, representing the number of Series C Preferred
Shares being purchased by it hereunder.
(b) As payment in full for the Series C Preferred Shares being
purchased by it hereunder, and against delivery of the certificate or
certificates therefor as aforesaid, on the Closing Date each Purchaser shall
transfer immediately available funds by wire transfer to an account designated
by the Company, an amount equal to $100 multiplied by the number of Series C
Preferred Shares to be purchased by such Purchaser in accordance with paragraph
(a) above.
SECTION 1.02. Closing Date. The transfer, sale and delivery of
the Series C Preferred Shares (the "Closing") shall take place at the offices of
Reboul, MacMurray, Hewitt, Maynard & Kristol, 45 Rockefeller Plaza, New York,
New York, on October 2, 1997 (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
2
<PAGE> 6
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").
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 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
3
<PAGE> 7
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 (i)
50,000,000 shares of Common Stock and (ii) 1,000,000 shares of Preferred Stock,
$.01 par value ("Preferred Stock"), of the Company of which 400,000 shares have
been designated Convertible Preferred Stock and 25,000 shares have been
designated Series B Convertible Preferred Stock. As of the date hereof,
6,847,563 shares of Common Stock, 400,000 shares of Convertible Preferred Stock
and 25,000 shares of Series B Convertible Preferred Stock are issued and
outstanding, all of which were duly authorized and validly issued and are fully
paid and nonassessable.
(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 A (the "Certificate of Designations"), 25,000 shares of
Preferred Stock shall be designated as authorized Series C Preferred Stock.
(c) Except as set forth in the Company SEC Filings or on Schedule
2.03 hereof, as of the date 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
4
<PAGE> 8
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, (ii) the
performance by the Company of its obligations hereunder, (iii) the issuance,
sale and delivery by the Company of the Series C Preferred Shares, and (iv) the
issuance and delivery of the shares of Common Stock issuable upon the conversion
of the Series C Preferred Shares (collectively, the "Conversion Shares") 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 any provision 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 Series C Preferred 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 Series C Preferred
Stock. The Conversion Shares, when issued and delivered upon the conversion of
the Series C Preferred Shares, will be duly authorized, validly issued, fully
paid and nonassessable shares of Common Stock. Neither the issuance, sale and
delivery of the Series C Preferred Shares to the Purchasers hereunder, nor the
issuance
5
<PAGE> 9
and delivery of the Conversion 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.
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 issuance, sale and delivery of the Series C Preferred Shares or
the issuance and delivery of the Conversion Shares upon the conversion of the
Series C Preferred Shares, other than (i) the filing of the Certificate of
Designations 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 Series C Preferred Stock, and (ii) 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 transactions
contemplated herein.
SECTION 2.07. Financial Statements, Etc. (a) The Company has
furnished to the Purchasers: (i) the audited consolidated balance sheet of the
Company and its subsidiaries as of September 30, 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the fiscal year then ended 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 June 30,
1997 and the related consolidated statements of operations and cash flows for
the nine 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
6
<PAGE> 10
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, 1996 (the
"September 30, 1996 Balance Sheet"), (ii) incurred since September 30, 1996 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. Since
September 30, 1996, 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, 1996, 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
7
<PAGE> 11
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 nine months ended June 30, 1997 referred to above, and except as
otherwise expressly contemplated by this Agreement, since September 30, 1996,
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, 1996
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, assigned or transferred any 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 or other intangible assets; (viii) waived any rights of
substantial value, whether or not in
8
<PAGE> 12
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. 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 $50,000, (ii) as set forth
on Schedule 2.10 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 board or tribunal. Except as set forth on Schedule 2.10 hereto,
there is no judgment, decree, injunction or order of any court, governmental
department, commission, agency, instrumentality or arbitrator outstanding
against the Company.
SECTION 2.11. Compliance with Law. 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.
9
<PAGE> 13
SECTION 2.12. 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 Series C Preferred
Shares 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 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 Series C Preferred Shares under the Securities
Act or the rules and regulations of the SEC thereunder) which would subject the
offering, issuance or sale of the Series C Preferred Shares to the Purchasers to
the registration provisions of the Securities Act.
SECTION 2.13. Brokers. All negotiations relative to this
Agreement and the transactions contemplated hereby have been carried on by the
Company directly with the Purchasers, 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 purchase and receipt by
such Purchaser of the Series C Preferred
10
<PAGE> 14
Shares being acquired by it hereunder, have been duly authorized by all
requisite action on the part of 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.
SECTION 3.03. Investment Representations.
(a) Such Purchaser is acquiring the Series C Preferred Shares
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 Series C Preferred Shares 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 (as defined below), as amended herein, 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 Series C Preferred Shares.
(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
11
<PAGE> 15
the Series C Preferred Shares being purchased hereunder for an indefinite period
of time. 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 Series C Preferred Shares 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 Series C Preferred Shares. 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 Series C Preferred Shares,
and that any such Purchaser that is a limited partnership has not been formed
solely for the purpose of purchasing the Series C Preferred Shares.
(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 such Purchaser
for the valid execution, delivery and performance of this Agreement.
IV.
CONDITIONS PRECEDENT
SECTION 4.01. 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:
12
<PAGE> 16
(a) Certificate of Designations. The Certificate of Designations
shall have been duly filed with the Secretary of State of the State of Delaware
and shall have become legally effective.
(b) Opinion of Counsel. The Purchasers shall have received from
Hughes & Luce L.L.P., counsel for the Company, an opinion dated the Closing
Date, satisfactory in form and substance to the Purchasers and their counsel.
(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, (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
13
<PAGE> 17
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, the designation, issuance, sale and delivery of the Series C
Preferred Shares, the reservation, issuance and delivery of the
Conversion Shares 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 stock
certificates representing the Series C Preferred 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.
SECTION 4.02. Condition Precedent to the Obligations of the
Company. The obligations of the Company hereunder are subject to the due filing
with the Secretary of State of the State of Delaware and the legal effectiveness
of the Certificate of Designations on or prior to the Closing Date.
V.
SURVIVAL OF REPRESENTATIONS; INDEMNITY
SECTION 5.01. Survival of Representations. Subject as set forth
below, all representations and warranties made by any party hereto in this
Agreement or pursuant hereto shall survive for a period of one year after the
Closing Date.
14
<PAGE> 18
SECTION 5.02. General Indemnity.
(a) Subject to the terms and conditions of this Article V, 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 Series C Preferred Shares),
damages, liabilities, costs and expenses, including, without limitation,
interest, penalties and reasonable attorneys' fees and expenses (collectively,
"Damages"), 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 V, the
Purchasers hereby agree 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 5.03. 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 5.02 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 earli-
15
<PAGE> 19
er, 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 5.03 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 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.
VI.
CERTAIN REGISTRATION RIGHTS
The Company hereby affirms and agrees that the registration
rights granted to the Purchasers and certain other stockholders of the Company
as set forth in the Registration Rights Agreement, dated as of March 29, 1996
(said agreement, as previously amended, the "Registration Rights Agreement"),
among
16
<PAGE> 20
the Company, the Purchasers and the other parties named therein, shall continue
in full force and effect, provided, however, that the Company and the Purchasers
acknowledge and agree that the Registration Rights Agreement is hereby amended
such that (i) the term "Convertible Preferred Stock" shall hereinafter refer to
and include the Series C Preferred Stock and (ii) the term "Preferred Shares"
shall hereinafter refer to and include the Series C Preferred Shares.
VII.
MISCELLANEOUS
SECTION 7.01. 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 contemplated hereby. 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.
SECTION 7.02. 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 Series C
Preferred Shares 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 7.03. 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.
17
<PAGE> 21
SECTION 7.04. 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 pre-paid, 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.
9477 Waples Street, Suite 150
San Diego, California 92121
Telecopy Number: (619) 552-8942
Attention: President
18
<PAGE> 22
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
320 Park Avenue, Suite 2500
New York, New York 10022-6815
Telecopy Number: (212) 893-9575
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 7.05. Entire Agreement; Assignment. This Agreement
(including the Schedules and Exhibits hereto) and the Registration Rights
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and may not
19
<PAGE> 23
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.
SECTION 7.06. 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 7.07. Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York.
20
<PAGE> 24
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
-----------------------------------------
Jim C. Cowart
Chairman and
Chief Executive Officer
WELSH, CARSON, ANDERSON & STOWE VII, L.P.
By WCAS VII Partners, L.P.,
General Partner
By
-----------------------------------------
General Partner
WCAS INFORMATION PARTNERS, L.P.
By WCAS Info Partners,
General Partner
By
-----------------------------------------
General Partner
Bruce K. Anderson
Russell L. Carson
Anthony J. de Nicola
Thomas E. McInerney
James B. Hoover
Robert A. Minicucci
Andrew M. Paul
Paul B. Queally
Richard H. Stowe
Laura M. VanBuren
Patrick J. Welsh
By
-----------------------------------------
Laura M. VanBuren
21
<PAGE> 25
Individually and
as Attorney-in-Fact
22
<PAGE> 26
EXHIBIT 4.12
WELSH, CARSON, ANDERSON & STOWE
320 PARK AVENUE
Suite 2500
New York, New York 100222-6615
January 6, 1998
Aurora Electronics. Inc.
9477 Waples Street, Suite 150
San Diego, CA 92121
Attn: Wayne Withers, Chief Financial Officer
SUBJECT Financial Support Agreement, dated as of September 30, 1996, as
amended, (the "Agreement"), among Aurora Electronics, Inc., a Delaware
corporation (the "Company"), Aurora Electronics Group, Inc., a
California corporation and wholly owned subsidiary of the Company
("AEG"), Welsh, Carson, Anderson & Stowe VII, L.P., a Delaware limited
partnership ("WCAS VII"), and WCAS Capital Partners II, L.P., a
Delaware limited partnership ("WCAS CP II" and together with WCAS VII
being hereinafter collectively referred to as the "Guarantors").
Pursuant to the Agreement, the Guarantors were to receive Warrants to
purchase common shares of the Company (the "Warrants") as recognition of the
financial risk of guaranteeing certain amounts owed by AEG for loans pursuant to
the Credit Agreement (the "Credit Agreement") among the Company, AEG and Chase
Manhattan Bank as a lender and agent for the lenders. The following warrants
have been issued as of this date:
<TABLE>
<CAPTION>
DATE WCAS VII WCAS CP II TOTAL EXERCISE PRICE
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
9/30/96 276,000 9,714 285,714 $2.100
6/01/97 340,941 12,000 352,941 1.700
6/06/97 43,909 1,546 45,455 1.650
1/27/97 548,864 19,318 568,182 1.760
10//28/97 942,439 33,171 975,610 1.025
</TABLE>
<PAGE> 27
-2-
Although the terms of the Agreement provide for WCAS VII and WCAS CP II
to be issued additional Warrants, WCAS VII and WCAS CP II do hereby waive and
forego the right to receive the additional Warrants due by reason of additional
guarantees issued or outstanding at this time.
/s/ Thomas E. McInerney
-------------------
By: Thomas McInerney, General Partner
WCAS VII
/s/ Thomas E. McInerney
-------------------
By: Thomas McInerney, General Partner
WCAS CP II Partners
<PAGE> 28
Schedule I
<TABLE>
<CAPTION>
Name of Purchaser Series C Preferred Shares
- ----------------- -------------------------
<S> <C>
Welsh, Carson, Anderson &
Stowe VII, L.P. 23,757
WCAS Information Partners, L.P. 324
Patrick J. Welsh 130
Russell L. Carson 194
Bruce K. Anderson 194
Richard H. Stowe 97
Andrew M. Paul 65
Thomas E. McInerney 113
Laura VanBuren 6
James B. Hoover 32
Robert A. Minicucci 52
Anthony J. de Nicola 26
Paul B. Queally 10
------
Total 25,000
======
</TABLE>
23
<PAGE> 1
EXHIBIT 10.42
================================================================================
SERIES D CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT
Among
AURORA ELECTRONICS, INC.
WELSH, CARSON, ANDERSON & STOWE VII, L.P.
and
The Several Other Persons Named
In Schedule I Hereto
Dated as of October 24, 1997
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
I. PURCHASE AND SALE OF THE SERIES D PREFERRED SHARES . . . . . . . . 1
SECTION 1.01. Issuance and Sale of the Series D
Preferred Shares . . . . . . . . . . . . 1
SECTION 1.02. Closing Date . . . . . . . . . . . . . . . . . . . 2
II. REPRESENTATIONS AND WARRANTIES OF THE COMPANY . . . . . . . . . . 2
SECTION 2.01. Organization and Qualification . . . . . . . . . . 2
SECTION 2.02. Subsidiaries . . . . . . . . . . . . . . . . . . . 2
SECTION 2.03. Capitalization . . . . . . . . . . . . . . . . . . 3
SECTION 2.04. Authorization of Agreements, Etc. . . . . . . . . . 4
SECTION 2.05. Validity . . . . . . . . . . . . . . . . . . . . . 5
SECTION 2.06. Governmental Approvals . . . . . . . . . . . . . . 5
SECTION 2.07. Financial Statements, Etc. . . . . . . . . . . . . 5
SECTION 2.08. SEC Filings . . . . . . . . . . . . . . . . . . . . 6
SECTION 2.09. Absence of Certain Changes or Events . . . . . . . 7
SECTION 2.10. Actions Pending . . . . . . . . . . . . . . . . . . 7
SECTION 2.11. Compliance with Law . . . . . . . . . . . . . . . . 8
SECTION 2.12. Offering of the Securities . . . . . . . . . . . . 8
SECTION 2.13. Brokers . . . . . . . . . . . . . . . . . . . . . . 8
III. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS . . . . . . . . . 9
SECTION 3.01. Authorization . . . . . . . . . . . . . . . . . . . 9
SECTION 3.02. Validity . . . . . . . . . . . . . . . . . . . . . 9
SECTION 3.03. Investment Representations . . . . . . . . . . . . 9
SECTION 3.04. Government Approvals . . . . . . . . . . . . . . . 10
IV. CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 4.01. Conditions Precedent to the Obligations
of the Purchasers . . . . . . . . . . . . . . . . . 10
SECTION 4.02. Condition Precedent to the Obligations
of the Company . . . . . . . . . . . . . . . . . . 12
V. SURVIVAL OF REPRESENTATIONS; INDEMNITY . . . . . . . . . . . . . . 12
SECTION 5.01. Survival of Representations . . . . . . . . . . . . 12
SECTION 5.02. General Indemnity . . . . . . . . . . . . . . . . . 12
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 5.03. Conditions of Indemnification . . . . . . . . . . . 13
VI. CERTAIN REGISTRATION RIGHTS . . . . . . . . . . . . . . . . . . . 14
VII. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 7.01. Expenses, Etc. . . . . . . . . . . . . . . . . . . 14
SECTION 7.02. Survival of Agreements . . . . . . . . . . . . . . 14
SECTION 7.03. Parties in Interest . . . . . . . . . . . . . . . . 14
SECTION 7.04. Notices . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 7.05. Entire Agreement; Assignment . . . . . . . . . . . 16
SECTION 7.06. Counterparts . . . . . . . . . . . . . . . . . . . 16
SECTION 7.07. Governing Law . . . . . . . . . . . . . . . . . . . 16
</TABLE>
INDEX TO EXHIBITS, SCHEDULES AND ANNEX
Exhibit Description
- ------- -----------
A Form of Certificate of Designations
Schedule Description
- -------- -----------
I Purchasers and Shares of Series D
Convertible Preferred Stock
ii
<PAGE> 4
SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT dated
as of October 24, 1997, among AURORA ELECTRONICS, INC., a Delaware corporation
(the "Company"), WELSH, CARSON, ANDERSON & STOWE VII, L.P., a Delaware limited
partnership ("WCAS VII") and the several other persons named in Schedule I
hereto (such persons, together with WCAS VII, being hereinafter called
individually a "Purchaser" and collectively the "Purchasers").
WHEREAS, the Company desires to sell to the Purchasers, and
the Purchasers desire to purchase from the Company, on the terms and subject to
the conditions set forth herein, an aggregate 20,000 shares of Series D
Convertible Preferred Stock, $.01 par value ("Series D Preferred Stock"), of
the Company at a purchase price of $100 per share; and
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 the shares of Common
Stock, $.03 par value ("Common Stock"), of the Company that will be issuable
upon the conversion of the Series D Preferred Stock being 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
THE SERIES D PREFERRED SHARES
SECTION 1.01. Issuance and Sale of the Series D 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 each Purchaser, and each Purchaser shall purchase from the Company,
the number of shares of Series D Preferred Stock set forth opposite the name of
such Purchaser on Schedule I hereto under the caption "Series D Preferred
Shares" (the aggregate number of shares of Series D
<PAGE> 5
Preferred Stock so purchased are referred to herein as the "Series D Preferred
Shares"), for a purchase price of $100 per share. On the Closing Date, the
Company shall issue a certificate or certificates in definitive form,
registered in the name of each Purchaser, representing the number of Series D
Preferred Shares being purchased by it hereunder.
(b) As payment in full for the Series D Preferred Shares
being purchased by it hereunder, and against delivery of the certificate or
certificates therefor as aforesaid, on the Closing Date each Purchaser shall
transfer immediately available funds by wire transfer to an account designated
by the Company, an amount equal to $100 multiplied by the number of Series D
Preferred Shares to be purchased by such Purchaser in accordance with paragraph
(a) above.
SECTION 1.02. Closing Date. The transfer, sale and delivery
of the Series D Preferred Shares (the "Closing") shall take place at the
offices of Reboul, MacMurray, Hewitt, Maynard & Kristol, 45 Rockefeller Plaza,
New York, New York, on October 24, 1997 (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
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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").
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 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
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<PAGE> 7
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
(i) 50,000,000 shares of Common Stock and (ii) 1,000,000 shares of Preferred
Stock, $.01 par value ("Preferred Stock"), of the Company of which 400,000
shares have been designated Convertible Preferred Stock, 25,000 shares have
been designated Series B Convertible Preferred Stock and 25,000 shares have
been designated Series C Convertible Preferred Stock. As of the date hereof,
6,847,563 shares of Common Stock, 400,000 shares of Convertible Preferred
Stock, 25,000 shares of Series B Convertible Preferred Stock and 25,000 shares
of Series C Convertible Preferred Stock are issued and outstanding, all of
which were duly authorized and validly issued and are fully paid and
nonassessable.
(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 A (the "Certificate of Designations"), 20,000 shares
of Preferred Stock shall be designated as authorized Series D Preferred Stock.
(c) Except as set forth in the Company SEC Filings or on
Schedule 2.03 hereof, as of the date 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
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<PAGE> 8
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, (ii) the
performance by the Company of its obligations hereunder, (iii) the issuance,
sale and delivery by the Company of the Series D Preferred Shares, and (iv) the
issuance and delivery of the shares of Common Stock issuable upon the
conversion of the Series D Preferred Shares (collectively, the "Conversion
Shares") 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 any
provision 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 Series D Preferred 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 Series D
Preferred Stock. The Conversion Shares, when issued and delivered upon the
conversion of the Series D Preferred Shares, will be duly authorized, validly
issued, fully paid and nonassessable shares of Common
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<PAGE> 9
Stock. Neither the issuance, sale and delivery of the Series D Preferred
Shares to the Purchasers hereunder, nor the issuance and delivery of the
Conversion 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.
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 issuance, sale and delivery of the Series D
Preferred Shares or the issuance and delivery of the Conversion Shares upon the
conversion of the Series D Preferred Shares, other than (i) the filing of the
Certificate of Designations 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 Series D Preferred Stock, and (ii)
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
transactions contemplated herein.
SECTION 2.07. Financial Statements, Etc. (a) The Company
has furnished to the Purchasers: (i) the audited consolidated balance sheet of
the Company and its subsidiaries as of September 30, 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the fiscal year then ended 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 June 30,
1997 and the related consolidated statements of operations and cash flows for
the nine months then ended, certified by the principal financial officer of the
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<PAGE> 10
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, 1996 (the "September 30, 1996 Balance Sheet"), (ii) incurred since
September 30, 1996 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. Since September 30, 1996, 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, 1996, 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
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(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 nine months ended June 30, 1997 referred to above, and except as
otherwise expressly contemplated by this Agreement, since September 30, 1996,
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, 1996 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, assigned or transferred any patents, trademarks and trade
names, trademark and trade name registrations, servicemark, brandmark and brand
name registrations and copyrights, the applications therefor and
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<PAGE> 12
the licenses with respect thereto 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. 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 2.10 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 board or tribunal. Except as set forth on
Schedule 2.10 hereto, there is no judgment, decree, injunction or order of any
court, governmental department, commission, agency, instrumentality or
arbitrator outstanding against the Company.
SECTION 2.11. Compliance with Law. 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.
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SECTION 2.12. 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 Series D
Preferred Shares 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
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 Pur- chasers 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 Series D Preferred Shares
under the Securities Act or the rules and regulations of the SEC thereunder)
which would subject the offering, issuance or sale of the Series D Preferred
Shares to the Purchasers to the registration provisions of the Securities Act.
SECTION 2.13. Brokers. All negotiations relative to this
Agreement and the transactions contemplated hereby have been carried on by the
Company directly with the Purchasers, 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 purchase and receipt by
such Purchaser of the Series D Preferred
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<PAGE> 14
Shares being acquired by it hereunder, have been duly authorized by all
requisite action on the part of 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.
SECTION 3.03. Investment Representations.
(a) Such Purchaser is acquiring the Series D Preferred Shares
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 Series D Preferred Shares 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 (as defined below), as amended herein, 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 Series D Preferred Shares.
(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
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<PAGE> 15
the Series D Preferred Shares being purchased hereunder for an indefinite
period of time. 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 Series D Preferred Shares 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 Series D Preferred Shares. 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 Series D
Preferred Shares, and that any such Purchaser that is a limited partnership has
not been formed solely for the purpose of purchasing the Series D Preferred
Shares.
(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 such
Purchaser for the valid execution, delivery and performance of this Agreement.
IV.
CONDITIONS PRECEDENT
SECTION 4.01. 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:
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(a) Certificate of Designations. The Certificate of
Designations shall have been duly filed with the Secretary of State of the
State of Delaware and shall have become legally effective.
(b) Opinion of Counsel. The Purchasers shall have
received from Hughes & Luce L.L.P., counsel for the Company, an opinion dated
the Closing Date, satisfactory in form and substance to the Purchasers and
their counsel.
(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, (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
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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, the designation, issuance, sale and
delivery of the Series D Preferred Shares, the reservation, issuance
and delivery of the Conversion Shares 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 stock certificates representing the
Series D Preferred 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.
SECTION 4.02. Condition Precedent to the Obligations of the
Company. The obligations of the Company hereunder are subject to the due
filing with the Secretary of State of the State of Delaware and the legal
effectiveness of the Certificate of Designations on or prior to the Closing
Date.
V.
SURVIVAL OF REPRESENTATIONS; INDEMNITY
SECTION 5.01. Survival of Representations. Subject as set
forth below, all representations and warranties made by any party hereto in
this Agreement or pursuant hereto shall survive for a period of one year after
the Closing Date.
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SECTION 5.02. General Indemnity.
(a) Subject to the terms and conditions of this Article V,
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 Series D Preferred Shares),
damages, liabilities, costs and expenses, including, without limitation,
interest, penalties and reasonable attorneys' fees and expenses (collectively,
"Damages"), 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 V,
the Purchasers hereby agree 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 5.03. 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 5.02 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 earli-
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er, 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 5.03 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 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.
VI.
CERTAIN REGISTRATION RIGHTS
The Company hereby affirms and agrees that the registration
rights granted to the Purchasers and certain other stockholders of the Company
as set forth in the Registration Rights Agreement, dated as of March 29, 1996
(said agreement, as previously amended, the "Registration Rights Agreement"),
among
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the Company, the Purchasers and the other parties named therein, shall continue
in full force and effect, provided, however, that the Company and the
Purchasers acknowledge and agree that the Registration Rights Agreement is
hereby amended such that (i) the term "Convertible Preferred Stock" shall
hereinafter refer to and include the Series D Preferred Stock and (ii) the term
"Preferred Shares" shall hereinafter refer to and include the Series D
Preferred Shares.
VII.
MISCELLANEOUS
SECTION 7.01. 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 contemplated hereby. 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.
SECTION 7.02. 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 Series D Preferred Shares 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 7.03. 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.
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SECTION 7.04. 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.
9477 Waples Street, Suite 150
San Diego, California 92121
Telecopy Number: (619) 552-8942
Attention: President
18
<PAGE> 22
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
320 Park Avenue, Suite 2500
New York, New York 10022-6815
Telecopy Number: (212) 893-9575
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 7.05. Entire Agreement; Assignment. This Agreement
(including the Schedules and Exhibits hereto) and the Registration Rights
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and may not
19
<PAGE> 23
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.
SECTION 7.06. 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 7.07. Governing Law. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York.
20
<PAGE> 24
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_____________________________________
Jim C. Cowart
Chairman and
Chief Executive Officer
WELSH, CARSON, ANDERSON & STOWE VII, L.P.
By WCAS VII Partners, L.P.,
General Partner
By_____________________________________
General Partner
WCAS INFORMATION PARTNERS, L.P.
By WCAS Info Partners,
General Partner
By_____________________________________
General Partner
Bruce K. Anderson
Russell L. Carson
Anthony J. de Nicola
Thomas E. McInerney
James B. Hoover
Robert A. Minicucci
Andrew M. Paul
Paul B. Queally
Richard H. Stowe
Laura M. VanBuren
Patrick J. Welsh
By_____________________________________
Laura M. VanBuren
Individually and
as Attorney-in-Fact
<PAGE> 25
Schedule I
<TABLE>
<CAPTION>
Name of Purchaser Series D Preferred Shares
- ----------------- -------------------------
<S> <C>
Welsh, Carson, Anderson &
Stowe VII, L.P. 19,005
WCAS Information Partners, L.P. 259
Patrick J. Welsh 104
Russell L. Carson 155
Bruce K. Anderson 155
Richard H. Stowe 78
Andrew M. Paul 52
Thomas E. McInerney 91
Laura VanBuren 5
James B. Hoover 26
Robert A. Minicucci 41
Anthony J. de Nicola 21
Paul B. Queally 8
------
Total 20,000
======
</TABLE>
22
<PAGE> 1
EXHIBIT 10.43
================================================================================
SENIOR SUBORDINATED NOTE
PURCHASE AGREEMENT
Among
AURORA ELECTRONICS, INC.
WELSH, CARSON, ANDERSON & STOWE VII, L.P.
and
The Several Other Persons Named
In Schedule I Hereto
Dated as of December 5, 1997
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
I. PURCHASE AND SALE OF THE NOTES..................................... 1
SECTION 1.01. Purchase and Sale of the Notes...................... 1
SECTION 1.02. Closing Date........................................ 1
II. REPRESENTATIONS AND WARRANTIES OF THE COMPANY...................... 2
SECTION 2.01. Organization and Qualification...................... 2
SECTION 2.02. Subsidiaries........................................ 2
SECTION 2.03. Capitalization...................................... 3
SECTION 2.04. Authorization of Agreements, Etc.................... 4
SECTION 2.05. Validity............................................ 4
SECTION 2.06. Governmental Approvals.............................. 4
SECTION 2.07. Financial Statements, Etc........................... 5
SECTION 2.08. SEC Filings......................................... 5
SECTION 2.09. Absence of Certain Changes or Events................ 6
SECTION 2.10. Actions Pending..................................... 7
SECTION 2.11. Compliance with Law.................................. 7
SECTION 2.12. Offering of the Securities.......................... 7
SECTION 2.13. Brokers.............................................. 8
III. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS.................... 8
SECTION 3.01. Authorization........................................ 8
SECTION 3.02. Validity............................................ 8
SECTION 3.03. Investment Representations.......................... 8
SECTION 3.04. Government Approvals................................. 9
IV. CONDITIONS PRECEDENT............................................... 10
SECTION 4.01. Conditions Precedent to the Obligations
of the Purchasers.................................. 10
V. MISCELLANEOUS...................................................... 12
SECTION 5.01. Expenses, Etc....................................... 11
SECTION 5.02. Survival of Agreements.............................. 11
SECTION 5.03. Parties in Interest................................. 11
SECTION 5.04. Notices............................................. 12
SECTION 5.05. Entire Agreement; Assignment........................ 13
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 5.06. Counterparts........................................ 13
SECTION 5.07. Governing Law....................................... 13
</TABLE>
<PAGE> 4
INDEX TO EXHIBITS, SCHEDULES AND ANNEX
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
A Form of 10% Senior Subordinated Demand
Note
Schedule Description
- -------- -----------
I Purchasers and Principal Amount of Notes
</TABLE>
iii
<PAGE> 5
SENIOR SUBORDINATED NOTE PURCHASE AGREEMENT, dated as of December
5, 1997, among AURORA ELECTRONICS, INC., a Delaware corporation (the "Company"),
WELSH, CARSON, ANDERSON & STOWE VII, L.P., a Delaware limited partnership ("WCAS
VII"), and the several other persons named in Schedule I hereto (such persons,
together with WCAS VII, being hereinafter called individually a "Purchaser" and
collectively the "Purchasers").
WHEREAS, the Company desires to sell to the Purchasers, and the
Purchasers desire to purchase from the Company, on the terms and subject to the
conditions set forth herein, 10% Senior Subordinated Demand Notes of the
Company, in the aggregate principal amount of $2,800,000;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the parties hereto agree as follows:
I.
PURCHASE AND SALE OF
THE NOTES
SECTION 1.01. Purchase and Sale of the Notes.
(a) Subject to the terms and conditions set forth herein, on the
Closing Date, the Company shall execute, sell and deliver to each Purchaser, and
each Purchaser shall purchase from the Company, a 10% Senior Subordinated Demand
Note of the Company in substantially the form attached hereto as Exhibit A,
dated the Closing Date and registered in the name of such Purchaser, in the
principal amount set forth opposite the name of such Purchaser on Schedule I
hereto under the caption "Principal Amount of Note" (said notes, together with
any PIK Notes (as defined therein) and together with any notes issued in
exchange or substitution therefor, being hereinafter collectively called the
"Notes").
(b) On the Closing Date, as payment in full for the Notes being
purchased by it hereunder, and against delivery thereof as aforesaid, each
Purchaser shall transfer the amount set forth opposite such Purchaser's name on
Schedule I hereto under the caption "Principal Amount of Note" by wire transfer
of
<PAGE> 6
immediately available funds to an account designated by the Company.
SECTION 1.02. Closing Date. The closing of the sale and delivery
of the Notes shall take place at the offices of Reboul, MacMurray, Hewitt,
Maynard & Kristol, 45 Rockefeller Plaza, New York, New York, on December 5, 1997
(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").
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
2
<PAGE> 7
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 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.
3
<PAGE> 8
SECTION 2.03. Capitalization.
(a) The authorized capital stock of the Company consists of (i)
50,000,000 shares of Common Stock and (ii) 1,000,000 shares of Preferred Stock,
$.01 par value, of which 400,000 shares have been designated Convertible
Preferred Stock, 25,000 shares have been designated Series B Convertible
Preferred Stock, 25,000 shares have been designated Series C Convertible
Preferred Stock and 20,000 shares have been designated Series D Convertible
Preferred Stock. As of the date hereof, 6,847,563 shares of Common Stock,
400,000 shares of Convertible Preferred Stock, 25,000 of Series B Convertible
Preferred Stock, 25,000 of Series C Convertible Preferred Stock and 20,000
shares of Series D Convertible Preferred Stock are issued and outstanding, all
of which were duly authorized and validly issued and are fully paid and
nonassessable.
(b) Except as set forth in the Company SEC Filings or on Schedule
2.03 hereof, as of the date 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.
(c) 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
4
<PAGE> 9
Agreement, (ii) the performance by the Company of its obligations hereunder and
(iii) the issuance, sale and delivery by the Company of the Notes 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 any provision 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 properties or assets of the Company or
any of its subsidiaries.
(b) The issuance, sale and delivery of the Notes to the
Purchasers hereunder is not 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 Notes, when issued and delivered in accordance with this Agreement, will
constitute legal, valid and binding obligations of the Company, enforceable
against it 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 or the issuance, sale and delivery of the Notes, other than 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 transactions
contemplated herein.
5
<PAGE> 10
SECTION 2.07. Financial Statements, Etc. (a) The Company has
furnished to the Purchasers: (i) the audited consolidated balance sheet of the
Company and its subsidiaries as of September 30, 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the fiscal year then ended 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 June 30,
1997 and the related consolidated statements of operations and cash flows for
the nine 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, 1996 (the
"September 30, 1996 Balance Sheet"), (ii) incurred since September 30, 1996 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.
6
<PAGE> 11
Since September 30, 1996, 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, 1996, 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) (a) were prepared in compliance with
the requirements of the Securities Act of 1933, as amended (the "Securities
Act"), or the Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder, as the case may be, and (b) 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 nine months ended June 30, 1997 referred to above, and except as
otherwise expressly contemplated by this Agreement, since September 30, 1996,
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, 1996
Balance Sheet
7
<PAGE> 12
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, assigned
or transferred any 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 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. 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 $50,000, (ii) as set forth
on Schedule 2.10 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
8
<PAGE> 13
board or tribunal. Except as set forth on Schedule 2.10 hereto, there is no
judgment, decree, injunction or order of any court, governmental department,
commission, agency, instrumentality or arbitrator outstanding against the
Company.
SECTION 2.11. Compliance with Law. 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.
SECTION 2.12. 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 Notes 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 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
Notes under the Securities Act or the rules and regulations of the SEC
thereunder) which would subject the offering, issuance or sale of the Notes to
the Purchasers to the registration provisions of the Securities Act.
SECTION 2.13. Brokers. All negotiations relative to this
Agreement and the transactions contemplated hereby have been carried on by the
Company directly with the Purchasers, 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
9
<PAGE> 14
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 purchase and receipt by
such Purchaser of the Notes being acquired by it hereunder, have been duly
authorized by all requisite action on the part of 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.
SECTION 3.03. Investment Representations.
(a) Such Purchaser is acquiring the Notes 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 Notes are not registered under the
Securities Act or any applicable state
10
<PAGE> 15
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 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 Notes.
(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 Notes being purchased by it hereunder
for an indefinite period of time. 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 Notes 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 Notes. 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 Notes, and that any such Purchaser that is a
limited partnership has not been formed solely for the purpose of purchasing the
Notes.
(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 such Purchaser
for the valid execution, delivery and performance of this Agreement.
11
<PAGE> 16
IV.
CONDITIONS PRECEDENT
SECTION 4.01. 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) Opinion of Counsel. The Purchasers shall have received from
Hughes & Luce L.L.P., counsel for the Company, an opinion dated the Closing
Date, satisfactory in form and substance to the Purchasers and their counsel.
(b) 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.
(c) 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, (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
12
<PAGE> 17
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 the By-laws
of the Company as in effect on the date of such certification have not
been amended 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 issuance, sale and delivery of the Notes 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 Notes 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.
V.
MISCELLANEOUS
SECTION 5.01. 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 contemplated hereby. 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
13
<PAGE> 18
connection with this Agreement and the transactions contemplated hereby.
SECTION 5.02. 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 Notes
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 5.03. 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 5.04. 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 pre-paid, 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.
9477 Waples Street, Suite 150
San Diego, California 92121
Telecopy Number: (619) 552-8942
Attention: President
with a copy to:
Hughes & Luce, L.L.P.
1717 Main Street
14
<PAGE> 19
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
320 Park Avenue, Suite 2500
New York, New York 10022-6815
Telecopy Number: (212) 893-9575
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 5.05. Entire Agreement; Assignment. This Agreement
(including the Schedules and Exhibits hereto) and the Notes constitute 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.
15
<PAGE> 20
SECTION 5.06. 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 5.07. Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York.
16
<PAGE> 21
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
---------------------------------------
Jim C. Cowart
Chairman and
Chief Executive Officer
WELSH, CARSON, ANDERSON & STOWE VII, L.P.
By WCAS VII Partners, L.P.,
General Partner
By
---------------------------------------
General Partner
WCAS INFORMATION PARTNERS, L.P.
By WCAS Info Partners,
General Partner
By
---------------------------------------
General Partner
Bruce K. Anderson
Russell L. Carson
Anthony J. de Nicola
Thomas E. McInerney
James B. Hoover
Robert A. Minicucci
Andrew M. Paul
Paul B. Queally
Richard H. Stowe
17
<PAGE> 22
Laura M. VanBuren
Patrick J. Welsh
By
---------------------------------------
Laura M. VanBuren
Individually and
as Attorney-in-Fact
18
<PAGE> 23
Schedule I
<TABLE>
<CAPTION>
Name of Purchaser Principal Amount of Note
- ----------------- ------------------------
<S> <C>
Welsh, Carson, Anderson &
Stowe VII, L.P. 2,660,600
WCAS Information Partners, L.P. 36,300
Patrick J. Welsh 14,500
Russell L. Carson 21,800
Bruce K. Anderson 21,800
Richard H. Stowe 10,900
Andrew M. Paul 7,300
Thomas E. McInerney 12,700
Laura VanBuren 700
James B. Hoover 3,600
Robert A. Minicucci 5,800
Anthony J. de Nicola 2,900
Paul B. Queally 1,100
---------
Total 2,800,000
=========
</TABLE>
19
<PAGE> 1
EXHIBIT 10.44
SENIOR SUBORDINATED DEMAND NOTE
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.
AURORA ELECTRONICS, INC.
10% Senior Subordinated Demand Note
$1 December 5, 1997
AURORA ELECTRONICS, INC., a Delaware corporation (hereinafter
called the "Company"), for value received, hereby promises to pay to 2~, or
registered assigns, the principal sum of 3~, ON DEMAND (subject to applicable
restrictions set forth in Section 13 hereof), 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 March 31, 1998, until the
principal amount hereof shall have become due and payable, whether on demand or
by acceleration or otherwise. Demand for payment shall be in writing, mailed by
first class registered or certified mail, postage prepaid, or sent by recognized
courier service to the Company addressed to it at its office or agency set forth
in paragraph (a) of Section 7 for purposes of notices hereunder, or sent by
facsimile to (619) 552-8942, confirmed by mail or courier as aforesaid.
All payments of principal and interest on this Note shall be in
such coin or currency of the United States of America
<PAGE> 2
as at the time of payment shall be legal tender for payment of public and
private debts.
On each Interest Payment Date, the Company shall pay interest on
said Interest Payment Date by issuing to the holder of this Note a note in
substantially the form hereof (and in any event containing subordination
provisions no less favorable to the holders of Senior Indebtedness (as defined
in Section 13(a) hereof) as those contained herein) (individually a "PIK Note"
and collectively the "PIK Notes") in a principal amount equal to the interest
payable to the holder of this Note on such Interest Payment Date.
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 Senior Subordinated Note Purchase Agreement
dated as of December 4, 1997 (the "Purchase Agreement"), among the Company,
Welsh, Carson, Anderson & Stowe VII, L.P., a Delaware limited partnership ("WCAS
VII") and the several other purchasers named on Schedule I thereto (WCAS VII and
such other purchases being herein sometimes referred to collectively as the
"Note Purchasers"). As used herein, the term "Note" or "Notes" includes the 10%
Senior Subordinated Demand Notes of the Company originally so issued and any 10%
Senior Subordinated Demand Note or Notes subsequently issued upon exchange or
transfer thereof or as PIK Notes.
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
there-
2
<PAGE> 3
with), receive in exchange therefor a Note or Notes each in such denomination or
denominations 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 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. 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.
3
<PAGE> 4
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, 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 December 4, 1997
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>
(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.
4
<PAGE> 5
(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. Subject to any
applicable restrictions in the Credit Agreement (as defined in Section 13(a)
hereof) with respect to paragraph (a) below:
(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
pursuant to the offer described below, at a purchase price equal to 101% of the
princi-
5
<PAGE> 6
pal 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
6
<PAGE> 7
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 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.
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. 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 indi-
7
<PAGE> 8
rect, 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 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; provided, however, that in no event shall a foreclosure on any
collateral pledged by the Company in respect of obligations arising under or in
connection with the Credit Agreement constitute a Change of Control.
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 Information Partners, L.P. and any general
partners thereof.
7. Covenants Relating to this Note. The Company covenants and
agrees that so long as this Note shall be outstand-
8
<PAGE> 9
ing 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 9477 Waples Street, Suite 150, San Diego, California
92121.
(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 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
(i) its corporate existence and the corporate existence of each of its
subsidiaries and (ii) the material rights and franchises of the Company and each
of its subsidiaries under the laws of the United States or any state
9
<PAGE> 10
thereof, or, in the case of subsidiaries organized and existing outside the
United States, under the laws of the applicable jurisdiction; provided, however,
that nothing in this paragraph (c) shall prevent the abandonment or termination
of any rights or franchises of the Company, or the liquidation or dissolution
of, or a sale, transfer or disposition (whether through merger, consolidation,
sale or otherwise) of all or any substantial part of the property and assets of,
any subsidiary or the abandonment or termination of the corporate existence,
rights and franchises of any subsidiary if such abandonment, termination,
liquidation, dissolution, sale, transfer or disposition is, in the good faith
business judgment of the Company, in the best interests of the Company and not
disadvantageous to the holder of this Note.
(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 their
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 of the Company and its subsidiaries 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.
10
<PAGE> 11
(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 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 and (iii) customer
transactions in the ordinary course of business and on arm's length terms.
(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. Subject to any applicable
provisions in the Credit Agreement and documents executed and delivered in
connection therewith, 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
11
<PAGE> 12
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 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).
Notwithstanding anything to the contrary herein, in no event shall a foreclosure
on any collateral pledged by the Company in respect of obligations arising under
or in connection with the
12
<PAGE> 13
Credit Agreement be deemed to constitute a violation of the Company's
obligations pursuant to 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 14), (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 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, 1999.
(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 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, Series B Convertible Preferred Stock, $.01 par value, Series C
Convertible Preferred Stock, $.01 par value,
13
<PAGE> 14
and Series D Convertible Preferred Stock, $.01 par value, or (Z) dividends,
distributions or payments by any subsidiary to the Company or to any
wholly-owned subsidiary of the Company, or (ii), except as permitted under the
Credit Agreement, 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:
14
<PAGE> 15
(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
(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 on
demand (to the extent demand is permitted to be made under Section 13
hereof) or at a date fixed for prepayment or repurchase (including
default of any
15
<PAGE> 16
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 in Section 7(j) hereof; or
(iv) default shall be made in the due observance or performance
of any other covenant, condition or agreement on 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
16
<PAGE> 17
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 (not reimbursed by insurance policies of the
Company or any of its subsidiaries) for the payment of money in excess
of $500,000 shall be rendered against the Company or any of its
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,
17
<PAGE> 18
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.
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.
18
<PAGE> 19
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. (a) 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), (C), (D) and (E), to all Senior Indebtedness of the Company. "Senior
Indebtedness" shall mean the principal of, premium, if any, and interest
(including any interest accruing subsequent to the filing of a petition of
bankruptcy at the rate provided for in the documentation with respect thereto,
whether or not such interest is an allowed claim under applicable law) on, and
all reasonable fees, reimbursement and indemnity obligations, and all other
obligations arising in connection with, any indebtedness for borrowed money of
the Company, contingent or otherwise, now outstanding or created, incurred,
issued, assumed or guaranteed in the future, for which, in the case of any
particular indebtedness, the instrument creating or evidencing the same or
pursuant to which the same is outstanding expressly provides that such
indebtedness shall not be subordinate in right of payment to any other
indebtedness of the Company. Without limiting the generality of the foregoing,
Senior Indebtedness shall include all Obligations under and as defined in the
Credit Agreement (the "Senior Credit Obligations"). Notwithstanding the
foregoing, Senior Indebtedness shall include only such Senior Credit Obligations
until such time as the same are paid in full in cash and all obligations to
provide financial accommodations under the Credit Agreement have terminated. For
purposes of this Note, "Credit Agreement" shall mean the Credit Agreement, dated
as of March 29, 1996, as amended or otherwise modified, among Aurora Electronics
Group, Inc., the Company, the Guarantors named therein, the Lenders named
therein and The Chase Manhattan Bank (formerly known as Chemical Bank, N.A.), as
Agent (the "Agent"), together with any agreement entered into in connection with
the restatement, renewal, extension, restructuring, refunding or refinancing of
the Obligations.
(A) Unless and until all Senior Indebtedness shall have been paid
in full in cash and all obligations to provide financial accommodations
under the Credit Agreement
19
<PAGE> 20
have terminated, the Company will not make, directly or indirectly, and
the holders of the Notes shall not be entitled to make demand for or
receive, any payment or prepayment on account of the Notes; provided,
however, that the Company shall be permitted to pay, and the holders of
the Notes shall be permitted to receive, regularly scheduled payments of
interest on the Notes made via the issuance of PIK Notes.
(B) 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 in cash and all
obligations to provide financial accommodations under the Credit
Agreement have terminated, before any payment, whether on account of
principal, interest or otherwise, is made upon the Notes.
(C) In any of the proceedings referred to in paragraph (B) 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 in cash and
all obligations to provide financial accommodations under the Credit
Agreement have terminated.
(D) Except for regularly scheduled payments of interest on the
Notes made via the issuance of PIK Notes, no payment shall be made,
directly or indirectly, on account of the Notes (i) upon maturity of any
Senior Indebtedness obligation, by lapse of time, acceleration (unless
waived), or otherwise, unless and until all principal thereof and
interest thereon and all other obligations in respect thereof shall
first be paid in full in cash and all obligations to provide financial
accommodations under the Credit Agreement have terminated, or (ii) upon
the happening of any default in payment of any principal of, premium, if
any, or
20
<PAGE> 21
interest on or any other amounts payable in respect of Senior
Indebtedness when the same becomes due and payable whether at maturity
or at a date fixed for prepayment or by declaration or otherwise (a
"Senior Payment Default"), unless and until such Senior Payment Default
shall have been cured or waived or shall have ceased to exist.
(E) Upon the happening of an event of default with respect to any
Senior Indebtedness permitting (after notice or lapse of time or both)
one or more holders of such Senior Indebtedness (or, in the case of the
Credit Agreement, the Agent) to declare such Senior Indebtedness due and
payable prior to the date on which it is otherwise due and payable (a
"Nonmonetary Default"), upon the occurrence of (i) receipt by the
holders of the Notes of written notice from the holders of said Senior
Indebtedness (or, in the case of the Credit Agreement, the Agent) of a
Nonmonetary Default (any such notice, a "Blockage Notice"), or (ii) if
such Nonmonetary Default results from the acceleration of the Notes, the
date of such acceleration; then (x) 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, except for regularly
scheduled payments of interest on the Notes made via the issuance of PIK
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,
except for regularly scheduled payments of interest on the Notes made
via the issuance of PIK 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 in cash and all
obligations to provide financial accommodations under the Credit
Agreement have terminated; provided, however, that if such Nonmonetary
Default shall have occurred and be continuing for a period (a "Blockage
Period") commencing on the earlier of the date of receipt of such
Blockage Notice or the date of the acceleration of the Notes and ending
179 days thereafter (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), and during such Blockage Period (i) such
Nonmonetary Default
21
<PAGE> 22
shall not have been cured or waived, (ii) the holder of such Senior
Indebtedness (or, in the case of the Credit Agreement, the Agent) shall
not have made a demand for payment and commenced an action, suit or
other proceeding against the Company and (iii) none of the events
described in subsection (A) above shall have occurred, then (to the
extent not otherwise prohibited by subsections (A), (B), (C) or (D)
above) the Company may, not less than 10 days after receipt by the
holders of such Senior Indebtedness or the Agent, as the case may be, of
written notice to such effect from the holders of the Notes, 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.
(b) Subject to the payment in full in cash of all Senior
Indebtedness as aforesaid and the termination of all obligations to provide
financial accommodations under the Credit Agreement, 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 interest on, the
Notes shall be paid in full in cash, 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
22
<PAGE> 23
as otherwise specified therein) the holders of the Notes from exercising all
remedies otherwise permitted by applicable law or hereunder upon default
hereunder.
(c) If any payment or distribution of any character or any
security, whether in cash, securities or other property, shall be received by
any holders of the Notes in contravention of any of the terms hereof or before
all the Senior Indebtedness obligations have been paid in full in cash and all
obligations to provide financial accommodations under the Credit Agreement have
terminated, such payment or distribution or security shall be received in trust
for the benefit of, and shall be paid over or delivered and transferred to, the
holders of the Senior Indebtedness at the time outstanding in accordance with
the priorities then existing among such holders for application to the payment
of all Senior Indebtedness remaining unpaid, to the extent necessary to pay all
such Senior Indebtedness in full in cash. In the event of the failure of any
such holder to endorse or assign any such payment, distribution or security,
each holder of any Senior Indebtedness is hereby irrevocably authorized to
endorse or assign the name.
(d) The rights under these subordination provisions of the
holders of any Senior Indebtedness as against any holders of the Notes shall
remain in full force and effect without regard to, and shall not be impaired or
affected by:
(i) any act or failure to act on the part of the Company; or
(ii) any extension or indulgence in respect of any payment or
prepayment of any Senior Indebtedness or any part thereof or in respect
of any other amount payable to any holder of any Senior Indebtedness; or
(iii) any amendment, modification or waiver of, or addition or
supplement to, or deletion from, or compromise, release, consent or
other action in respect of, any of the terms of any Senior Indebtedness
or any other agreement which may be made relating to any Senior
Indebtedness; or
(iv) any exercise or non-exercise by the holder of any Senior
Indebtedness of any right, power, privilege or remedy
23
<PAGE> 24
under or in respect of such Senior Indebtedness or these subordination
provisions or any waiver of any such right, power, privilege or remedy
or of any default in respect of such Senior Indebtedness or these
subordination provisions or any receipt by the holder of any Senior
Indebtedness of any security, or any failure by such holder to perfect a
security interest in, or any release by such holder of, any security for
the payment of such Senior Indebtedness; or
(v) any merger or consolidation of the Company or any of its
subsidiaries into or with any other person, or any sale, lease or
transfer of any or all of the assets of the Company or any of its
subsidiaries to any other person; or
(vi) absence of any notice to, or knowledge by, any holder of any
claim hereunder of the existence or occurrence of any of the matters or
events set forth in the foregoing clauses (i) through (v); or
(vii) any other circumstance.
(e) The holders of the Notes unconditionally waive (i) notice of
any of the matters referred to in Section 13(d); (ii) all notices which may be
required, whether by statute, rule of law or otherwise, to preserve intact any
rights of any holder of any Senior Indebtedness, including, without limitation,
any demand, presentment and protest, proof of notice of nonpayment under any
Senior Indebtedness or the Credit Agreement, and notice of any failure on the
part of the Company to perform and comply with any covenant, agreement, term or
condition of any Senior Indebtedness, (iii) any right to the enforcement,
assertion or exercise by any holder of any Senior Indebtedness of any right,
power, privilege or remedy conferred in such Senior Indebtedness or otherwise,
(iv) any requirements of diligence on the part of any holder of any of the
Senior Indebtedness, (v) any requirement on the part of any holder of any Senior
Indebtedness to mitigate damages resulting from any default under such Senior
Indebtedness and (vi) any notice of any sale, transfer or other disposition of
any Senior Indebtedness by any holder thereof.
(f) The obligations of the holder under these subordination
provisions shall continue to be effective, or be reinstated, as the case may be,
if at any time any payment in respect of
24
<PAGE> 25
any Senior Indebtedness, or any other payment to any holder of any Senior
Indebtedness in its capacity as such, is rescinded or must otherwise be restored
or returned by the holder of such Senior Indebtedness upon the occurrence of any
proceeding referred to in paragraph 13(a)(B) or upon or as a result of the
appoint of a receiver, intervenor or conservator of, or trustee or similar
officer for, the Company or any substantial part of its property or otherwise,
all as though such payment had not been made.
(g) Notwithstanding anything to the contrary herein, the Company
shall not at any time offer (and the holder hereof shall not at any time accept)
(i) any pledge of collateral or (ii) any guaranty by any parent or subsidiary of
the Company, in each case with respect to the obligations of the Company under
this Note.
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.
25
<PAGE> 26
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:
-------------------------------------
Jim C. Cowart
Chairman and Chief
Executive Officer
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed
Registration Statements on Form S-8 File No. 33-62102, Form S-8 File No.
33-62104, Form S-8 File No. 33-79426 and Form S-3 File No. 33-73758.
ARTHUR ANDERSEN LLP
Orange County, California
January 12, 1998
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