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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
( X ) Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934). For the fiscal year ended July 31, 1997.
OR
( ) 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 1-8342
PICO PRODUCTS, INC.
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(Exact name of registrant as specified in its charter)
NEW YORK 15-0624701
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
12500 Foothill Blvd., Lakeview Terrace, CA 91342
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (818) 897-0028
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
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Common Stock, par value $.01 American Stock Exchange
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 requirement for the past 90 days. YES X NO
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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 the Form 10-K or any amendment to this
Form 10-K. ( )
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The aggregate market value of the Registrant's Voting Stock held by non-
affiliates of the Registrant computed by reference to the closing price of such
stock on the American Stock Exchange at September 30, 1997, was $ 6,319,552.
Excluded from this value were shares held by officers and directors of the
Registrant.
The number of the Registrant's common shares outstanding at October 31,
1997, was 4,185,913.
DOCUMENTS INCORPORATED BY REFERENCE:
Definitive Proxy Statement to be filed pursuant to Regulation 14A in
connection with the 1997 annual meeting of shareholders of the Registrant.
Index to Exhibits is at page 58.
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PART I
ITEM 1. BUSINESS
GENERAL
Pico Products, Inc. was formed as a corporation in the State of New York
on July 31, 1962. Pico and its subsidiaries (the "Company") design,
manufacture and distribute products and systems for the pay TV and cable TV
industry (CATV), broadband communications and other signal distribution
markets. These other distribution markets include "private" cable TV systems
such as those found in hotels, schools, hospitals and large apartment
complexes. Private cable systems are referred to in the industry as master
antenna (MATV) or satellite master antenna (SMATV) systems. These systems
receive satellite and "off-air," or broadcast, signals at a single source
known as the "headend". The signals are processed and then distributed by
coaxial or fiber optic cable to the consumer. Also included in other signal
distribution markets are wireless cable or MMDS (multichannel multipoint
distribution systems) and business-to-business or direct-to-home (DTH)
communications by satellite. The Company also sells pay TV security products
and home satellite market products. Finally, the Company is pursuing
development and introduction of broadband communications products and
services that will support high speed internet transmissions. In general, the
Company is a solutions provider to TV system operations and suppliers engaged
in the the convergence of voice, video, text and data transmissions.
BROADBAND COMMUNICATIONS INDUSTRY BACKGROUND
CABLE AND SATELLITE TECHNOLOGY
There are currently five primary methods for the transmission, reception
and distribution of TV signals. These include direct "off-air" transmission,
cable TV, satellite master antenna TV or SMATV, MMDS or wireless TV, and DBS or
direct broadcast satellite transmission. A brief description of each method
follows.
The evolution of cable TV and SMATV has been made possible by the
development of satellite communications. With a satellite, TV signals are
transmitted up to a satellite located in geosynchronous orbit 22,400 miles
above the equator. From the satellite, signals are retransmitted to a wide
geographic reception area known as a signal "footprint". Many of these
signals, and all of the premium programs such as HBO or CNN, are now encoded
or scrambled. A special decoding device or descrambler is required to
receive these signals. In a cable TV system, the satellite signals are
received,
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processed and amplified by a cable "headend" located at the cable satellite
reception site, before being sent along copper coaxial cable or fiber optic
cable through a distribution system to individual subscribers. A small cable
system may have several hundred subscribers with several miles of cable,
while a large system may have hundreds of thousands of subscribers and
thousands of miles of cable.
A SMATV system is essentially a small cable system which has been
configured for a single building or building complex such as an apartment
building, hotel, hospital or school. Because it is designed to serve a single
building complex and fewer subscribers, a SMATV system is significantly less
expensive than a cable system. A SMATV system consists of a headend and a
distribution system to carry the TV signal through the building.
A home satellite system, known as direct-to-home or DTH, consists of a
dedicated dish antenna and a satellite receiver installed at every subscriber's
house. In the past, DTH received a signal directly from a satellite normally
using a large 12 foot dish antenna mounted near the house. However, a new
version of DTH was introduced by Hughes in 1994, called DirecTV, which involves
a dedicated Hughes Electronics satellite and direct microwave retransmission
from the satellite to a small, 18-inch dish at the home. A number of other DTH
competitors, including Primestar and Echostar, are now transmitting DTH signals
and this market is expected to become very competitive.
MMDS systems, known as a wireless cable, use a headend to receive and
process both satellite and local off-air signals. The signals are then
modulated and retransmitted at microwave frequencies to a microwave antenna and
down converter at the subscriber's home. Wireless cable can also be used to
transmit television signals to high-rise apartment buildings where the signals
can then be received, processed through a SMATV headend and distributed through
the building. The broadcast range of an MMDS system is strictly line-of-sight
and reception depends on the terrain and the height of the microwave
transmitting antenna.
While cable TV has dominated the U.S. market, SMATV and MMDS have been the
primary signal distribution approach in South America, the Middle East and Asia.
In cities such as Sao Paulo and Rio de Janeiro, Brazil, most people live in
apartment buildings and operators have found that the economics of SMATV or MMDS
work much better than cable TV for initial installations. However, a number of
cable systems are now being built. In China, cable is being rapidly developed
in all major cities. In smaller cities there are plans to develop 3,000 new
cable systems. In Thailand, SMATV and wireless systems are currently being
developed in Bangkok.
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THE CABLE INDUSTRY
Due to technological and regulatory changes, the traditional cable TV, or
CATV, industry is undergoing a major transition. Competition in the form of
DTH, MMDS, and SMATV have all enjoyed rapid growth partially at the expense of
the CATV industry. DTH is currently growing at levels never envisioned by the
CATV experts, and each new DTH customer represents the potential loss of a cable
customer. Furthermore, as the regulatory barriers are removed and as digital
compression technologies become more cost effective, the Regional Bell operating
companies (RBOC's) are seeking opportunities to offer video, information
services, and data services to consumers while they protect their local
telephony business.
CATV companies, while facing new and strong competition, are making plans
to offer telephone services. Additionally, due to the inherent large amount of
bandwidth that CATV systems provide, expanding existing services and delivering
large amounts of high speed data to the home can be offered by CATV companies.
Most of the large CATV companies are currently expanding their systems and
offering more channels.
Technological advances in the broadband communications industry now allow
for the delivery of a tremendous amount of information to a consumer's home. In
the traditional analog environment, one (1) TV channel requires 6 Mhz of
bandwidth. Due to digital compression, it is now possible to transmit in excess
of 6 TV channels in the same 6 Mhz bandwidth, albeit, with some degradation of
picture quality. Furthermore, when digital technology is used, data services
(especially access to the Internet) can be transmitted via the CATV network at
speeds of 6 to 10 megabits per second, far faster than the 56 kilobit speed of
the RBOC's existing twisted pair wiring used for telephone service or their ISDN
service at 128 Kb.
This combination of technological advances and the removal of regulatory
barriers has created substantial opportunities to provide both CATV and other
telecommunications companies with products and services in support of delivering
large amounts of digital data to the home. With more bandwidth available, more
broadband services can be offered. With increased bandwidth, highly specialized
programming can be targeted and offered to specific categories of customers.
Additionally, telephony services can be provided by CATV operators and
partnerships are being formed among cable companies, long-distance carriers, and
RBOC's with alliances to offer telephony services where they have traditionally
been prohibited. Finally, creating more bandwidth to the home for Internet
connections will allow the Internet to sustain higher growth than it has enjoyed
during the last two years.
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TRENDS IN THE TELECOMMUNICATIONS INDUSTRY
The recent passage of sweeping legislation to deregulate the
telecommunications industry is having a major impact on both the
telecommunication and cable industries. The immediate result has been the
creation of numerous new partnerships and alliances among companies in the
telecommunications, cable TV, cable electronics, computer and programming
industries. While the "convergence" of those industries is in an early stage of
evolution, a number of major investment commitments and consolidations have
occurred such as, the recent $1 billion dollar investments of Microsoft in
Comcast and U.S. West Continental Cablevision Division.
Deregulation has important implications for the cable TV industry. This in
turn presents major potential new opportunities for the Company in the U.S. The
rapid evolution of the "information highway" is transforming broadband
communications in the U.S. The information highway is an open network which
permits interactive access to data and information. The highway provides a vast
capability to connect users through the Internet, using fiber optic and copper
cable links. In the future, this interconnection will also incorporate new
wireless and microwave links for both video and data communications. The major
technological change that will result is the wide availability of broadband
communications involving high-speed digital data transmissions. This will
permit the transmission of very large amounts of data at very high speeds over
all segments of the network and is making possible, not only video and data
links between government agencies, schools, libraries, and research facilities,
but also links between businesses and individuals.
It is becoming clear that new technology developments are concentrated on
the development of an interactive link with the consumer's home. Within five to
ten years, the television set and cable TV converter box will be replaced by
smart telecommunications computer systems which will provide interactive access
to movies, data, home shopping, video games, video telephone, and
teleconferencing, as well as hundreds of channels of television programming.
Prototype interactive systems are now operational in many metropolitan areas.
Additionally, links to personal computers in consumers' homes will allow direct
transmission of high volumes of information to consumers.
The cost to provide connections and hardware to all U.S. households is
estimated to be at least $3,000 per household. Assuming a total of 90 million
U.S. households, the total cost to implement the new technology could approach
$300 billion. The requirement for vast capital expenditures means that only the
best capitalized companies, such as the RBOC's, the largest cable providers and
information technology companies can afford to make this investment. However,
the
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pace of investment in new technology will be determined largely by the
willingness of consumers to pay for new information or interactive services.
MARKETING AND SALES
Prior to January 1997, the Company sold its products through two distinct
sales groups, Pico Macom Inc.(a wholly-owned subsidiary of the Company) and the
CATV Division. In a effort to improve customer service and reduce costs, the
Company consolidated these sales forces into one group in January 1997.
The Company sells broadband systems and hardware components, cable TV
accessories and passive radio frequency products primarily to the CATV, SMATV,
MMDS and DTH industry and related markets. Broadband systems include active
headend electronics, such as satellite receivers, signal processors, modulators
and amplifiers. The Company's headend products are manufactured under contract
on an exclusive or OEM basis by one principal subcontractor with facilities in
Taiwan and China.
Passive products include splitters, connectors, switches and couplers for
coaxial cable installation. Passive products are produced to the Company's
specifications by a number of subcontract manufacturers in Taiwan. The Company
maintains tight quality control supervision of these manufacturers through on-
site inspections.
Products for the U.S. market are shipped to the Company's warehouse in
California. In some cases, there is additional assembly and tuning or testing
of products before shipment.
The primary business focus for the Company has been on the development and
positioning of its line of headend equipment, 1 GHz product lines and 2 GHz
satellite products. Engineering and production efforts have upgraded various
products to ensure that they meet all U.S. regulatory requirements. In
addition, the engineering staff has been increased significantly in the last few
years. As the technical needs of the CATV, SMATV and MMDS industries have
grown, the Company's product line has been improved through the use of surface
mount technology (SMT) and computer aided design. Engineering design and
product development are done in the U.S. Independent testing and evaluation is
completed prior to the introduction of new products. The engineering efforts
have resulted in improved quality and features to the point where the Company
has been able to introduce low-cost, high-performance products for use by CATV
operators.
The second segment of Pico's domestic market is signal distribution systems
which use passive components such as splitters, taps and connectors. Private
cable TV operators purchase passive
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components which are used to wire multiple dwelling units. CATV operators
purchase components through a newly created direct sales force.
The Company sells over 500 different products at prices ranging from under
$1 for most passive components to over $20,000 for a complete multiple channel
SMATV headend. Products are sold to over 800 distributors, dealers and OEM
manufacturers located primarily in the United States. Sales are also made to
customers in Canada, Mexico, Central and South America, Europe, the Middle East,
and Asia. Sales are primarily made through telemarketing efforts conducted from
the Company's Lakeview Terrace, California, facility with some direct sales to
major distributors and OEM accounts. The Company currently uses industry trade
shows and targeted advertising to market its products.
The Company also designs, manufactures and sells Pay TV security products
for the cable TV industry. These devices include both negative filters, as well
as positive encoders and filters. In the industry, these are known as "traps".
Single channel negative traps block out an entire channel of a pay service, such
as HBO, so that it cannot be viewed by a non-subscriber. Single channel
positive trapping systems use an encoder to "scramble" a video signal on a pay
channel. Installation of a positive trap by the cable operator allows the
subscriber to view the premium channel. Non-subscribers will only see a
scrambled picture.
The Company has been making Pay TV security products since HBO introduced
its premium service in 1975. Following a product quality problem in 1988, Pico
developed and introduced its PT (Perfect Trap) line of products. This
hermetically sealed product line has two distinct advantages over previous
technologies. The first advantage is highly accurate temperature compensation
which allows the device to operate over a temperature range of -40 degrees to
+60 degrees Celsius in the harshest of environments. The second advantage is
the sealing method used in the device which eliminates water or water vapor
migration into the trap.
The Company also markets a variety of tier traps that block out an entire
tier or group of channels. Business has recently expanded as the result of new
government regulations. These devices can be used to defeat signal theft by
blocking access to groups of premium channels when theft of service is
suspected.
The primary market for Pay TV security products is the cable television or
CATV industry in the U.S., although sales to Taiwan and South America have
increased during the past several years. The major customers are the U.S.
multiple system operators (MSO's) such as
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Adelphia, Comcast, Cox, Media One, Time Warner, and TCI. The top 25 MSO's
constitute about 80% of the potential market.
The Company has developed specialized noise blocking filters that the CATV
Industry is using for telephone, Internet and data delivery to customer homes.
These filters incorporate SMT technologies. One version, the HPF-02 mini, has
been very successful in terms of sales volume and technical performance.
Variations of the type of noise blocking filters are anticipated during the
first half of fiscal year 1998 as CATV companies define their unique
requirements.
The Company's sales to American Technology Exporters, Inc. in Miami,
Florida ("Amtech") were approximately 9%, 16% and 20% of consolidated sales for
the years ended July 31, 1997, 1996 and 1995, respectively.
As is customary in the industries served, the Company's sales are normally
made pursuant to individual purchase orders. Orders are subject to cancellation
by the buyer under certain conditions without penalty. The backlog of purchase
orders as of July 31, 1997 and July 31, 1996 was approximately $3,316,000 and
$4,608,000, respectively. These purchase orders were believed to be firm, and
the Company expects to fill the July 31, 1997 backlog within its 1998 fiscal
year.
The largest dollar volume sales are of the Company's active electronic
equipment items used in headend installations for which unit prices range from
approximately $100 to $500. However, a large volume of the Company's sales is
of low cost components sold at unit prices under $5.00. Since 1982, a large
portion of Pico Macom's passive products have been sold under the trademark,
"Tru-Spec-Registered Trademark-".
FOREIGN OPERATIONS
The Company owns and operates a manufacturing facility on the island of St.
Kitts (St. Christopher and Nevis) in the Caribbean Sea. Pico (St. Kitts)
Limited assembles the circuit boards for the Company's positive, negative and
tier traps, and is a manufacturing source for the HPF-O2 mini filter used in
two-way cable TV systems.
The Company opened an office in Hong Kong in September 1995, to provide
sales technical support for Hong Kong, China, Taiwan, the Philippines, and South
Korea. The Company opened an office in Thailand in October 1995. In an
effort to better serve the Far East market and reduce costs, the Company has
decided to close its offices in both Hong Kong and Thailand. All sales activity
in Asia will be handled through a new distributor based in Hong Kong.
At July 31, 1997 the assets located outside the United States constituted
less than 10% of the Company's total assets and the
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revenues and operating expenses attributable to the Company's foreign
operations were also less than 10% of the Company's revenues and
expenses.
MANUFACTURERS AND SUPPLIERS
Approximately 58% of the Company's sales are from products manufactured by
subcontractors according to the Company's design and quality specifications.
These subcontractors are located primarily in Taiwan, China, and Thailand. For
more than ten years, the SMATV electronic components sold by the Company have
been manufactured under contract on an exclusive basis by one subcontractor in
Taiwan and China. Management believes that the Company's relationship with this
subcontractor is excellent and that the financial strength of the subcontractor
is strong. However, the loss of this subcontractor could have a material
adverse impact on the Company's operations until the Company could obtain an
alternative source of supply. The contract does not require the subcontractor
to maintain a parts inventory, so that from time-to-time delays are possible in
completing customer orders. The current contract expires in May 1998 and
management anticipates renewing the contract prior to its expiration. Most of
the other products obtained from foreign-based vendors are available from a
number of different subcontractors.
Approximately 21% of the Company's sales are from products manufactured by
the Company. These items consist primarily of passive traps and high-pass
filters. The trap manufacturing process involves raw materials procured from
domestic and foreign-based sources which are assembled at the Company's
manufacturing facility in St. Kitts. Final assembly and quality control is
accomplished at the manufacturing facility in Lakeview Terrace, California. The
raw materials used in the manufacturing processes are available from a number of
different suppliers, both domestic and foreign-based, and management believes
that no one vendor has the ability to significantly impact the Company's supply
of raw materials.
The remaining 21% of products sold are primarily items purchased from
domestic subcontractors for resale.
In August 1987, Pico Macom Taiwan was organized as a Taiwanese export
trading company to facilitate procurement of products from vendors who are too
small to export directly. Pico Macom Taiwan serves as a liaison between Pico
Macom and all of its Far East vendors by monitoring quality control of the
products and assisting in new product development.
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PRODUCT DEVELOPMENT
Product development costs are expensed as incurred. Expenses allocated to
product development for the years ended July 31, 1997, 1996 and 1995 totaled
approximately $1,340,000, $1,368,000, and $979,000, respectively.
COMPETITION AND PATENTS
Equipment reliability, diversity of product lines, delivery requirements,
price, customer service and technological competence are the major basis of
competition in the broadband communications equipment industries. The broadband
communications equipment industries are characterized by intense competition and
technological changes. Many companies which provide equipment and services to
these industries are substantially larger in size and in resources than the
Company.
Royalties received on a Company-owned patent were $0, $0, and $257,000
during fiscal 1997, 1996 and 1995, respectively. In February 1995, the Company's
patent for positive trapping systems expired resulting in the reduction of
royalties for fiscal year 1995. In fiscal year 1996 the Company received a U.S.
patent that is used in the new LNDA broadband amplifiers. In 1997, the Company
was awarded an expanded version of the patent, thus allowing for wider
application in 1 GHz amplifiers. However, patent protection is not available
for many of the Company's products. Management believes that its business is
dependent upon marketing and product availability rather than patent protection.
WARRANTIES
The Company warrants its products against faulty material and workmanship
for two years for its electronic equipment and one year for its other products.
The Company's warranties are limited to repair or replacement of the defective
product. During the three years ended July 31, 1997, direct costs associated
with the warranties have been minimal.
EMPLOYEES
At July 31, 1997, the Company employed 370 persons, of whom 33 were engaged
in administration and accounting, 14 in engineering and quality control, 27 in
sales and marketing, and the remainder in production, purchasing and shipping.
None of the Company's employees are represented by labor unions.
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GOVERNMENTAL REGULATION
The Company's products are subject to Federal Communications Commission
("FCC") regulation. Certain of the Company's customers also are subject to
regulation by the FCC and by state and local governmental authorities. The
rules, regulations, policies and procedures of the FCC affecting the broadband
communications industry are constantly under review. The likelihood of changes
in such regulation and its effect on the business of the Company cannot be
ascertained.
In October 1992, the U.S. Congress enacted legislation to reregulate
certain aspects of the U.S. cable television industry. As part of this
legislation, the FCC mandated two separate rollbacks in subscriber rates
totaling as much as 17% of the prior rates. This rate reduction adversely
impacted the Company's sales of pay TV security devices during fiscal year 1994
as the system operators reduced their capital expenditure budgets to reflect
their lowered revenues. During fiscal year 1995, the Company experienced an
increase in demand for pay TV security devices as the system operators began to
again order products.
In early 1996, the U.S. Congress enacted sweeping legislation to deregulate
the U.S. telecommunications industry. This legislation is having a major impact
on both the telecommunication and cable industries. The immediate result has
been the creation of numerous new partnerships and alliances among companies in
the telecommunications, cable TV, cable electronics, computer and programming
industries. While the "convergence" of those industries is in an early stage of
evolution, a number of major investment commitments have been made, such as the
purchase of Continental Cablevision by a division of US West (a RBOC).
Deregulation has important implications for the cable TV industry. This in turn
presents major potential new opportunities for Pico in the U.S.
The Company's products are used by broadband communications systems in
foreign countries, especially in Latin America and Asia. Sales to Latin America
are made directly by the Company or through U.S.-based distributors while sales
to Asia are planned through alliances with Asian-based distributors. Regulation
of construction, technical character and operation of the broadband
communications system is controlled by each country's government. The Company
cannot predict the impact on its sales due to changes in regulation or
legislation by foreign governments.
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TABLE OF COMPANY'S SUBSIDIARIES
Name Jurisdiction of Year Incorporated Active (A)
Incorporation Inactive (I)
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Pico Macom, Inc. Delaware 1983 A (1)
Pico Macom Taiwan Taiwan 1987 A (2)
Co. Ltd.
Pico (St. Kitts) St. Christopher 1983 A (1)
Ltd. and Nevis
Pico (Bermuda) Bermuda 1994 A (1)
Ltd.
Pico Products Asia Hong Kong 1994 A (3)
Ltd.
Pico Siam Thailand 1996 A (2)
Company Limited
PicoMacom Brazil 1996 A (2)
Productos de
Telecommunicacao,
Ltda
Pico (St. Vincent) St. Vincent and 1981 I (1)
Ltd. the Grenadines
Pico Satellite, Delaware 1983 I (1)
Inc.
Pico Cargo, Inc. Delaware 1983 I (1)
Pico Korea, Ltd. Korea 1985 I (2)
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Notes: (1) Subsidiary of Pico Products, Inc.
(2) Subsidiary of Pico Macom, Inc.
(3) Subsidiary of Pico (Bermuda) Limited.
Ownership percentage in all cases exceeds 90%.
At July 31, 1997, no operational activities were performed by the following
subsidiaries: Pico (St. Vincent) Ltd., Pico Satellite, Inc., Pico Cargo, Inc.
and Pico Korea, Ltd.
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ITEM 2. PROPERTIES
The Company presently owns or leases an aggregate of approximately 85,000
square feet of office, production and warehouse space.
Pico Macom leases 60,000 square feet of space in Lakeview Terrace,
California which is used for corporate headquarters for Pico Products, Inc. and
Pico Macom, Inc., final assembly of Pay TV Security division products and Pico
Macom's administration, sales, engineering and distribution functions. The two-
year facility lease expires in March 1998 and the Company anticipates
negotiating renewal at this time. The net annual rental for the current
facility is approximately $360,000.
The Company leases approximately 1,700 square feet for its CATV division
sales office in East Syracuse, New York. The lease expires in October, 1998.
The net annual rental is approximately $20,000. The Company also leases
approximately 1,700 square feet of office space in West Conshohocken,
Pennsylvania. The lease expires in October, 2000. The net annual rent is
approximately $43,000. The Company is obligated to provide this office to its
former chairman through December 1997, at which time the Company intends to sub-
lease the office.
Pico (St. Kitts) Limited, which manufactures components for the Company's
CATV Security products, owns a 16,000 square foot building and the underlying
ground lease located in Saint Christopher and Nevis, a country in the Caribbean.
The net annual rental of the underlying ground lease is $570 through 2018.
Pico Products Asia Limited leases approximately 4,000 square feet for an
office facility in Hong Kong at an annual rental of approximately $86,000. The
lease expires in July, 1998. At July 31, 1997, the Company decided to close its
Hong Kong office. This lease was assumed by a third-party on November 1, 1997.
Pico Macom Taiwan leases approximately 2,000 square feet for an office
facility in Taipei, Taiwan at an annual rental of approximately $30,000. The
lease expires in January 1998 and the Company currently anticipates renewing it
at that time.
Management believes that the above-described properties are sufficient for
the Company's present needs.
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ITEM 3. LEGAL PROCEEDINGS
EAGLE LITIGATION
On July 30, 1997, Eagle Comtronics, Inc. ("Eagle") filed a motion in the
United States District Court for the Northern District of New York to amend the
complaint for patent infringement it had filed in 1979 against the Company.
This 1979 action had been settled by Consent Judgment in 1988, pursuant to which
the Company and Eagle entered into a License Agreement providing for specified
royalty payments from Eagle to the Company. Eagle's motion sought the District
Court's permission to proceed against the Company under various legal theories
for breach of the License Agreement, based on Eagle's allegation that the
Company, in violation of the License Agreement's "most favored nation" clause,
granted a license to a third party (Arrow Communication Laboratories, Inc.) on
more favorable terms than those provided to Eagle. Eagle sought damages of
approximately $1,600,000 plus interest and attorneys fees. The Company believed
that Eagle's motion was procedurally improper and that, even if the amended
complaint were allowed by the District Court, it had meritorious defenses to the
claims stated in the amended complaint.
The Company responded to Eagle's motion, and Eagle promptly withdrew the
motion to file an amended complaint. At the same time Eagle filed a complaint
in New York State Supreme Court similar to the proposed amended federal
complaint. Management believes that the Company has meritorious defenses to
Eagle's action and that such suit will not have any material adverse effect on
the Company.
ARCOM LITIGATION
In November 1991, Arrow Communication Laboratories, Inc. (Arcom) of
Syracuse, New York, initiated a lawsuit in the New York Supreme Court, which, as
amended, alleged that Arcom had a paid-up license with respect to the Company's
patent for positive trapping systems and that Arcom was entitled to unspecified
damages based on overpayment of royalty amounts. Arcom also claimed that it was
entitled to compensatory damages in excess of $250,000, plus punitive damages of
$3,000,000, as a result of a Company press release announcing termination of the
license agreement.
The Company initiated a patent infringement suit against Arcom in the
United States District Court for the Northern District of New York, which sought
treble damages for willful infringement plus attorneys fees. The Company
requested that the Court grant a preliminary injunction to prevent Arcom from
infringing its patent. At a Court hearing in February 1994, the parties agreed,
and it was ordered by the Court, that Arcom would post as security amounts equal
to the royalties due to the Company for the manufacture and sale of product
covered by the license agreement from December 15, 1991, the date that the
license would have terminated, until the expiration of
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the patent in February 1995. Through July 31, 1995 Arcom had made cash
payments of $462,066 covering royalties through February 14, 1995. The
Company did not include these amounts in income in any fiscal period but
recorded a current liability for $462,066 at July 31, 1995. In addition,
Arcom agreed to post an irrevocable letter of credit in an amount deemed
sufficient to permit recovery of a significant portion of the Company's
damages if it were to prevail on its willful infringement claim. In
exchange, the Company withdrew its request for a preliminary injunction.
In May, 1996, the Company and Arcom agreed to settle the foregoing
lawsuits, pursuant to which all suits were terminated and dismissed with
prejudice. As part of this agreement, the Company and Arcom, respectively,
granted each other full releases from liability, the Company released certain
deposits and other collateral provided to the Company by Arcom during the
litigation, and the Company reimbursed Arcom approximately $70,000 for certain
fees and expenses.
EPA INFORMATION REQUEST
In March 1995, a subsidiary of the Company received a Joint Request for
Information (the "Information Request") from the United States Environmental
Protection Agency, Region II (the "EPA"), under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), with
respect to the release and/or threatened release of hazardous substances,
hazardous wastes, pollutants or contaminants into the environment at the
Onondaga Lake Site, Syracuse, Onondaga County, New York. The Company learned
that the EPA added the Onondaga Lake Site to the Superfund National Priorities
List in December 1994, and has completed an onsite assessment of the degree of
hazard. The EPA has indicated that the Company is only one of 26 companies
located in the vicinity of Onondaga Lake or its tributaries that have received a
similar Information Request.
The Information Request related to the activities of the Company's Printed
Circuit Board Division, which was sold to a third party in 1992, and which
conducted operations within the specified area. Under the Agreement of Sale
with the buyer, the Company retained liability for environmental obligations
which occurred prior to the sale.
The Company has provided all information requested by the EPA. The
Information Request does not designate the Company as a potentially responsible
party, nor has the EPA indicated the basis upon which it would designate the
Company as a potentially responsible party. The Company is therefore unable to
state whether there is any material likelihood for liability on its part, and,
if there were to be any such liability, the basis of any sharing of such
liability with others.
16
<PAGE>
In March 1997, the Company received a follow-on request for additional
information in this matter and has provided all information requested.
OTHER
The Company is involved, from time to time, in certain other legal actions
arising in the normal course of business. Management believes that the outcome
of other litigation will not have a material adverse effect on the Company's
consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
17
<PAGE>
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common shares are traded on the American Stock Exchange under
the symbol "PPI". The following table sets forth, for the fiscal periods
indicated, closing prices for the common shares on the American Stock Exchange
as reported by the American Stock Exchange, Inc.
High Low
Fiscal Year Ended July 31, 1996:
First Quarter......................... 2 1/2 1 5/8
Second Quarter........................ 2 1/16 1 1/2
Third Quarter......................... 3 7/16 1 5/8
Fourth Quarter........................ 2 3/4 1 3/4
Fiscal Year Ended July 31, 1997:
First Quarter......................... 2 5/16 1 3/4
Second Quarter........................ 2 3/8 1 3/8
Third Quarter......................... 2 1/16 1 1/16
Fourth Quarter........................ 1 1/2 7/8
August 1, 1997 to September 30, 1997... 1 3/4 1 1/8
As of September 30, 1997, there were approximately 2,000 holders of record
of the Company's common shares.
The Company has never paid a cash dividend on its common shares. The
Company's Board of Directors currently intends to retain any future earnings for
use in the Company's business. Payment of cash dividends in the future will be
dependent upon the Company's earnings, financial condition, capital requirements
and other factors deemed relevant by the Company's Board of Directors.
18
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following is selected consolidated financial data of the Company for
the five fiscal years ended July 31, 1997. The selected consolidated financial
data should be read in connection with the consolidated financial statements
included as Item 8 of this Annual Report on Form 10-K.
(amounts in thousands,
except per share data) FISCAL YEAR ENDED JULY 31, 1997
---------------------------------------------
1997 1996 1995 1994 1993
1) STATEMENT OF OPERATIONS DATA:
Sales $35,448 $36,051 $33,367 $29,886 $23,740
Income (loss) from
operations $(4,502) $ 534 $ 997 $ 799 $ (225)
Net income (loss) $(5,887) $ (400) $ 526 $ 905 $ (277)
Net income (loss) attributable
to common stock $(5,972) $ (400) $ 526 $ 905 $ (277)
Net income (loss) attributable
to common stock per common
and common equivalent share -
primary and fully diluted $ (1.45) $ (0.11) $ 0.12 $ 0.21 $ (0.08)
Weighted average common and common
equivalent shares outstanding -
primary and fully diluted 4,113 3,798 4,240 4,295 3,577
2) BALANCE SHEET DATA:
Working capital $ 3,362 $ 3,124 $ 3,497 $ 3,151 $ 2,180
Total assets $19,896 $17,945 $17,633 $13,853 $11,592
Long-term debt $ 4,915 $ 39 $ 279$ 632 $ 32
Redeemable preferred stock $ 917 $ - $ - $ - $ -
Shareholders' equity (deficiency) $ (817) $ 4,456 $4,513$ 3,961 $ 3,009
19
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SALES
Sales for the fiscal year ended July 31, 1997 were $35.4 million
compared to $36.1 million for the prior year, a decrease of 2%. The
Company's Pico Macom subsidiary recorded a sales decrease of approximately
$449,000, or 2%, compared to the prior year. This decrease was primarily due
to severe competition from U.S.-based distributors of Satellite Master
Antenna Television (SMATV) products in South America. Management is working
diligently to recapture lost market share through competitive pricing and the
customer support of the Company's Brazilian sales and marketing office which
was opened in November 1996. However, management believes that the reduced
level of sales into South America will continue into the first half of fiscal
year 1998. The decrease in Pico Macom's sales into South America during
fiscal year 1997 was partly offset by an increase in sales into the Middle
East of over $1.4 million compared to the prior fiscal year. This included a
contract worth over $1 million to supply components for a cable TV system on
the Seychelles Islands. A majority of the contract was supplied as of July
31, 1997.
The Company's CATV division recorded a sales decrease of approximately
$110,000, or 2%, in fiscal year 1997 compared to the prior year. This
decrease was mainly due to an industry-wide downturn in demand for single
channel pay TV decoders. However, most of this decline was offset by sales
of the Company's new high pass filter used in two-way interactive
communications systems. This product was introduced early in fiscal year
1997, and sales of this product have remained strong into the first quarter
of fiscal year 1998. The Company's Hong Kong subsidiary recorded a slight
sales decrease in fiscal year 1997 compared to the prior year. Based on the
disappointing sales performance of the Hong Kong subsidiary, management
decided to close down its Hong Kong office effective July 31, 1997 and
transition to in-country distribution of its products into the Far East.
Sales for fiscal year 1997 were substantially below the Company's
targeted sales levels. This shortfall has resulted in a continued inventory
buildup at July 31, 1997 which has put a strain on the Company's financial
position. Management is addressing this problem through an expansion of its
sales and marketing efforts and a focused inventory reduction program.
However, management believes that overall sales in the first quarter of
fiscal year 1998 will fall short of the sales level of the first quarter of
fiscal year 1997.
Sales for the fiscal year ended July 31, 1996 were $36.1 million
compared to $33.4 million for the prior year, an increase of 8%. This was
the highest annual sales total in the Company's history. The Company's CATV
division recorded a sales increase of $1.8 million, or 34%, compared to the
prior year. This increase was primarily due to strong domestic and
international demand for pay TV encoders and decoders. The Company's Hong
Kong subsidiary recorded a
20
<PAGE>
sales increase of $1.2 million over the prior year, as fiscal year 1996 was its
first full year of distributing product into China, Hong Kong and Southeast
Asia. Sales for the Company's Pico Macom subsidiary were even with the prior
year due to a slowdown in sales in the first half of fiscal year 1996. This
sales slowdown was caused by the consolidation of several U.S. multiple cable TV
system operators (MSO's) and a resulting slowing of demand in the first half of
the year and a slow down of investment by the MSO's in South America in the
first half of the year. However, demand for these products increased in the
second half of fiscal year 1996.
COST OF SALES
Cost of sales increased by approximately $3.1 million, or 11%, for the
fiscal year ended July 31, 1997 compared to the previous year. Cost of sales
as a percentage of sales increased from 76% in fiscal year 1996 to 86% for
fiscal year 1997. The dollar increase in cost of sales and the increase in
cost of sales as a percentage of sales was primarily due to over $2 million
of reserves for slow moving and obsolete inventory. Additionally, the
Company faced severe price competition both domestically and in South America
which resulted in price reductions for many of the Company's products.
Startup costs related to initial manufacturing of some of the Company's new
products also impacted costs. Finally, cost of sales was impacted unfavorably
by the lower margins generated by the sales of third-party products by the
Company's Hong Kong subsidiary.
Cost of sales for the fiscal year ended July 31, 1996 increased by
approximately $2.2 million, or 8.5%, compared to the previous year. Cost of
sales as a percentage of sales was unchanged at 76% for fiscal year 1996,
compared to the previous year. The dollar increase in cost of sales was
primarily attributable to the increase in sales volume. Manufacturing cost
improvements for the Company's CATV division security products and improved
purchasing power of the U.S. dollar in the Far East resulted in slight
product costs reductions in fiscal year 1996. However, these reductions were
offset by startup costs for several of the Company's new product lines.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses increased by approximately $1.3
million, or 16%, in fiscal year 1997 compared to the prior year. The primary
reasons for the increase were an expansion of the Company's sales and
marketing activities worldwide and approximately $900,000 of restructuring
costs recorded at July 31, 1997. The restructuring costs include the closing
of the Company's Hong Kong office and transition to in-country distribution
to sell the Company's products in the Far East, as well as a contract
settlement with the Company's former chairman and chief executive officer.
Management expects selling and administrative expenses to decline in fiscal
year 1998 due to cost savings associated with the closing of the Hong Kong
office.
Selling and administrative expenses increased by approximately $995,000,
or 14%, in fiscal year 1996 compared to the prior year. The primary reasons
for the increase were continuing investment in upgrading and expanding the
21
<PAGE>
product line and expenditures related to development of new markets in Asia.
The Company also expanded its regional office in Hong Kong. During fiscal
year 1996 the Company established a sales office in Bangkok, Thailand to
market its products into Thailand, Indonesia, and other markets in Southeast
Asia. For fiscal year 1996 the Company's product development expenses and
Asian market development expenses increased by approximately $389,000 and
$654,000, respectively, when compared with the prior fiscal year.
PRODUCT DEVELOPMENT
Product development expenditures for fiscal years 1997, 1996, and 1995
were approximately $1,340,000, $1,368,000, and $979,000 respectively. These
amounts are included in the selling and administrative expenses totals
mentioned previously. The product development efforts during fiscal years
1995 through 1997 were concentrated on upgrading and expanding Pico Macom's
product line to address CATV industry new products, new features and higher
performance specifications. Additionally, new products were developed for
the CATV Division that incorporate 1 GHz capability in specialized RF filter
products for the cable industry. Also, broadband amplifiers that support 1
GHz with two-way capabilities were designed and brought into production.
Agile headend products, including modulator and demodulator products, were
brought into full manufacturing. Finally, microprocessor controlled
modulators and demodulators were developed and placed into early deployment.
Management believes that in order to remain competitive in a constantly
changing technological market place, the Company needs to maintain comparable
levels of product development expenses.
OTHER INCOME
Other income decreased by approximately $9,000, or 39%, for fiscal year
1997 compared to the prior year. The decrease in other income was due to
lower interest income in fiscal year 1997 as most of the Company's short-term
investments were liquidated during the prior year.
Other income decreased by approximately $260,000, or 92%, for fiscal
year 1996 compared to the prior year. The decrease in other income was
primarily due to the elimination of royalty income from license holders
following the expiration of the Company's patent for positive encoding and
decoding systems in February 1995.
INTEREST EXPENSE
Interest expense increased by approximately $443,000, or 46%, for fiscal
year 1997 compared to the prior year. The increase in interest expense was
due to higher borrowing levels on the Company's bank line of credit and
interest on the $5 million subordinated debt financing completed in November
1996. Higher than forecast inventory levels required greater borrowing
levels throughout fiscal year 1997.
22
<PAGE>
Interest expense increased by approximately $243,000, or 34%, for fiscal
year 1996 compared to the prior year. The increase in interest expense was
primarily due to higher borrowing levels on the Company's bank line of credit
to support the Company's working capital requirements.
INCOME TAX PROVISION
No provision for U.S. Federal and state regular income taxes or foreign
income taxes have been recorded for fiscal year 1997, fiscal year 1996 or
fiscal year 1995 due to the Company's U.S. Federal, state and foreign net
operating loss carryforward positions and a tax holiday granted to one of the
Company's foreign subsidiaries. However, a provision for U.S. Federal and
State alternative minimum tax was recorded for fiscal year 1995.
NET LOSS ATTRIBUTABLE TO COMMON STOCK
The Company recorded a net loss attributable to common stock in fiscal
years 1997 and 1996 of approximately $6 million and $400,000, respectively.
The fiscal year 1997 loss was due to a number of factors, including reserves
for obsolete and slow moving inventory, product sales price reductions to
meet price competition, restructuring costs and a significant shortfall in
sales from targeted levels. Return to profitability in fiscal year 1998 is
contingent upon a resurgence in demand for the Company's products on a
worldwide basis, tight control of operating expenses, and execution of an
effective inventory reduction program to bring stocking levels in line with
Company requirements.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 1997, the Company had working capital of approximately
$3,362,000 and a ratio of current assets to current liabilities of
approximately 1.23 to 1, compared with working capital of approximately
$3,124,000 and a ratio of current assets to current liabilities of
approximately 1.23 to 1 as of July 31, 1996. During fiscal year 1997 the
Company recorded negative cash flow from operating activities primarily as a
result of the net loss from operations and increased inventory purchases to
support the Company's forecasted sales levels.
Sales for fiscal year 1997 were significantly lower than planned,
resulting in higher inventory levels at July 31, 1997. The increased
investment in inventory has reduced the Company's borrowing availability on
its revolving bank line of credit. During the year, the Company implemented
programs to significantly reduce inventory levels through improved inventory
management and improved sales resulting from expanded sales and marketing
efforts.
During the years ended July 31, 1997, 1996 and 1995, cash used for
capital expenditures was approximately $ 283,000, $229,000 and $221,000,
respectively. The Company financed approximately $258,000 for upgrades to its
management
23
<PAGE>
information system during fiscal year 1997. Capital expenditures for fiscal
year 1998 are expected to be under $500,000.
Pico Macom has an $11,000,000 revolving bank line of credit which is
secured by substantially all of Pico Macom's assets, including all trade
accounts receivable and inventories. The line provides for interest at the
prime rate (8.5% at July 31, 1997) plus 1.25%. The revolving line of credit
is used to fund operating expenses, product purchases and letters of credit
for import purchases. The line has a $1,500,000 sublimit for outstanding
letters of credit. The amount available to borrow at any one time is based
upon various percentages of eligible accounts receivable and eligible
inventories as defined in the agreement. The credit facility is subject to
certain financial tests and covenants. The line of credit is subject to
review and renewal on December 31, 1998.
At July 31, 1997, the Company was in violation of several financial
covenants relating to Pico Macom's bank line of credit. These covenants
required a minimum net income for the fiscal year by Pico Macom and limited
certain financial ratios. Pico Macom's bank has issued a waiver of these
violations effective July 31, 1997 and the Company negotiated new, less
restrictive covenants, with which management believes the Company can comply.
At July 31, 1997, Pico Macom had approximately $ 9,425,000 in revolving
loans and approximately $8,000 in letters of credit outstanding, and the
unused portion of the borrowing base was approximately $ 290,000.
In February 1996, the Company was notified by the holders of the two
outstanding notes payable that they intended to exercise 250,000 warrants to
purchase common stock of the Company as an offset against the first $250,000
installment payment due on the debt. This transaction was completed by the
end of March 1996.
In February 1997, the Company was notified by the holders of two
outstanding notes payable that they intended to exercise 100,000 warrants to
purchase common stock of the Company, totaling $100,000, against the second
installment payment due on the debt. This transaction was completed in
February 1997.
During the second half of fiscal year 1996, management determined that
the Company's credit arrangements, along with an inventory reduction program
implemented by the Company, would not provide sufficient cash to fund growth
in the Company's sales and planned operations for fiscal year 1997 and
beyond. Consequently, on November 21, 1996 the Company completed a private
placement financing totaling $6 million with two U.S.-based institutional
investors to provide funds for general working capital requirements and
investment in new product development, market development, and upgrade of
facilities. The private placement consisted of $5 million of seven-year 12
percent subordinated debentures sold to Allied Capital Corporation of
Washington, D.C. and certain
24
<PAGE>
of its affiliates, and $1 million of seven-year 12 percent redeemable
preferred stock sold to the Sinkler Corporation of Wilmington, Delaware.
In connection with the financing, Allied Capital Corporation and
affiliates received warrants to purchase 779,313 shares of the Company's
common stock. The Sinkler Corporation received warrants to purchase 155,863
of the Company's common stock, and Shipley Raidy Capital Partners, LP, the
Company's investment banker, received warrants to purchase 20,000 shares of
the Company's common stock. Additionally, Allied Capital Corporation and
affiliates and The Sinkler Corporation received warrants to purchase, in the
aggregate, up to 18% of the number of shares of the Company's common stock
resulting from the exercise, from time to time, by holders of options and
warrants previously granted by the Company. The warrants are exercisable at
a price of $1.81 per share, the average closing price of the Company's common
stock for the 30 trading days prior to November 21, 1996.
Various transaction costs totaling $459,443 were incurred in conjunction
with the private placement financing. These costs are being amortized over
the seven-year term of the debt and preferred stock.
The Company has measured the fair value of the warrants issued in
connection with the private placement financing. This value has been
allocated as a discount applied against the related long-term debt and
redeemable preferred stock and will be amortized over the seven-year term of
the financing.
The private placement financing agreements require the Company to meet
certain financial covenants which are very similar to the financial covenants
relating to Pico Macom's bank revolving line of credit. Additionally, these
new agreements prohibit the distribution of cash, stock or other property to
shareholders (whether characterized as dividends or otherwise) or the
redemption or repurchase of the Company's capital stock or similar
securities, subject to limited exceptions.
At July 31, 1997 the Company was in violation of several financial
covenants relating to the private placement. These covenants required a
minimum net income for the fiscal year-end by Pico Macom and limited certain
financial ratios. The holders of the subordinated debt and the redeemable
preferred stock have issued waivers of these violations effective July 31,
1997 and the Company negotiated new, less restrictive covenants, with which
management believes the Company can comply.
In response to the cable TV industry reduction in demand for the
Company's products during fiscal year 1997, management determined in the
fourth quarter of fiscal year 1997 that the existing credit arrangements
along with the ongoing inventory reduction program was not likely to provide
sufficient cash to fund the Company's operations at anticipated levels for
fiscal year 1998 and beyond. Consequently, the Company decided to pursue
other financing alternatives including, but not limited to, additional
subordinated debt financing and adjustments to the availability formula of
Pico Macom's revolving
25
<PAGE>
line of credit in order to increase the amount available to borrow against
the credit facility.
On September 12, 1997 the Company completed a private placement
financing totaling $1,650,000 with two U.S.-based institutional investors to
provide funds for general working capital requirements. The private
placement provides for an investment of up to $1,485,000 of three-year 10
percent junior subordinated debentures by Allied Capital Corporation and
affiliates, and an investment of $165,000 of three-year 10 percent redeemable
preferred stock by The Sinkler Corporation. In connection with the
financing, the Company has agreed to issue to the investor's warrants for up
to 1,442,000 shares of its common stock, of which 300,000 Shares are subject
to call provisions. The Company may purchase from the investors up to
300,000 shares of the warrant shares, at $3.00 per share, or if the warrants
have not been exercised, at $3.00 per share less the exercise price.
As of October 31, 1997 the Company had received cash of $985,000 of the
total financing facility, with $500,000 still available to fund the Company's
operating needs. The remaining $150,000 for the private placement facility
represents previously issued subordinated notes payable of the Company which
were purchased by Allied Capital Corporation and affiliates in June 1997.
Additionally, the Company issued to Allied Capital Corporation and affiliates
860,441 warrants to purchase shares of the Company's common stock, and the
Company issued to The Sinkler Corporation 144,200 warrants to purchase shares
of the Company's common stock, of which 209,010 shares are subject to the
above call provision. Warrants to purchase up to 437,359 additional shares
of the Company's common stock will be issued to Allied Capital Corporation
when the balance of the financing is funded.
The warrants issued in conjunction with this financing are exercisable
no later than 6 years from the date of issuance, at a price equal to the
average trading price of the Company's common stock over the 90-day period
commencing 30 days after the Company files its fiscal year 1997 Annual Report
on Form 10-K with the Securities and Exchange Commission.
As a condition to the financing, Allied requested that the Company's
Board of Directors participate in Allied's investment on the same terms and
conditions as Allied. Four members of the Company's Board of Directors have
participated with Allied for an amount up to $335,000.
Profitability of operations is subject to various uncertainties
including general economic conditions and the actions of actual or potential
competitors and customers. The Company's future depends on the growth of the
cable TV market in the United States and internationally. In the United
States, a number of factors could affect the future profitability of the
Company, including changes in the regulatory climate for cable TV, changes in
the competitive structure of the cable and telecommunications industries or
changes in the technology base of the industry. Internationally, the
Company's profitability depends on its ability to penetrate new markets in
the face of competition from other United States and foreign companies.
OTHER
IMPACT OF TECHNOLOGICAL OBSOLESCENCE
The Company's products are subject to technological obsolescence as
government regulations, competition or the nature of the broadband
communications industry could require changes in the current product lines.
The rapid changes in all sectors of the communications industry and the entry
of new technology could significantly impact the sale of the Company's
26
<PAGE>
products. While management is not aware of any specific products,
regulations or requirements that would create significant obsolescence in the
next fiscal year, technological obsolescence could materially affect the
operating results of the Company in any fiscal period.
IMPACT OF INFLATION AND CHANGING PRICES
Although the Company cannot accurately determine the precise effect of
inflation, the Company has experienced some increased costs of materials,
supplies, salaries and benefits due to inflation. The Company attempts to
pass on increased costs and expenses by increasing selling prices, when
possible, and by developing more useful and economical products that can be
sold at favorable profit margins.
FOREIGN OPERATIONS
Because a substantial portion of the Company's products are purchased
from vendors in Taiwan, China and Thailand (the "Far East"), the Company is
subject to price increases imposed by those vendors to compensate for
currency fluctuations. During fiscal years 1995 through 1997 the U.S. dollar
generally maintained it's purchasing power against the currencies of the
countries from which the Company purchases most of its products. If the U.S.
dollar were to weaken, the Company would consider setting price increases for
its products. Continued weakening of the U.S. dollar could cause the Company
to lose its competitive costing edge to U.S.-based manufacturers which could
adversely affect operating results. Restrictive foreign government
regulations or political instability could also materially affect the
operating results of the Company. As discussed above, foreign economic and
financial uncertainties could also materially affect sales levels to foreign
customers which could materially affect the operating results of the Company.
FORWARD LOOKING STATEMENTS
Statements which are not historical facts, including statements about
the Company's confidence, strategies and expectations, technologies and
opportunities, industry and market segment growth, demand and acceptance of
new and existing products, and return on investments in products and markets,
are forward looking statements that involve risks and uncertainties,
including without limitation, the effect of general economic and market
conditions, industry market conditions caused by changes in the supply and
demand for the Company's products, the continuing strength of the markets the
Company serves, competitor pricing, maintenance of the Company's current
momentum and other factors.
ITEM 7A. DERIVATIVE EXPOSURE
Not applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
27
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
Pico Products, Inc.:
We have audited the accompanying consolidated balance sheets of Pico Products,
Inc. and its subsidiaries as of July 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity (deficiency), and
cash flows for each of the three years in the period ended July 31, 1997. Our
audits also included the financial statement schedule listed at Item 14a(2).
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Pico Products, Inc. and its
subsidiaries at July 31, 1997 and 1996, and the results of their operations and
their cash flows for each of the three years in the period ended July 31, 1997
in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Los Angeles, California
November 7, 1997
28
<PAGE>
PICO PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
July 31,
------------------------
1997 1996
----------- -----------
ASSETS (Note C):
CURRENT ASSETS:
Cash and cash equivalents $ 22,286 $ 159,669
Accounts receivable (less allowance
for doubtful accounts: July 31, 1997,
$200,000; July 31, 1996, $200,000) 5,621,232 5,289,288
Inventories (Note B) 11,961,229 10,933,244
Prepaid expenses and other current
assets 339,760 191,215
----------- -----------
TOTAL CURRENT ASSETS 17,944,507 16,573,416
----------- -----------
PROPERTY, PLANT AND EQUIPMENT (Note E):
Buildings 217,255 217,255
Leasehold improvements 279,842 345,136
Machinery and equipment 2,900,270 2,637,609
----------- -----------
3,397,367 3,200,000
Less accumulated depreciation
and amortization 2,431,779 2,393,995
----------- -----------
965,588 806,005
----------- -----------
OTHER ASSETS:
Patents and licenses (less accumulated
amortization: July 31, 1997, $68,156;
July 31, 1996, $62,180) 153,054 159,030
Excess of cost over net assets of
businesses acquired (less accumulated
amortization; July 31, 1997, $395,970;
July 31, 1996, $366,930) 181,465 210,505
Deposits and other noncurrent assets 235,614 195,582
Debt issuance costs (less accumulated
amortization; July 31, 1997, $43,760;
July 31, 1996; $-0-) 415,683 -
----------- -----------
985,816 565,117
----------- -----------
$19,895,911 $17,944,538
----------- -----------
----------- -----------
See notes to consolidated financial statements.
29
<PAGE>
PICO PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
July 31,
--------------------------
1997 1996
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIENCY)
CURRENT LIABILITIES:
Notes payable (Note C) $ 9,425,299 $ 8,227,776
Current portion of long-term debt
(Note D) 132,902 311,086
Accounts payable 3,348,977 3,921,081
Accrued expenses:
Legal and accounting 212,976 170,497
Payroll and payroll taxes 486,397 506,742
Other accrued expenses 395,552 312,193
Restructuring costs (Note N) 580,035 -
------------ -----------
TOTAL CURRENT LIABILITIES 14,582,138 13,449,375
------------ -----------
LONG-TERM DEBT (Note D) 4,915,286 39,414
------------ -----------
RESTRUCTURING COSTS (Note N) 298,744 -
------------ -----------
COMMITMENTS AND CONTINGENCIES - -
(Notes E and M)
REDEEMBABLE PREFERRED STOCK, $.01 par
value; authorized 500,000 shares;
issued and outstanding 1,000 shares
at July 31, 1997 and -0- shares at
July 31, 1996 (Note D) 917,086 -
------------ -----------
SHAREHOLDERS' EQUITY (DEFICIENCY)
(Notes K and L):
Common shares, $.01 par value;
authorized 15,000,000 shares
issued and outstanding 4,185,913
shares at July 31, 1997 and
4,052,246 shares at July 31, 1996 41,859 40,522
Additional paid-in capital 22,715,292 22,035,178
Stock subscriptions receivable (105,000) (115,000)
Accumulated deficit (23,381,874) (17,409,924)
Cumulative translation adjustment (87,620) (95,027)
------------ -----------
TOTAL SHAREHOLDERS' EQUITY (DEFICIENCY) (817,343) 4,455,749
------------ -----------
$19,895,911 $ 17,944,538
------------ -----------
------------ -----------
See notes to consolidated financial statements.
30
<PAGE>
PICO PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended July 31,
1997 1996 1995
----------- ----------- -----------
SALES (Note I) $35,448,383 $36,051,304 $33,367,249
COSTS AND EXPENSES
Cost of Sales 30,471,220 27,377,269 25,225,052
Selling and administrative
expenses (Notes H and N) 9,479,008 8,140,285 7,145,472
----------- ----------- -----------
TOTAL COSTS AND EXPENSES 39,950,228 35,517,554 32,370,524
----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (4,501,845) 533,750 996,725
OTHER INCOME (Note F) 13,496 22,060 281,897
INTEREST EXPENSE (1,398,934) (955,465) (712,921)
----------- ----------- -----------
INCOME (LOSS)
BEFORE INCOME TAXES (5,887,283) (399,655) 565,701
INCOME TAX PROVISION (Note G) - - 40,000
----------- ----------- -----------
NET INCOME (LOSS) (5,887,283) (399,655) 525,701
DIVIDENDS ON PREFERRED STOCK 84,667 - -
----------- ----------- -----------
NET INCOME(LOSS) ATTRIBUTABLE TO
COMMON STOCK $(5,971,950) $ (399,655) $ 525,701
----------- ----------- -----------
----------- ----------- -----------
NET INCOME (LOSS) ATTRIBUTABLE
TO COMMON STOCK PER COMMON
AND COMMON EQUIVALENT SHARE:
Primary $ (1.45) $ (0.11) $ 0.12
----------- ----------- -----------
----------- ----------- -----------
Fully Diluted $ (1.45) $ (0.11) $ 0.12
----------- ----------- -----------
----------- ----------- -----------
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING:
Primary 4,113,229 3,797,972 4,240,241
----------- ----------- -----------
----------- ----------- -----------
Fully Diluted 4,113,229 3,797,972 4,240,241
----------- ----------- -----------
----------- ----------- -----------
See notes to consolidated financial statements.
31
<PAGE>
PICO PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF COMMON ADDITIONAL STOCK ACCUMULATED CUMULATIVE TOTAL
COMMON SHARES - PAID-IN SUBSCRIPTIONS DEFICIT TRANSLATION
SHARES PAR VALUE CAPITAL RECEIVABLE ADJUSTMENT
--------- ---------- ----------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE
August 1, 1994 3,632,046 $36,320 $21,561,555 $ 0 $(17,535,970) $(101,114) $ 3,960,791
Cumulative
Translation
Adjustment - - - - - 23,215 23,215
Shares issued
under stock
incentive plans 5,000 50 3,700 - - - 3,750
Net income - - - - 525,701 - 525,701
--------- ---------- ----------- ------------- ------------- ------------- -----------
BALANCE
July 31, 1995 3,637,046 36,370 21,565,255 0 (17,010,269) (77,899) 4,513,457
--------- ---------- ----------- ------------- ------------- ------------- -----------
Cumulative
Translation
Adjustment - - - - - (17,128) (17,128)
Shares issued
under stock
incentive plans 165,200 1,652 107,423 - - - 109,075
Shares issued
for exercise of
stock warrants 250,000 2,500 247,500 - - - 250,000
Stock subscrip- -
tions receivable - - 115,000 (115,000) - -
Net loss - - - - (399,655) - (399,655)
--------- ---------- ----------- ------------- ------------- ------------- -----------
BALANCE
July 31, 1996 4,052,246 40,522 22,035,178 (115,000) (17,409,924) (95,027) 4,455,749
--------- ---------- ----------- ------------- ------------- ------------- -----------
Cumulative
Translation
Adjustment - - - - 7,407 7,407
Shares issued
under stock
incentive plans 33,667 337 46,664 - - - 47,001
Shares issued
for exercise of
stock warrants 100,000 1,000 99,000 - - - 100,000
Stock subscrip-
tions receivable (10,000) 10,000 - - -
Value of stock
warrants issued
(Note D) - - 544,450 - - - 544,450
Preferred dividends - - - - (84,667) - (84,667)
Net loss - - - - (5,887,283) - (5,887,283)
--------- ---------- ----------- ------------- ------------- ------------- -----------
Balance
July 31, 1997 4,185,913 $ 41,859 $22,715,292 $ (105,000) $(23,381,874) $(87,620) $ (817,343)
--------- ---------- ----------- ------------- ------------- ------------- -----------
</TABLE>
See notes to consolidated financial statements.
32
<PAGE>
PICO PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended July 31,
--------------------------------------
1997 1996 1995
----------- ----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(5,887,283) $ (399,655) $ 525,701
Adjustments to reconcile net
income (loss) to net cash
used in operating activities:
Depreciation and amortization 521,681 362,367 370,176
Provision for losses on
accounts receivable 124,119 143,769 142,897
Provision for inventory
obsolescence 2,200,000 174,900 91,200
Changes in operating assets
and liabilities:
Accounts receivable (456,063) 459,281 (1,617,523)
Inventories (3,220,578) (1,365,108) (2,657,205)
Prepaid expenses and
other current assets (148,545) (7,345) 197,372
Other assets 15,846 (115,074) (3,591)
Accounts payable (572,104) 594,715 1,439,609
Accrued expenses 44,027 100,635 (168,786)
Other liabilities - (466,066) 58,367
Restructuring costs (Note N) 878,779 - -
----------- ----------- ----------
NET CASH USED IN
OPERATING ACTIVITIES (6,500,121) (513,581) (1,621,783)
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (283,231) (228,749) (220,532)
------------ ----------- ----------
Continued on next page.
See notes to consolidated financial statements.
33
<PAGE>
PICO PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Year Ended July 31,
--------------------------------------
1997 1996 1995
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of
credit agreements $1,197,523 $ 449,121 $1,991,373
Issuance of long-term debt (Note D) 5,000,000 - -
Issuance of preferred stock (Note D) 1,000,000 - -
Private placement financing costs
(Note D) (459,443) - -
Principal payments on long-term
debt (115,911) (134,772) (92,142)
Proceeds from exercise of stock
options 37,800 86,125 3,000
Dividends paid on preferred stock (14,000) - -
----------- ----------- ----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 6,645,969 400,474 1,902,231
----------- ----------- ----------
NET INCREASE (DECREASE)IN CASH
AND CASH EQUIVALENTS (137,383) (341,856) 59,916
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 159,669 501,525 441,609
----------- ----------- ----------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 22,286 $ 159,669 $ 501,525
----------- ----------- ----------
----------- ----------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Year Ended July 31,
--------------------------------------
1997 1996 1995
----------- ----------- ----------
CASH PAID DURING THE YEAR FOR:
Interest $1,324,731 $ 953,955 $ 681,803
----------- ----------- ----------
----------- ----------- ----------
Income taxes $ 10,234 $ 28,950 $ 15,138
----------- ----------- ----------
----------- ----------- ----------
Continued on next page.
See notes to consolidated financial statements.
34
<PAGE>
PICO PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In February 1997 the holders of $100,000 of the Company's notes payable
exercised 100,000 warrants to purchase common stock of the Company at $1.00 per
share. The proceeds from the exercise of the warrants offset the payment due on
the debt.
In fiscal year 1997 the Company financed the purchase of computer, office
and test lab equipment totaling approximately $358,000.
In fiscal year 1996 the Company financed the purchase of office and test
lab equipment totaling approximately $94,000.
In March 1996 the holders of $250,000 of the Company's notes payable
exercised 250,000 warrants to purchase common stock of the Company at $1.00 per
share. The proceeds from the exercise of the warrants offset the payment due on
the debt.
In April 1996 an officer of the Company exercised options to acquire
125,000 shares of the Company's common stock in exchange for a stock
subscription note receivable.
In June 1996 several officers and employees of the Company exercised
options to acquire 50,000 shares of the Company's common stock in exchange for
stock subscription notes receivable.
See notes to consolidated financial statements.
35
<PAGE>
PICO PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Pico
Products, Inc. and its wholly owned subsidiaries. All significant inter-company
balances and transactions have been eliminated in consolidation.
The Company had net losses of $5,887,263 and $399,655 and negative cash
flows from operating activities of $6,500,121 and $513,581 for the years
ended July 31, 1997 and 1996, respectively. It also was in violation of
certain financial debt covenants at July 31, 1997.
The Company obtained waivers of its debt covenant violations and
negotiated new, less restrictive covenants, with which management believes
the Company can comply. Management has also implemented a plan to reduce its
excess inventories and decrease expenses. This plan includes closing its
Hong Kong and Thailand sales offices and selling products in the Far East
through alliances with local distributors.
Profitability of operations is subject to various uncertainties including
general economic conditions and the actions of actual or potential competitors
and customers. The Company's future depends on the growth of the cable TV
market in the United States and internationally. In the United States, a number
of factors could affect the future profitability of the Company, including
changes in the regulatory climate for cable TV, changes in the competitive
structure of the cable and telecommunications industries or changes in the
technology base of the industry. Internationally, the Company's profitability
depends on its ability to penetrate new markets in the face of competition from
other United States and foreign companies.
DESCRIPTION OF BUSINESS
Pico Products, Inc. and its subsidiaries (the "Company") design,
manufacture and distribute products and systems for the pay TV and cable TV
industry (CATV), broadband communications and other signal distribution markets.
These other distribution markets include "private" cable TV systems such as
those found in hotels, schools, hospitals and large apartment complexes.
Private cable systems are referred to in the industry as master antenna (MATV)
or satellite master antenna (SMATV) systems. These systems receive satellite
and "off-air" (or broadcast) signals at a single source known as the "headend".
The signals are processed and then distributed by coaxial or fiber optic cable
to the consumer. Also included in other signal distribution markets are
wireless cable or MMDS (multichannel multipoint distribution systems) and
business-
36
<PAGE>
to-business or direct-to-home (DTH) communications by satellite. The
Company also sells pay TV security products and home satellite market products.
Finally, the Company is pursuing development and introduction of broadband
communications products that will support high speed internet transmissions.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash equivalents,
accounts receivable, accounts payable, and debt instruments. The carrying value
of cash equivalents, accounts receivable and accounts payable, are
representative of their fair values due to their short maturities. The
estimated fair value of the revolving bank line of credit approximates fair
value because of its variable interest rate. It is not practical to estimate
the fair value of the Company's private placement financings due to the lack of
quoted market prices.
CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to credit risk consist
primarily of accounts receivable. Concentration of credit risk with respect to
accounts receivable is generally diversified due to the large number of entities
comprising the Company's customer base and their geographic dispersion. The
Company performs ongoing credit evaluations of its customers and maintains an
allowance for potential credit losses.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent 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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventory costs consist of material, direct labor and overhead.
37
<PAGE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation and
amortization are provided for on the straight-line method over the estimated
useful lives of the assets as follows:
Buildings 20 years
Leasehold improvements Term of lease
Machinery and equipment 3 to 10 years
During the fiscal years ended July 31, 1997 and 1995, approximately
$342,000 and $878,000, respectively, of cost and the related accumulated
depreciation were removed from the accounting records for fully depreciated
assets no longer in use.
Repairs and maintenance costs not extending the useful life of the assets
are expensed in the year incurred. Betterments are capitalized.
PATENTS AND TRADEMARKS
Patents and trademarks are amortized on the straight-line method over the
shorter of their estimated useful lives or the remaining lives of the patents
and trademarks which at July 31, 1997 represented 15 to 26 years.
EXCESS OF COST OVER NET ASSETS OF BUSINESSES ACQUIRED
The excess of the Company's purchase price of subsidiaries over the fair
market value of net assets acquired is being amortized on the straight-line
method over twenty years. The Company reviews the carrying value of all
intangible assets on a regular basis, and if the undiscounted future cash flows
are believed insufficient to recover the remaining carrying value of an
intangible asset, the carrying value is written down to its estimated fair value
in the period the impairment is identified.
REVENUE RECOGNITION
Revenue from sale of products or services is recognized when goods are
delivered or services performed. Reserves for estimated product returns are
provided at the time of sale.
DEBT ISSUANCE COSTS
Debt issuance costs are included in other noncurrent assets and are
amortized over the term of the related debt.
INCOME TAXES
Deferred income taxes reflect the net tax effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and (b) operating loss
and tax credit carryforwards.
38
<PAGE>
INCOME (LOSS) PER SHARE
Income (loss) per common and common equivalent share is based upon the
weighted average number of common shares outstanding during each year, assuming
exercise of dilutive outstanding stock options and warrants under the treasury
stock method. For the years ended July 31, 1997 and 1996, common stock
equivalents and warrants were not included in the computations since their
inclusion would be anti-dilutive.
CERTAIN RECLASSIFICATIONS
The Company has made certain reclassifications to the 1996 and 1995
consolidated financial statements to conform to the classifications used in the
1997 consolidated financial statements.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, ("SFAS 128") "Earnings per Share."
SFAS 128 replaces the presentation of primary earnings per share with a
presentation of basic earnings per share based upon the weighted average number
of common shares for the period. It also requires dual presentation of basic
and diluted earnings per share for companies with complex capital structures.
SFAS 128 will be adopted by the Company for the fiscal quarter ending January
31, 1998 and earnings per share for all prior periods will be restated upon
adoption.
B. INVENTORIES
The composition of inventories was as follows:
July 31,
---------------------------
1997 1996
----------- -----------
Raw materials $ 4,634,967 $ 3,485,548
Work in process 606,218 636,072
Finished goods 6,720,044 6,811,624
----------- -----------
$11,961,229 $10,933,244
----------- -----------
----------- -----------
In the fourth quarter, the Company recognized additional write-downs of
inventories of $1,745,000.
C. NOTES PAYABLE
At July 31, 1997, the Company's Pico Macom, Inc. subsidiary (Pico Macom)
had a $11,000,000 revolving bank line of credit with HSBC Business Loans, a
member of the Hongkong and Shanghai Banking Corporation Group, which provides
for interest at the prime rate (8.5% at July 31, 1997 and 8.25% at July 31,
1996) plus 1.25%. The bank line of credit is used to fund operating
expenses, product purchases and letters of credit for import purchases. The
line of credit is secured by substantially all of Pico Macom's assets,
including all trade accounts receivable and inventories.
39
<PAGE>
The line is structured as a $11,000,000 line of credit with a sublimit of
$1,500,000 for outstanding letters of credit. The amount available to borrow at
any one time is based upon various percentages of eligible accounts receivable
and eligible inventories as defined in the agreement. At July 31, 1997, Pico
Macom had $9,425,299 in revolving loans and $7,871 in letters of credit
outstanding, and the unused portion of the borrowing base was $290,471.
The line of credit arrangement is subject to various financial tests and
covenants, including but not limited to, tangible net worth, working capital and
current ratio requirements; and contains certain restrictions on acquisitions,
capital expenditures and payment of dividends or purchases of stock. The line
of credit is subject to review and renewal on December 31, 1998.
At July 31, 1997, the Company was in violation of several financial
covenants relating to Pico Macom's bank revolving line of credit. These
covenants required a certain minimum net income for the fiscal year ended
July 31, 1997 for Pico Macom and limited certain financial ratios. Pico
Macom's bank has issued a waiver of these violations effective July 31, 1997
and the Company negotiated new, less restrictive covenants, with which
management believes the Company can comply.
D. LONG-TERM DEBT AND REDEEMABLE PREFERRED STOCK
Long-term debt consisted of the following:
July 31,
----------------------
1997 1996
---------- ----------
Subordinated debentures to domestic invest-
ment funds, payable in installments
beginning in fiscal 2001 through fiscal
2004, with interest at 12.0% $5,000,000 -
Debt discount for valuation of stock
warrants issued to domestic investment
funds (425,202) -
Subordinated notes payable to domestic
Investment funds, payable in fiscal 2001,
with interest at 10.0% 150,000 -
Notes payable to Bermuda-based and Jersey-
based investment funds, payable in equal
installments in fiscal 1996 and 1997,
with interest at 8.0% - $250,000
Capital lease obligations (Note E) 319,425 93,737
Other loans payable 3,965 6,763
---------- ----------
5,048,188 350,500
40
<PAGE>
Less current portion 132,902 311,086
---------- ----------
$4,915,286 $ 39,414
---------- ----------
---------- ----------
In November 1996 the Company completed a private placement financing
totaling $6 million with two U.S.-based institutional investors. The private
placement consisted of $5 million of seven-year 12 percent subordinated
debentures and $1 million of seven-year 12 percent redeemable preferred stock.
In connection with the financing, the Company issued warrants to the investors
and to the Company's investment banker for 955,176 shares of its common stock.
These warrants are exercisable no later than 10 years from the date of issuance,
at a price of $1.81 per share.
Additionally, the Company issued warrants to the investors providing for
the purchase, in the aggregate, of up to 18% of the number of shares of the
Company's common stock resulting from the exercise from time-to-time by holders
of options and warrants previously granted by the Company. These contingent
warrants are exercisable no later than 10 years from the date of issuance, at a
price of $1.81 per share.
Various transaction costs totaling $459,443 were incurred in conjunction
with the private placement financing. These costs are being amortized over the
seven-year term of the debt and preferred stock.
The Company has measured the fair value of the warrants issued in
connection with the private placement financing. This value has been
allocated as a discount applied against the related long-term debt and
redeemable preferred stock and is being amortized over the seven-year term of
the subordinated debentures and preferred stock.
The private placement financing agreements require the Company to meet
certain financial covenants which are very similar to the financial covenants
relating to Pico Macom's bank revolving line of credit. Additionally, these new
agreements prohibit the distribution of cash, stock or other property to
shareholders (whether characterized as dividends or otherwise) or the redemption
or repurchase of the Company's capital stock or similar securities, subject to
limited exceptions.
At July 31, 1997 the Company was in violation of several financial
covenants relating to the private placement. These covenants required a
minimum net income for the fiscal year-end and limited certain financial
ratios. The holders of the subordinated debt and the redeemable preferred
stock have issued waivers of these violations effective July 31, 1997 and the
Company negotiated new, less restrictive covenants, with which management
believes the Company can comply.
In June 1997 the holders of $150,000 of the Company's subordinated notes
payable, with interest at 8%, sold the notes to one of the U.S.-based
institutional investors involved in the November 1996 private placement
financing. As of July 31, 1997, the debt has been converted to subordinated
notes payable due in fiscal year 2001, with interest at 10%.
41
<PAGE>
In February 1996, the Company was notified by the holders of two
outstanding notes payable that they intended to exercise 250,000 warrants to
purchase common stock of the Company as an offset against the first $250,000
installment payment due on the debt. This transaction was completed in March
1996.
In February 1997, the Company was notified by the holders of two
outstanding notes payable that they intended to exercise 100,000 warrants to
purchase common stock of the Company, totaling $100,000, against the second
installment or payment due on the debt. This transaction was completed in
February 1997.
Long-term debt and redeemable preferred stock at July 31, 1997 are payable
as follow:
Redeemable
Long-Term Debt Preferred Stock
-------------- ---------------
Year ending July 31, 1998 $ 132,902 -
Year ending July 31, 1999 127,085 -
Year ending July 31, 2000 63,404 -
Year ending July 31, 2001 650,000 100,000
Year ending July 31, 2002 500,000 100,000
Thereafter 3,574,757 717,086
-------------- ---------------
$5,048,188 917,086
-------------- ---------------
-------------- ---------------
E. LEASE COMMITMENTS
The Company leases manufacturing, computer and office equipment under lease
agreements, some of which have been capitalized. These capitalized lease
obligations are payable in monthly and quarterly installments through fiscal
year 2000 and have interest rates varying from 4% to 12%. The Company has
included the cost of equipment under capital leases of $401,920 and $371,824 in
property, plant and equipment at July 31, 1997 and 1996, respectively.
Accumulated amortization on such assets was $47,279 and $262,412 at July 31,
1997 and 1996, respectively.
The Company also leases certain of its manufacturing and office facilities
and equipment under operating lease agreements. Minimum rental commitments at
July 31, 1997 for these leases are as follows:
Capital Operating
-------- ----------
Year ending July 31, 1998 $153,138 $ 458,193
Year ending July 31, 1999 137,525 83,291
Year ending July 31, 2000 65,641 69,794
Year ending July 31, 2001 - 35,569
Year ending July 31, 2002 - 15,526
Thereafter - 9,119
-------- ----------
356,304
Less imputed interest 36,879
--------
$319,425 $ 671,492
-------- ----------
-------- ----------
42
<PAGE>
Renewal options exist on certain of the operating leases for additional
periods at increased rental rates. Total rental expense for the years ended
July 31, 1997, 1996 and 1995 was $677,784, $650,175 and $507,739,respectively.
The Company is also required to pay real estate taxes and other occupancy costs
of the facilities in addition to the above rentals.
F. OTHER INCOME
Other income consisted of the following:
Year Ended July 31,
---------------------------
1997 1996 1995
------- ------- --------
Royalty income $ - $ - $256,657
Interest income 13,496 22,060 25,240
------- ------- --------
$13,496 $22,060 $281,897
------- ------- --------
------- ------- --------
The Company's patent for positive trapping systems expired in fiscal year
1995. Licenses issued for use of this patented technology generated the
Company's royalty income. At July 31, 1995, the Company had fully written off
the patent's cost and the related accumulated amortization from its books and
records.
G. INCOME TAXES
A reconciliation of the Company's income tax provision to that computed
using the Federal statutory rate is as follows:
Year Ended July 31,
-----------------------------------
1997 1996 1995
----------- --------- ----------
Federal tax (benefit)
based on statutory tax rate $(2,061,000) $(140,000) $ 198,000
Other 101,000 318,000 170,000
Change in valuation
allowance 1,960,000 (178,000) (368,000)
Alternative minimum tax - - 40,000
----------- --------- ----------
$ - $ - $ 40,000
----------- --------- ----------
----------- --------- ----------
At July 31, 1997, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $16.8 million which expire in
varying amounts from the year 2000 through the year 2012. Additionally, the
Company has federal tax credit carryforwards of approximately $367,000 which
expire in varying amounts from the year 1998 through the year 2001.
Neither U.S. nor foreign taxes have been provided on the cumulative
undistributed foreign earnings, as of July 31, 1997, due to an exemption
43
<PAGE>
from foreign taxes, which expires in 1998, and the intention of the Company
to permanently reinvest earnings in the operations of foreign subsidiaries.
The following represents the tax effects of significant items comprising
the Company's deferred income taxes as of July 31, 1997 and 1996. The Company
recognized a valuation allowance to offset the net deferred tax asset since the
future benefit of these assets is not assured
July 31,
-----------------------
1997 1996
----------- -----------
Deferred income tax assets:
Differences between book and
tax basis of property $ 136,000 $ 92,000
Reserves not currently deductible 1,353,000 385,000
Other 64,000 49,000
Operating loss carryforwards 6,765,000 5,730,000
Tax credit carryforwards 367,000 469,000
----------- -----------
8,685,000 6,725,000
Valuation allowance (8,685,000) (6,725,000)
----------- -----------
Net deferred income taxes $ -0- $ -0-
----------- -----------
----------- -----------
H. PRODUCT DEVELOPMENT COSTS
Product development costs are expensed as incurred and are included as part
of selling and administrative expenses. Expenses related to product development
for the years ended July 31, 1997, 1996 and 1995 amounted to approximately
$1,340,000, $1,368,000, and $979,000, respectively.
I. SIGNIFICANT CUSTOMERS
In fiscal 1997, 1996 and 1995 the Company's sales to one customer were
approximately 9%, 16%, and 20%, respectively, of the Company's consolidated
sales.
J. RETIREMENT BENEFITS
The Company maintains a defined contribution pension plan (under Internal
Revenue Code Section 401(k)) covering substantially all of its U.S.-based
employees with more than three months of service. Company contributions are
determined at 50% of each employee's voluntary contribution (up to 6% of
compensation) to the plan. The Company's contribution expense totaled $91,407,
$77,856 and $63,958 for the years ended July 31, 1997, 1996 and 1995,
respectively.
K. OTHER STOCK OPTIONS
During fiscal year 1994, the Board of Directors issued nonqualified, non-
plan options to two individuals. These options were issued in November 1993 and
became exercisable in November 1994. A total of 30,000 options were issued at
an average exercise price of $1.29 per share. The Company recognized
compensation expense of $12,292 and $33,958 during
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fiscal year 1995 and fiscal year 1994, respectively, for the difference
between the fair value of the stock options at the date of the grant and the
exercise price of the options.
L. STOCK INCENTIVE PLANS
The Company has four stock incentive plans; the 1981 Non-Qualified Stock
Option Plan (1981 Plan) amended in December, 1991 and in December 1995; the 1982
Incentive Stock Option Plan (1982 Plan) adopted in April 1982; the 1992
Incentive Stock Plan (1992 Plan), adopted in January, 1993 and amended in July,
1994; and the 1996 Incentive Stock Plan (1996 Plan), adopted in December 1996.
The 1981 Plan reserved 450,000 common shares for issuance, the 1982 Plan
reserved 150,000 shares for issuance, the 1992 Plan reserves 175,000 common
shares for issuances and the 1996 Plan reserves 195,000 common shares for
issuance. Each plan is administered by the Board of Directors, or a special
committee thereof, which has the authority to determine the persons, the shares
and the related terms and provisions of the incentives which may be granted.
Under the 1981 Plan, the option exercise price could not be less than 80%
of the fair market value of the shares at the date of grant. Under the 1982
Plan, the option exercise price could not be less than 100% (or 110% if the
optionee owned 10% or more of the Company's outstanding voting securities) of
the fair market value of the shares at the date of grant. Options under the
1981 Plan and the 1982 Plan could not be exercised more than five years and ten
years, respectively, from the date of grant. The 1982 Plan provided limitations
on the number of option shares which could be granted to officers and directors.
In both plans, options became exercisable as specified in the option agreement,
subject to the limitation that no option could be exercised within twelve months
after the date it is granted. The 1982 Plan provided that no incentive stock
options could be granted after April 28, 1992, and the 1981 Plan provided that
no non-qualified stock options could be granted after May 31, 1996.
Under the 1992 Plan, incentive stock options ("ISO"), nonqualified stock
options ("NSO"), stock appreciation rights ("Rights") and stock awards
("Awards") may be granted to eligible persons. The Board of Directors, or a
committee thereof, determines the option prices and vesting periods for all
options granted; however, options may not be exercised less than one nor more
than ten years from the date of grant. The option exercise prices for ISO's
must be at 100% of the fair market value of the shares at the date of grant to
comply with tax regulations. The 1992 Plan specified that each director who is
not also an employee of the Company or any of its affiliates would be awarded an
annual grant of 5,000 NSO's at an option price equal to 80% of the fair market
value on the date of grant. During fiscal year 1994, the Board of Directors
amended the plan by reducing the annual grant to directors to 2,000 NSO's with
option prices and vesting provisions consistent with all other plan options.
During fiscal year 1994, the Board of Directors also determined that NSO's would
be granted at 100% of the fair market value of the shares at the date of grant.
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<PAGE>
Under the 1992 plan, Rights may be granted to holders of stock options
outstanding under the 1981 Plan, the 1982 Plan, or the 1992 Plan, whereby the
holder of such options, in exchange for the surrender of the options to the
Company, will receive from the Company an amount equal to the excess of the fair
market value of the related shares over the option price of the options
surrendered. Awards may be granted to selected recipients, without payment
therefore, as additional compensation for their services to the Company or its
affiliates. Any Awards will be subject to various terms and conditions as
determined by the committee.
The 1996 Plan provisions are essentially the same as the 1992 Plan,
allowing for grants of ISO's, NSO's, Rights and Awards to eligible persons.
Under the 1996 Plan, Rights may be granted to holders of stock options
outstanding under the 1981 Plan, the 1992 Plan, or the 1996 Plan, whereby the
holder of such options, in exchange for the surrender of the options to the
Company, will receive from the Company an amount equal to the excess of the
fair market value of the related shares over the option price of the options
surrendered. Awards may be granted to selected recipients, without payment
therefore, as additional compensation for their services to the Company or
its affiliates. Any Awards will be subject to various terms and conditions
as determined by a committee of the Board of Directors.
In June 1996, the Board of Directors of the Company rescinded the amendment
to the 1981 Plan which provided for extending the expiration date from five
years to ten years for options granted under the Plan. This amendment had been
approved by the shareholders in December 1995.
In April 1996 an officer of the Company exercised options to acquire
125,000 shares of the Company's common stock in exchange for a stock
subscription note receivable. In June 1996 several officers and employees of
the Company exercised options to acquire 50,000 shares of the Company's common
stock in exchange for stock subscription notes receivable.
A SUMMARY OF CHANGES IN SHARES UNDER OPTION FOR THE COMPANY'S FOUR STOCK
INCENTIVE PLANS IS AS FOLLOWS:
Year Ended July 31,
--------------------------------
1997 1996 1995
--------- --------- --------
NON QUALIFIED PLAN (1981):
Outstanding at beginning of year 290,000 410,000 408,500
Options granted - 10,500 6,500
Options expired (33,750) (10,500) -
Options exercised (23,000) (120,000) (5,000)
--------- --------- --------
Outstanding at end of year @ 233,250 * 290,000 410,000
--------- --------- --------
--------- --------- --------
Exercisable at end of year @ 227,083 * 268,670 370,000
--------- --------- --------
--------- --------- --------
Weighted average
exercise price of options -
Outstanding at beginning of year $ 0.95 $ 0.75 $ 0.80
Options granted $ -- $ 1.81 $ 2.50
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<PAGE>
Options expired $ 1.26 $ 1.20 $ --
Options exercised $ 1.12 $ 0.60 $ 0.60
Outstanding at end of year $ 0.89 $ 0.95 $ 0.75
Exercisable at end of year $ 0.86 $ 0.87 $ 0.75
* includes options to acquire 175,000 shares of the Company's common
stock which were exercised in exchange for stock subscription notes
receivable during fiscal year 1996.
@ includes options to acquire 165,000 shares of the Company's common
stock which were exercised in exchange for stock subscription notes
receivable during fiscal year 1996.
INCENTIVE PLAN (1982):
Outstanding at beginning of year - 45,200 45,200
Options exercised - (45,200) -
--------- --------- --------
Outstanding at end of year - - 45,200
--------- --------- --------
--------- --------- --------
Exercisable at end of year - - 45,200
--------- --------- --------
--------- --------- --------
Weighted average
exercise price of options -
Outstanding at beginning of year $ -- $ 0.31 $ 0.31
Options exercised $ -- $ 0.31 $ --
Outstanding at end of year $ -- $ -- $ 0.31
Continued on next page
47
<PAGE>
STOCK PLAN (1992) Year Ended July 31,
- ---------------------- --------------------------------
(Nonqualified options) 1997 1996 1995
-------- -------- --------
Outstanding at beginning of year 135,000 114,000 45,000
Options granted 10,000 23,500 69,000
Options expired (17,833) (2,500) --
Options exercised (10,667) -- --
-------- -------- --------
Outstanding at end of year 116,500 135,000 114,000
-------- -------- --------
-------- -------- --------
Exercisable at end of year 76,673 58,832 28,000
-------- -------- --------
-------- -------- --------
Weighted average
exercise price of options -
Outstanding at beginning of year $ 2.19 $ 2.29 $ 1.16
Options granted $ 1.62 $ 1.83 $ 3.03
Options expired $ 2.43 $ 3.19 $ --
Options exercised $ 1.13 $ -- $ --
Outstanding at the end of year $ 2.20 $ 2.19 $ 2.29
Exercisable at end of year $ 2.13 $ .85 $ 1.13
STOCK PLAN (1996) Year Ended July 31,
- ---------------------- --------------------------------
(Nonqualified options) 1997 1996 1995
-------- -------- --------
Outstanding at beginning of year 120,000 -0- -0-
Options granted 7,500 120,000 -0-
Options expired (75,000) -0- -0-
Options exercised -0- -0- -0-
-------- -------- --------
Outstanding at end of year 52,500 120,000 -0-
-------- -------- --------
-------- -------- --------
Exercisable at end of year 14,999 -0- -0-
-------- -------- --------
-------- -------- --------
Weighted average
exercise price of options -
Outstanding at beginning of year $ 2.34 $ -- $ --
Options granted $ 2.09 $ 2.34 $ --
Options expired $ 2.34 $ -- $ --
Options exercised $ -- $ -- $ --
Outstanding at the end of year $ 2.25 $ 2.34 $ -0-
Exercisable at end of year $ 2.28 $ -0- $ -0-
Significant option groups outstanding at July 31, 1997 and related
weighted average price and life information follow:
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at July 31, 1997 Life Price at July 31,1997 Price
- -------- ---------------- ---------------- -------- --------------- --------
$ .60- .80 165,000 # $ .64 165,000 $ .64
1.00-1.50 93,000 1.4 years 1.14 87,668 1.12
1.62-2.34 79,250 4.0 years 2.10 20,581 2.18
2.50-3.38 60,000 2.2 years 3.08 40,506 3.08
3.94 5,000 1.5 years 3.94 5,000 3.94
------- -------
402,250 318,755
------- -------
------- -------
# Options were exercised for stock subscription notes receivables during
fiscal year 1996.
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<PAGE>
The weighted average fair value of the stock options granted from the 1981
Plan, the 1992 Plan, and the 1996 Plan during fiscal years 1997 and 1996 was
$1.53 and $ 1.39 respectively. The fair value of each stock option grant is
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions used:
Year Ended July 31,
1997 1996
--------- ---------
Expected life 5.0 years 5.0 years
Risk-free interest rate 6.23% 6.32%
Volatility 83% 83%
Dividend yield - -
The Company has applied the provisions of APB Opinion 25 to account for
stock options, under which no compensation cost has been recognized for stock
option awards. Had compensation costs for the Company's stock incentive
plans been determined consistent with the provisions of Statement of
Financial Accounting Standards Number 123, the Company's pro-forma net income
(loss) attributable to common stock and earnings (loss) per share for fiscal
years 1997 and 1996 would have been as follows:
Year Ended July 31,
1997 1996
----------- ---------
Net income (loss)
Attributable to Common Stock $(5,988,898) $(406,892)
----------- ---------
----------- ---------
Net income (loss) attributable
to common stock per common
share:
Primary $ (1.46) $ (0.11)
----------- ---------
----------- ---------
Fully Diluted $ (1.46) $(0.11)
----------- ---------
----------- ---------
Because options vest over several years and additional options may be granted
each year, the effects on pro forma net loss and related per share amounts
presented above are not representative of the effects for future years.
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<PAGE>
M. COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
The majority of the SMATV electronic components sold by Pico Macom are
manufactured under contract on an exclusive basis by one subcontractor in
Taiwan. The Company is committed to procure a minimum of approximately
$6,000,000 of products from this subcontractor through fiscal year 1998.
Management believes that the Company's relationship with this subcontractor is
excellent and that the financial strength of the subcontractor is strong.
However, the loss of this subcontractor could have a material adverse impact on
the Company's operations until the Company could obtain an alternative source of
supply. The contract does not require the subcontractor to maintain a parts
inventory, so that from time-to-time delays are possible in completing customer
orders. The current contract expires in May 1998 and management anticipates
renewing the contract prior to its expiration. Most of the other products
obtained from foreign-based vendors are available from a number of different
subcontractors.
EAGLE LITIGATION
On July 30, 1997, Eagle Comtronics, Inc. ("Eagle") filed a motion in the
United States District Court for the Northern District of New York to amend the
complaint for patent infringement it had filed in 1979 against the Company.
This 1979 action had been settled by Consent Judgment in 1988, pursuant to which
the Company and Eagle entered into a License Agreement providing for specified
royalty payments from Eagle to the Company. Eagle's motion sought the District
Court's permission to proceed against the Company under various legal theories
for breach of the License Agreement, based on Eagle's allegation that the
Company, in violation of the License Agreement's "most favored nation" clause,
granted a license to a third party (Arrow Communication Laboratories, Inc.) on
more favorable terms than those provided to Eagle. Eagle sought damages of
approximately $1,600,000 plus interest and attorneys fees. The Company believed
that Eagle's motion was procedurally improper and that, even if the amended
complaint were allowed by the District Court, it had meritorious defenses to the
claims stated in the amended complaint.
The Company responded to Eagle's motion, and Eagle promptly withdrew the
motion to file an amended complaint. At the same time Eagle filed a complaint
in New York State Supreme Court similar to the proposed amended federal
complaint. Management believes that the Company has meritorious defenses to
Eagle's action and that such suit will not have any material adverse effect on
the Company.
ARCOM LITIGATION
In November 1991, Arrow Communication Laboratories, Inc. (Arcom) of
Syracuse, New York initiated a lawsuit in the New York Supreme Court, which,
as amended, alleged that Arcom had a paid-up license with respect
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<PAGE>
to the Company's patent for positive trapping systems and that Arcom was
entitled to unspecified damages based on overpayment of royalty amounts.
Arcom also claimed that it was entitled to compensatory damages in excess of
$250,000, plus punitive damages of $3,000,000, as a result of a Company press
release announcing termination of the license agreement.
The Company initiated a patent infringement suit against Arcom in the
United States District Court for the Northern District of New York, which sought
treble damages for willful infringement plus attorneys fees. The Company
requested that the Court grant a preliminary injunction to prevent Arcom from
infringing its patent. At a Court hearing in February 1994, the parties agreed,
and it was ordered by the Court, that Arcom would post as security amounts equal
to the royalties due to the Company for the manufacture and sale of product
covered by the license agreement from December 15, 1991, the date that the
license would have terminated, until the expiration of the patent in February
1995. Through July 31, 1995 Arcom had made cash payments of $462,066 covering
royalties through February 14, 1995. The Company did not include these amounts
in income in any fiscal period but recorded a current liability for $462,066 at
July 31, 1995. In addition, Arcom agreed to post an irrevocable letter of
credit in an amount deemed sufficient to permit recovery of a significant
portion of the Company's damages if it were to prevail on its willful In-
fringement claim. In exchange, the Company withdrew its request for a
preliminary injunction.
In May, 1996, the Company and Arcom agreed to settle the foregoing
lawsuits, pursuant to which all suits were terminated and dismissed with
prejudice. As part of this agreement, the Company and Arcom, respectively,
granted each other full releases from liability, the Company released certain
deposits and other collateral provided to the Company by Arcom during the
litigation, and the Company reimbursed Arcom approximately $70,000 for certain
fees and expenses.
EPA INFORMATION REQUEST
In March 1995, a subsidiary of the Company received a Joint Request for
Information (the "Information Request") from the United States Environmental
Protection Agency, Region II (the "EPA"), under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), with
respect to the release and/or threatened release of hazardous substances,
hazardous wastes, pollutants or contaminants into the environment at the
Onondaga Lake Site, Syracuse, Onondaga County, New York. The Company learned
that the EPA added the Onondaga Lake Site to the Superfund National Priorities
List in December 1994 and has completed an onsite assessment of the degree of
hazard. The EPA has indicated that the Company is only one of 26 companies
located in the vicinity of Onondaga Lake or its tributaries that have received
a similar Information Request.
The Information Request related to the activities of the Company's Printed
Circuit Board Division, which was sold to a third party in 1992,
51
<PAGE>
and which conducted operations within the specified area. Under the
Agreement of Sale with the buyer, the Company retained liability for
environmental obligations which occurred prior to the sale.
The Company has provided all information requested by the EPA. The
Information Request does not designate the Company as a potentially responsible
party, nor has the EPA indicated the basis upon which it would designate the
Company as a potentially responsible party. The Company is therefore unable to
state whether there is any material likelihood for liability on its part, and,
if there were to be any such liability, the basis of any sharing of such
liability with others.
In March 1997 the Company received a follow-on request for additional
information in this matter and has provided all information requested.
OTHER
The Company is involved, from time to time, in certain other legal actions
arising in the normal course of business. Management believes that the outcome
of other litigation will not have a material adverse effect on the Company's
consolidated financial statements.
N. RESTRUCTURING COSTS
The Company has recorded restructuring expenses of approximately $900,000
in the fourth quarter of fiscal year 1997 related to the realignment of its
operations and a contract settlement with the Company's former chairman and
chief executive officer. The Company has decided to pursue product distribution
in the Far East through alliances with local distributors, and therefore will
incur the costs of closing down its Hong Kong office.
SUBSEQUENT EVENT
On September 12, 1997 the Company completed a private placement
financing totaling $1,650,000 with two U.S.-based institutional investors to
provide funds for general working capital requirements. The private
placement provides for an investment of up to $1,485,000 of three-year 10
percent junior subordinated debentures and $165,000 of three-year 10 percent
redeemable preferred stock. In connection with the financing, the Company
has agreed to issue to the investors warrants for up to 1,442,000 shares of
its common stock, of which 300,000 shares are subject to call provisions. The
Company may purchase from the investors up to 300,000 shares of the warrant
shares, at $3.00 per share, or if the warrants have not been exercised, at
$3.00 per share less the exercise price.
As of October 31, 1997 the Company had received cash of $985,000 of the
total financing facility, with $500,000 still available to fund the Company's
operating needs. The remaining $150,000 of the private placement facility
represents previously issued subordinated notes payable of the Company which
were purchased by one of the institutional investors in June 1997.
Additionally, the Company issued to the investors warrants for 1,004,641
shares of its common stock, of which 209,010 shares are subject to the above
call provision. Warrants to purchase an
52
<PAGE>
additional 437,359 shares will be issued to the investors when the balance of
the financing is funded.
The warrants issued in conjunction with this financing are exercisable no
later than 6 years from the date of issuance, at a price equal to the average
trading price of the Company's common stock over the 90-day period commencing 30
days after the Company files its fiscal year 1997 Annual Report on Form 10-K
with the Securities and Exchange Commission.
As a condition to the financing, Allied requested that the Company's Board
of Directors participate in Allied's investment on the same terms and conditions
as Allied. Four members of the Company's Board of Directors have participated
with Allied for an amount up to $335,000.
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<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance charged to Balance
beginning cost and end of
Description of period expenses Deduction* Period
- ----------- --------- --------- ---------- --------
Fiscal Year Ended July 31, 1995:
Allowance for
doubtful accounts $295,000 $142,897 $147,897 $290,000
Fiscal Year Ended July 31, 1996:
Allowance for
doubtful accounts $290,000 $143,769 $233,769 $200,000
Fiscal Year Ended July 31, 1997:
Allowance for
doubtful accounts $200,000 $124,119 $124,119 $200,000
* Write-off of uncollectible accounts receivable and other adjustments.
54
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
55
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information called for by this item is incorporated by reference to the
Company's Proxy Statement for its 1997 annual meeting of shareholders which will
be filed prior to November 28, 1997.
ITEM 11. EXECUTIVE COMPENSATION.
The information called for by this item is incorporated by reference to the
Company's Proxy Statement for its 1997 annual meeting of shareholders which will
be filed prior to November 28, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information called for by this item is incorporated by reference to the
Company's Proxy Statement for its 1997 annual meeting of shareholders which will
be filed prior to November 28, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by this item is incorporated by reference to the
Company's Proxy Statement for its 1997 annual meeting of shareholders which will
be filed prior to November 28, 1997.
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. The following consolidated financial statements are included in
Part II Item 8:
Independent Auditors' Report
Consolidated Balance Sheets as of July 31, 1997 and 1996
Consolidated Statements of Operations for the Years Ended July 31,
1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity for the Years Ended
July 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended July 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements
2. The following consolidated financial statement schedule should be read
in conjunction with the consolidated financial statements set forth
in Part II Item 8:
Valuation and Qualifying Accounts
All other schedules called for under Regulation S-X are not submitted
because they are not applicable or not required or because the
required information is not material or is included in the
consolidated financial statements or notes thereto.
3. See Index to Exhibits for a list of exhibits to this Annual Report.
(b) Reports on Form 8-K.
None.
57
<PAGE>
(C) INDEX TO EXHIBITS
3(a) Complete copy of the Certificate of Incorporation of the Company, as
amended on November 19, 1996.
3(b)e By-Laws of the Company, as amended on December 17, 1987.
4(a)b 1981 Non-Qualified Stock Option Plan.
4(b)a 1982 Incentive Stock Option Plan.
4(c)i 1992 Incentive Stock Plan.
4(d)j Warrant Certificates issued to Scimitar Development Capital Fund and
Scimitar Development Capital "B" Fund, dated February 10, 1993.
4(e)k Warrant Certificate issued to City National Bank, dated February 10,
1993.
4(f)m Amendment to 1992 Incentive Stock Plan.
4(g)r Amendment to 1981 Non-Qualified Stock Option Plan.
4(h)s Investment Agreement between the Company and certain of its
subsidiaries, and Allied Capital Corporation and certain of its
affiliated companies, dated November 21, 1996.
4(i)s Subordinated Secured Debenture issued by the Company and certain of
its subsidiaries, payable to Allied Capital Corporation, dated
November 21, 1996. The Company has issued subordinated secured
debentures in substantially the same form as this debenture to the
following parties for the following amounts:
Holder Amount
----------------------------- ----------
Allied Investment Corporation $2,300,000
Allied Investment Corporation II $1,450,000
Allied Capital Corporation II $ 550,000
4(j)s Letter Agreement covering the issuance and sale by the
Company of Preferred Stock to The Sinkler Corporation, dated
November 21, 1996.
4(k)s Stock Purchase Warrant issued by the Company to Allied
Capital Corporation, dated November 21, 1996. The Company
has issued warrants in substantially the same form as this
warrant to the following parties for the following number of
shares:
See page 62 for Key to Index of Exhibits Incorporated by Reference.
58
<PAGE>
(c) INDEX TO EXHIBITS (CONTINUED)
Holder Shares
----------------------------- -------
Allied Investment Corporation 358,484
Allied Investment Corporation II 226,001
Allied Capital Corporation II 85,724
The Sinkler Corporation 155,863
Shipley Raidy Capital Partners, LP 20,000
4(l)s Stock Purchase Warrant issued by the Company to Allied
Capital Corporation, dated November 21, 1996. The Company
has issued warrants in substantially the same form as this
warrant to the following parties for the following
percentage of shares:
Percentage of
Holder Shares
----------------------------- -----------
Allied Investment Corporation 6.9%
Allied Investment Corporation II 4.35%
Allied Capital Corporation II 1.65%
The Sinkler Corporation 3.0%
4(m)s Registration Rights Agreement between the Company, Allied
Capital Corporation and certain of its affiliated companies,
Scimitar Development Capital Fund and Scimitar Development
Capital "B" Fund, Shipley Raidy Capital Partners, LP, and
The Sinkler Corporation, dated November 21,1996.
4(n)t Amended and Restated 1996 Incentive Stock Plan.
4(o) Investment Agreement between the Company and certain of its
subsidiaries, and Allied Capital Corporation and certain of its
affiliated companies, dated September 12, 1997.
4(p) Junior Subordinated Secured Debenture issued by the Company and
certain of its subsidiaries, payable to Allied Capital
Corporation, dated September 12, 1997. The Company has issued
subordinated secured debentures in substantially the same form as
this debenture to the following parties for the following
amounts:
Holder Amount
----------------------------- -------
Allied Investment Corporation $374,300
Allied Capital Corporation II $394,000
See page 62 for Key to Index of Exhibits Incorporated by Reference.
59
<PAGE>
4(q) Letter Agreement covering the issuance and sale by the
Company of Preferred Stock to The Sinkler Corporation, dated
September 12, 1997.
4(r) Stock Purchase Warrant issued by the Company to Allied
Capital Corporation, dated September 12, 1997. The Company
has issued warrants in substantially the same form as this
warrant to the following parties for the following number of
shares:
Holder Shares
----------------------------- -------
Allied Investment Corporation 258,944
Allied Capital Corporation II 272,572
The Sinkler Corporation 114,200
4(s) Stock Purchase Warrant Subject to Call issued by the Company
to Allied Capital Corporation, dated September 12, 1997.
The Company has issued warrants in substantially the same
form as this warrant to the following parties for the
following number of shares:
Holder Shares
----------------------------- -------
Allied Investment Corporation 68,024
Allied Capital Corporation II 71,604
The Sinkler Corporation 30,000
4 (t) First amendment to Investment Agreement between the Company
and certain of its subsidiaries, and Allied Capital
Corporation and certain of its affiliated Companies, dated
September 12, 1997.
10(a)f The Company product warranties
10(b)c Pico (St. Kitts) Limited lease on Pond Pasture Industrial
Estate, Basseterre, St. Christopher and Nevis
10(c)d Pico Macom, Inc. lease on approximately 60,000 square feet
of building at 12500 Foothill Blvd., Lakeview Terraace,
California.
10(d)g Amendment to Pico Macom, Inc. lease of building at 12500
Foothill Blvd., Lakeview Terrace, California.
10(e)e Lease on office of Pico Macom Taiwan Co., Ltd.
See page 62 for Key to Index of Exhibits Incorporated by Reference.
60
<PAGE>
(c) INDEX TO EXHIBITS (continued):
10(f)g Exclusive Manufacturing Agreement between Pico Macom, Inc.
and Goodmind Industries, dated April 26, 1989.
10(g)k Amendment to Exclusive Manufacturing Agreement between Pico
Macom, Inc. and Good Mind Industries (dated April 26, 1989) -
amendment dated April 27, 1993
10(h)l Loan and Security Agreement between Pico Macom, Inc. and Marine
Midland Business Loans, Inc. dated May 25, 1994
10(i)o Employment Agreement between Pico Macom, Inc. and Norman
Reinhardt, dated March 22, 1995.
10(j)o Amendment to Exclusive Manufacturing/Marketing Agreement between
Pico Macom, Inc. and Goodmind Industries (dated April 26, 1989) -
amendment dated April 10, 1995.
10(k)p Amendments to the Loan and Security Agreement between Pico Macom,
Inc. and Marine Midland Business Loans, Inc. dated May 25, 1994 -
amendments dated April 27, 1995 and May 18, 1995.
10(l)p Employment Agreement between Pico Products, Inc. and Everett
T. Keech, dated September 22, 1995.
10(m)q Amendment to Pico Macom, Inc. lease of building at 12500 Foothill
Boulevard, Lakeview Terrace, California - amendment dated
November 9, 1995.
10(n)r Amendment No. 3 to the Loan and Security Agreement between Pico
Macom, Inc. and Marine Midland Business Loans, Inc. dated May 25,
1994 - amendment dated December 20, 1995.
10(o)s Amendment No. 4 to the Loan and Security Agreement between Pico
Macom, Inc. and HSBC Business Loans, Inc., as successor to Marine
Midland Business Loans, Inc. (original agreement dated May 25,
1994) - amendment dated November 25, 1996.
10(p)u Employment Agreement between Pico Products, Inc. and Robert G.
Cunningham, dated December 12, 1996.
11.1 Computation of Per Share Earnings.
22(a) Subsidiaries of the Company are listed in the Table at the end of Item
1
24(a) Independent Auditors' Consent
27 Financial Data Schedule (included only in the EDGAR filing).
See next page for Key to Index of Exhibits Incorporated by Reference.
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<PAGE>
KEY TO INDEX OF EXHIBITS INCORPORATED BY REFERENCE
a Previously filed by the Company as an exhibit to the Company's
Registration Statement on Form S-1, File No. 2-77439 and incorporated
by reference.
b Previously filed by the Company as an exhibit to the Company's
Registration Statement on Form S-18, File No. 2-72318 and
incorporated by reference.
c Previously filed by the Company as an exhibit to the Company's Form
10-K for the fiscal year ended July 31, 1983 and incorporated by
reference.
d Previously filed by the Company as an exhibit to the Company's Form
10-K for the fiscal year ended July 31, 1985 and incorporated by
reference.
e Previously filed by the Company as an exhibit to the Company's Form
10-K for the fiscal year ended July 31, 1988 and incorporated by
reference.
f Previously filed by the Company as an exhibit to the Company's Form
10-K for the fiscal year ended July 31, 1990 and incorporated by
reference.
g Previously filed by the Company as an exhibit to the Company's Form
10-K for the fiscal year ended July 31, 1991 and incorporated by
reference.
h Previously filed by the Company as an exhibit to the Company's Form
10-K for the fiscal year ended July 31, 1992 and incorporated by
reference.
i Previously filed by the Company as an exhibit to the Company's Form
10-Q for the fiscal quarter ended January 31, 1993 and
incorporated by reference.
j Previously filed as exhibits to Schedule 13D, dated February 16, 1993,
filed by Standard Chartered Equitor Trustee CI Limited, Scimitar
Development Capital Fund and Scimitar Development Capital "B"
Fund, and incorporated by reference.
k Previously filed by the Company as an exhibit to the Company's Form
10-K for the fiscal year ended July 31, 1993 and incorporated by
reference.
62
<PAGE>
KEY TO INDEX OF EXHIBITS INCORPORATED BY REFERENCE (continued)
l Previously filed by the Company as an exhibit to the Company's Form
10-Q for the fiscal quarter ended April 30, 1994 and incorporated
by reference.
m Previously filed by the Company as an exhibit to the Company's Form
10-K for the fiscal year ended July 31, 1994 and incorporated by
reference.
n Previously filed by the Company as an exhibit to the Company's Form
10-Q for the fiscal quarter ended January 31, 1995 and
incorporated by reference.
o Previously filed by the Company as an exhibit to the Company's Form
10-Q for the fiscal quarter ended April 30, 1995 and incorporated
by reference.
p Previously filed by the Company as an exhibit to the Company's Form
10-K for the fiscal year ended July 31, 1995 and incorporated by
reference.
q Previously filed by the Company as an exhibit to the Company's Form
10-Q for the fiscal quarter ended October 31, 1995 and
incorporated by reference.
r Previously filed by the Company as an exhibit to the Company's Form
10-Q for the fiscal quarter ended January 31, 1996 and
incorporated by reference.
s Previously filed by the Company as an exhibit to the Company's Form
10-Q for the fiscal quarter ended October 31, 1996 and
incorporated by reference.
t Previously filed by the Company as an amendment to the Company's
definitive proxy statement dated December 4, 19965 and
incorporated by reference.
u Previously filed by the Company as an exhibit to the Company's Form
10-Q for the fiscal quarter ended January 31, 1997 and
incorporated by reference.
Copies of all exhibits incorporated by reference are available
at no charge by written request to Assistant Corporate
Secretary, Pico Products, Inc., 12500 Foothill Blvd.,
Lakeview Terrace, California 91342.
63
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Pico Products, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 13, 1997
PICO PRODUCTS, INC.
By: /s/ Charles G. Emley, Jr. By: /s/ Jack Brucker
-------------------------- ---------------------
Charles G. Emley, Jr. Jack Brucker
Chairman of the Board Executive Vice President,
(Principal Executive Officer) Operations and Chief
Financial Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Pico Products, Inc.
and in the capacities and on the dates indicated.
/s/ Charles G. Emley, Jr. /s/ David Heenan
- -------------------------- ---------------------
Charles G. Emley, Jr. David Heenan
Chairman of the Board Director
November 13, 1997 November 13, 1997
/s/ E.B. Leisenring, Jr. /s/ Pierson G. Mapes
- -------------------------- ---------------------
E.B. Leisenring, Jr. Pierson G. Mapes
Director Director
November 13, 1997 November 13, 1997
/s/ William W. Mauritz
- --------------------------
William W. Mauritz
Director
November 13, 1997
<PAGE>
FORM 10-K
YEAR ENDED JULY 31, 1997
NEW EXHIBITS
- ------------------------------------------------------------------------------
3(a) Complete copy of Certificate of Incorporation of the Company, as amended on
November 19, 1996.
4(o) Investment Agreement between the Company and certain of its subsidiaries,
and Allied Capital Corporation and certain of its affiliated companies,
dated September 12, 1997.
4(p) Junior Subordinated Secured Debenture issued by the Company and certain of
its subsidiaries, payable to Allied Capital Corporation, dated September
12, 1997. The Company has issued subordinated secured debentures in
substantially the same form as this debenture to the following parties for
the following amounts:
Holder Amount
----------------------------- --------
Allied Investment Corporation $374,300
--------
Allied Capital Corporation II $394,000
--------
4(q) Letter Agreement covering the issuance and sale by the
Company of Preferred Stock to The Sinkler Corporation, dated
September 12, 1997.
4(r) Stock Purchase Warrant issued by the Company to Allied
Capital Corporation, dated September 12, 1997. The Company
has issued warrants in substantially the same form as this
warrant to the following parties for the following number of
shares:
Holder Shares
----------------------------- ----------
Allied Investment Corporation 258,944
Allied Capital Corporation II 272,572
The Sinkler Corporation 114,200
List of New Exhibits Continued on Next Page.
<PAGE>
FORM 10-K
YEAR ENDED JULY 31, 1997
NEW EXHIBITS (CONTINUED)
- ------------------------------------------------------------------------------
4(s) Stock Purchase Warrant Subject to Call issued by the Company to Allied
Capital Corporation, dated September 12, 1997. The Company has issued
warrants in substantially the same form as this warrant to the following
parties for the following number of shares:
Holder Shares
----------------------------- -------
Allied Investment Corporation 68,024
Allied Capital Corporation II 71,604
The Sinkler Corporation 30,000
4(t) First Amendment to Investment Agreement between the Company and certain of
its subsidiaries, and Allied Capital Corporation and
certain of its affiliated Companies, dated September
12, 1997.
11.1 Computation of Per Share Earnings
24(a) Independent Auditors' Consent
27 Financial Data Schedule (included only in the EDGAR filing).
<PAGE>
EXHIBIT 3(a)
RESTATED
CERTIFICATE OF INCORPORATION
OF
PICO PRODUCTS, INC.
FIRST: The name of the Corporation is Pico Products, Inc. (the
"Corporation").
SECOND: The purpose for which it is to be formed are as follows:
2.1. To conduct the business of manufacturing, buying, selling, servicing,
assembling, preparing for market, importing, exporting, leasing,
renting, distributing, advertising, promoting, owning, acquiring,
developing, inventing, patenting, and generally dealing in every sort
of electrical, printed circuit, cable television, radio,
telecommunication, and other devices, machinery, appliances, equipment
and the purchasing, selling, pledging, mortgaging, granting of
security interests in licensing, leasing, and otherwise acquiring,
using and disposing of patents, patent rights, inventions, trademarks,
tradenames, trade secrets, copyrights, research, ideas and systems,
and to acquire all real estate and plant or plants necessary to carry
out the above objects.
2.2. To manufacture, patent, buy, sell and generally deal in metal name
plates, alkali, acid and photo etched and any and all other kinds or
types of identification items, including tapes and labels for hard
goods, hardware, transportation, military, amusement, electrical,
electronic and any other type, kind or nature of its requiring product
identification and all other kinds and types of product
identification, machinery and machinery for the manufacture thereof.
To acquire all real estate and plant or plants necessary to carry out
the above objects.
2.3. To borrow money, with or without pledge of, or security interest in or
mortgage on, all or any of its property, real or personal, as
security, and to loan and advance money upon mortgages on real and
personal property, or either of them.
2.4. To sell, manage, improve, develop, assign, transfer, convey, lease,
sublease, pledge, grant a security interest in or otherwise alienate
or dispose of and to mortgage or otherwise encumber the lands,
buildings, real property, chattels, real and other property of the
Corporation, wheresoever situate and any and all legal and equitable
rights therein.
2.5. To buy, sell and deal in, with or without guarantee of payment
thereof, notes, stocks, bonds and mortgages and other like securities
and other kinds of property, whether real or personal, not prohibited
or especially excepted by
<PAGE>
law, and to do and prosecute any acts and thing incidental to or
proper in connection with the carrying out of its business.
2.6. To subscribe for, purchase, invest in, hold, own, pledge, grant a
security interest in, assign, or otherwise dispose of, shares of
capital stock, bonds, mortgages, debentures, notes or other securities
obligations, contracts, and evidence of indebtedness of corporations
organized under the law of the State of New York, and any other state
of the United States, and of any foreign government, and the bonds and
other evidences of indebtedness of the United States and foreign
governments, and the stocks, bonds and indebtedness of foreign
corporations and municipalities. To exercise in respect to any such
shares of stock, bonds, and other securities of corporations,
municipalities, foreign or domestic governments, any and all rights,
powers, privileges of individual ownership, including the right to
vote, to issue bonds and other obligations, and to secure the same by
pledging or mortgaging the whole or any part of the property of the
Corporation, and to sell or pledge such bonds and other obligations
for proper corporate purposes, and to do any and all acts and things
tending to increase the value of the property at any time held by it.
The Corporation shall be and hereby is authorized to purchase, hold,
acquire and dispose of the stocks, bonds and other evidences of
indebtedness of any corporation, domestic or foreign, and to issue and
exchange therefor its stock, bonds or other obligations.
2.7. To purchase or otherwise acquire, undertake, carry on, improve or
develop all or any of the business, goodwill, rights, assets or
liabilities of any person, firm, association or corporation carrying
on any kind of business the same as, or of a similar nature to that
which the Corporation is authorized to carry on, pursuant to the
provisions of this Certificate.
2.8. To use its surplus earnings or accumulated profits in the purchase or
acquisition of its own capital shares from time to time as its Board
of Directors shall determine, and any capital shares purchased may, if
the Directors so determine, be held in the treasury of the Corporation
as treasury shares, or be thereafter reissued or disposed of in such
manner as the Directors, subject to the provisions of law, shall deem
proper.
2.9. To issue in exchange for stocks, bonds, contracts, mortgages or other
obligations of individuals, co-partners or corporations, the shares of
the Corporation therefor.
2.10. To do all and everything necessary, suitable, useful or proper
for the accomplishment of any of the purposes or the attainment of any
of the objects or the furtherance of any of the powers hereinbefore
set forth, as principal or agent, either alone or in association with
other corporations, firms, or individuals, and to do every act or
acts, thing or things incidental or appurtenant
-2-
<PAGE>
to or growing out of or connected with any of the aforesaid purposes,
objects and powers, or any parts or part thereof, and to do any such
act or thing to the same extent and as fully as natural persons might
or could do in any part of the world.
2.11. To buy, sell, manage and generally deal in goods, wares,
merchandise, and property of any and every class and description, and
generally do any and all things and exercise any and all powers which
may now or hereafter be lawful for a corporation to do or exercise
under and pursuant to the Business Corporation Law of the State of New
York, or any other law that may be now or hereafter applicable to the
Corporation.
THIRD: The total number of shares of all classes which the Corporation
shall have authority to issue is fifteen million five hundred thousand
(15,500,000) shares, of which fifteen million (15,000,000) shall be common
shares, having a par value of $0.01 per share ("Common Shares"), and five
hundred thousand (500,000) shall be series preferred shares, having a par value
of $0.01 per share ("Preferred Shares").
3.1 The designations, powers, preferences and rights, and the
qualifications, limitations or restrictions thereof, of the shares
of each class shall be governed by the following provisions:
3.1.1.1 The Board of Directors of the Corporation has
authority, subject to the provisions of this Article THIRD and the
limitations prescribed by law to authorize the issue of one or more
series of Preferred Shares and with respect to each such series to
execute, deliver and file any certificate which the Board of Directors
may deem to be necessary or appropriate under the Business Corporation
Law of New York. The authority of the Board of Directors with respect
to each of the series shall include, but not be limited to, the fixing
of the following by resolutions providing for the issue of that
series.
(a) The designation of the series and the number of Preferred
Shares which shall constitute the series.
(b) The dividend rate of the series, the conditions and dates
upon which dividends shall be payable, the relation which
the dividends shall bear to the dividends payable on any
other series or class of shares, and whether such dividends
shall be cumulative or non-cumulative.
(c) Whether the shares of the series shall be subject to
redemption by the Corporation and, if made subject to
redemption, the times, prices and other terms and conditions
of redemption.
(d) Whether the shares of the series shall be convertible into
or exchangeable for shares of any other series or class of
shares of
-3-
<PAGE>
the Corporation and, if provision is made for conversion or
exchange, the times, prices, rates, adjustments, and other
terms and conditions of conversion or exchange.
(e) The extent, if any, to which the holders of the shares of
the series shall be entitled to vote with respect to the
election of Directors or otherwise.
(f) The restrictions, if any, on the issue or reissue of any
additional Preferred Shares of the series.
(g) The rights of the holders of the shares of the series upon
the voluntary or involuntary liquidation, merger,
consolidation, distribution or sale of assets or dissolution
or winding up, of the Corporation.
(h) Such other designations, preferences and relative
participatory, optional or other special rights of the
shares of the series and all other restrictions on the
Corporation in connection with the Preferred Shares (subject
to this Restated Certificate of Incorporation or the laws of
the State of New York).
3.1.2. Except as otherwise required by law and except for such
voting powers with respect to the election of Directors or other
matters as may be stated in the resolution or resolutions of the Board
of Directors providing for the issue of any series of Preferred
Shares, the holder of any such series shall have no voting power
whatsoever and all voting rights shall be vested exclusively in the
holders of the outstanding Common Shares and each such holder shall be
entitled to one vote per share for all purposes for each Common Share
held of record by such holder.
3.1.3. When dividends shall have been paid (or declared and
set aside for payment) on the Preferred Shares to the full extent of
the preferences, if any, dividends on the Common Shares and on any
Preferred Shares participating in dividends in addition to be fixed
dividends may then be paid out of the funds of the Corporation which
are legally available therefor. Subject to the limitations prescribed
in this Article THIRD and any further limitations which may from time
to time be prescribed by the Board of Directors in accordance
herewith, the holders of Common Shares shall be entitled to receive
dividends on the Common Shares when, as and if declared by the Board
of Directors, out of the funds of the Corporation which are legally
available therefor.
3.1.4. No holder of shares of any class of shares of the
Corporation shall as such holder have any preemptive or preferential
right of subscription to any shares of any class of the Corporation or
to any obligations convertible into
-4-
<PAGE>
shares of the Corporation, issued or sold, or to any right of
subscription to, or to any warrant or option for the purchase of any
thereof, other than such (if any) as the Board of Directors of the
Corporation, in its discretion, may determine from time to time.
3.2 Pursuant to this Paragraph THIRD of the Certificate of Incorporation
of the Corporation, there be and hereby is created a series of
Preferred Shares hereby designated as Series A Redeemable Preferred
Shares, to consist of one thousand (1,000) shares having a par value
of $0.01 per share, which series shall have the voting rights,
designations, powers, preferences, relative and other special rights,
and qualifications, limitations and restrictions set forth below:
3.2.1. DESIGNATION. The designation of the series of Preferred
Shares created hereby is Series A Redeemable Preferred Shares and the
number of shares constituting such series is one thousand (1,000) (the
"Series A Shares").
3.2.2. RANK. The Series A Shares shall, with respect to dividend
rights, rights on redemption and rights on liquidation, winding up and
dissolution, rank prior to all classes of common shares of the
Corporation and to each other class of capital shares or series of
Preferred Shares of the Corporation hereafter created which does not
expressly provide that it ranks senior to or on a parity with the
Series A Shares.
3.2.3. VOTING RIGHTS. Except as otherwise provided by law, the
holder of the Series A Shares shall not be entitled to vote on any
matters with the holders of other voting capital shares.
3.2.4. DIVIDENDS. Except as otherwise provided in this Paragraph
3.2.4, the holder of the Series A Shares shall not be entitled to
receive dividends.
(a) GENERAL DIVIDEND OBLIGATIONS. When and as declared by the
Board of Directors of the Corporation, the Corporation shall
pay to the holders of the Series A Shares, out of the assets
of the Corporation available for such payment of dividends
under the New York Business Corporation Law, payable in
preference and priority to any payment of any dividend on
common shares of the Corporation, dividends at the times and
in the amounts provided in this Paragraph 3.2.4. The Board
of Directors of the Corporation shall declare and pay to the
holder of Series A Shares dividends at the Dividend Rate
described in Paragraph 3.2.4(c) below on a quarterly basis;
provided that the Board of Directors may in its discretion
postpone the declaration and payment of one or more
quarterly dividends so long as dividends are declared and
paid on at least an annual basis.
-5-
<PAGE>
(b) CALCULATION OF DIVIDENDS. Dividends for each Series A
Share will be calculated cumulatively on a quarterly basis
at the rate and in the manner prescribed herein from and
including the "Commencement Date" with respect to such
Series A Shares to, but excluding, the date on which the
Series A Shares are redeemed or the Liquidation Price has
been received with respect to the Series A Shares, whether
or not such dividends have been declared and whether or
not there are (at the time such dividends are calculated or
become payable or at any other time) profits, surplus or
other funds of the Corporation legally available for the
payment of dividends.
For the purposes of this Subparagraph 3.2.4(b), the
"Commencement Date" with respect to any Series A Share shall
be deemed to be the date of issuance regardless of the
number of times transfer of such Series A Share is made on
the share records maintained by or for the Corporation and
regardless of the number of certificates which may be issued
to evidence such Series A Share (whether by reason of
transfer of such Series A Share or for any other reason.)
(c) DIVIDEND RATE. Dividends payable on the Series A Shares
shall be calculated cumulatively with respect to each
quarter in which dividends are due on each Series A Share at
a rate of 12% of the Liquidation Value per annum ("Dividend
Rate"). To the extent not paid on the first day of each
January, April, July, and October (each a "Dividend
Reference Date"), an amount equal to all dividends which
have been calculated on Series A Shares then outstanding
during the quarterly period (pro rated for a shorter period
as appropriate) ending on the day immediately preceding such
Dividend Reference Date shall be added to the Redemption
Price (as described in Paragraph 3.2.7 hereof) of such
Series A Share and will remain a part thereof until (but
only until) such dividends are paid. Any subsequent
dividends which are paid to the holder of the Series A
Shares in respect thereof shall, in all instances, be
applied first to the payment of amounts of dividends which
have been added on previous Dividend Reference Dates to the
Redemption Price until the Redemption Price of all Series A
Shares shall be equal to the original Redemption Price, as
adjusted, herein stated.
(d) FORM OF PAYMENT. The Dividend Rate shall be payable
quarterly in cash or in common shares of the Corporation, as
determined by the holders of a majority of the outstanding
Series A Shares, by notice to the Corporation at least
thirty (30) days
-6-
<PAGE>
prior to the applicable Dividend Reference Date. In the
absence of such notice, it shall be presumed that the
dividend for the applicable quarter shall be payable in
cash. In the event that payment in the form of common
shares is elected by the holders of the Series A Shares, the
number of common shares issuable shall be determined by
dividing the amount of the dividend by the average Market
Value (as hereinafter defined) of the Corporation's common
shares over the ten consecutive trading days ending on the
trading day immediately prior to the Dividend Reference
Date. "Market Value" shall mean the average of the high and
low prices of the common shares, as reported in The Wall
Street Journal, on the American Stock Exchange (or a similar
consolidated transactions report for the exchange or other
market on which the common shares is then trading, if not
the American Stock Exchange) for the relevant date, or if no
sales of common shares were made on such exchange on such
date, the average of the high and low prices of such shares
as reported in such composite transaction report for the
preceding day on which sales of shares were made on such
exchange. If the common shares are not listed on a national
securities exchange at the time Market Value is to be
determined, then Market Value shall be determined by the
Board of Directors of the Corporation in good faith pursuant
to such method as the Board of Directors deems appropriate
and equitable. Under no circumstances shall the Market
Value of a common share be less than its par value. All
fractional shares shall be paid in cash. All unpaid cash
dividends shall be cumulative.
(e) PRIORITY. So long as any Series A Shares shall be
outstanding, without the consent of the holders of a
majority of the outstanding Series A Shares, the Corporation
shall not declare or pay on the common shares of the
Corporation any dividend whatsoever, whether in cash,
property or otherwise, nor shall the Corporation make any
distribution on the common shares, nor shall any common
shares be purchased or redeemed by the Corporation or any
subsidiary thereof, unless (1) all dividends to which the
holders of Series A Shares have been entitled for all
previous dividend periods shall have been paid or declared
and a sum of money sufficient for the payment thereof set
apart, and (2) all Series A Shares which the Corporation was
theretofore obligated to redeem in accordance with Paragraph
3.2.7 hereof shall have been redeemed.
3.2.5 LIQUIDATION. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of
the Corporation, the
-7-
<PAGE>
holders of Series A Shares then outstanding shall be entitled to
be paid out of the assets of the Corporation available for
distribution to its shareholders an amount equal to one thousand
dollars ($1,000.00) for each Series A Share outstanding (such amount,
as it may be adjusted from time to time to give effect to any share
splits or combinations, recapitalizations or other similar events, the
"Liquidation Value") plus an amount equal to all accumulated but
unpaid dividends thereon to the date fixed for the liquidation,
dissolution or winding up, before any payment shall be made or any
assets distributed to the holders of common shares. Except as
provided in the preceding sentence, holders of Series A Shares shall
not be entitled to any distribution in the event of liquidation,
dissolution or winding up of the affairs of the Corporation. If the
assets of the Corporation are not sufficient to pay in full the
liquidation payments payable to the holders of the Series A Shares,
then the holders of all such shares shall share ratably in accordance
with the respective amounts to which the holders of outstanding Series
A Shares would be entitled if all amounts payable thereon were paid in
full. The liquidation payment with respect to each outstanding
fractional Series A Share (if any) shall be equal to a ratably
proportionate amount of the liquidation payment with respect to each
outstanding Series A Share.
3.2.6 CONVERSION. The Series A Shares shall not be
convertible into or exchangeable for shares of any other series or
class of shares of the Corporation.
3.2.7. REDEMPTION. The Series A Shares shall be redeemable as
follows:
(a) OPTIONAL REDEMPTION. The Series A Shares shall be
redeemable, at the option of the Corporation, in whole or in
part, at any time without penalty, at a redemption price
equal to one thousand dollars ($1,000.00) per share (the
"Redemption Price") plus an amount equal to all accumulated
but unpaid dividends thereon to the date fixed for
redemption.
(b) MANDATORY REDEMPTION. The Series A Shares shall be
redeemed, out of funds legally available therefor, at the
Redemption Price plus an amount equal to all accumulated but
unpaid dividends thereon to the date fixed for redemption on
the following dates and in the following amounts:
(i) One hundred (100) shares (less any shares previously
redeemed pursuant to Paragraph 3.2.7(a) or 3.2.7(b)) on
or before November 30, 2000;
-8-
<PAGE>
(ii) Two hundred (200) shares (less any shares previously
redeemed pursuant to Paragraph 3.2.7(a) or 3.2.7(b)) on
or before November 30, 2001;
(iii) Four hundred (400) shares (less any shares
previously redeemed pursuant to Paragraph 3.2.7(a) or
3.2.7(b)) on or before November 30, 2002; and
(iv) All outstanding shares on or before November 30, 2003.
(c) REDEMPTION PROCEDURES. When the Corporation redeems the
Series A Shares, the following procedures shall apply:
(i) When less than all of the outstanding Series A Shares
are being redeemed, the shares subject to redemption
shall be determined in the sole discretion of the
Corporation.
(ii) Notice of redemption shall be given by first class
mail, postage prepaid, mailed not less than 30 days nor
more than 60 days prior to the date on which Series A
Shares are to be redeemed (any such date, a "redemption
date"), to the holder of record of the shares to be
redeemed at such holder's address as the same appears
on the share register of the Corporation. Such notice
shall state: (a) the redemption date; (b) the
redemption price; (c) the number of shares subject to
redemption; and (d) the place or places where
certificates for such shares are to be surrendered for
payment of the redemption price.
(iii) Notice having been mailed as aforesaid, from and
after the redemption date (unless default shall be made
by the Corporation in providing money for the payment
of the redemption price of the shares called for
redemption) said shares shall no longer be deemed to be
outstanding and shall have the status of authorized but
unissued Series A Shares, and shall not be reissued as
Series A Shares, and all rights of the holder thereof
as a shareholder of the Corporation (except the right
to receive from the Corporation the redemption price)
shall cease. Upon surrender in accordance with said
notice of the certificates for any shares so redeemed
(properly endorsed or assigned for transfer, if the
Board of Directors of the Corporation shall so require
and the notice shall so state), such shares shall be
redeemed by the Corporation at the redemption price
aforesaid.
-9-
<PAGE>
3.3. Pursuant to this Paragraph THIRD of the Certificate of Incorporation
of the Corporation, there be and hereby is created a series of
Preferred Shares hereby designated as Series B Redeemable Preferred
Shares, to consist of one hundred sixty-five (165) shares having a
par value of $0.01 per share, which series shall have the voting
rights, designations, powers, preferences, relative and other special
rights, and qualifications, limitations and restrictions set forth
below:
3.3.1. DESIGNATION. The designation of the series of Preferred
Shares created hereby is Series B Redeemable Preferred Shares and the
number of shares constituting such series is one hundres sixty-five
(165) (the "Series B Shares").
3.3.2. RANK. The Series B Shares shall, with respect to
dividend rights, rights on redemption and rights on liquidation,
winding up and dissolution, rank prior to all classes of common shares
of the Corporation and to each other class of capital shares or series
of Preferred Shares of the Corporation hereafter created which does
not expressly provide that it ranks senior to or on a parity with the
Series B Shares. The Series B Shares shall, with respect to all such
Rights, be on a parity with the Series A Shares.
3.3.3. VOTING RIGHTS. Except as otherwise provided by law,
the holder of the Series B Shares shall not be entitled to vote on any
matters with the holders of other voting capital shares.
3.3.4. DIVIDENDS. Except as otherwise provided in this
Paragraph 3.3.4, the holder of the Series B Shares shall not be
entitled to receive dividends.
(a) GENERAL DIVIDEND OBLIGATIONS. When and as declared by the
Board of Directors of the Corporation, the Corporation shall
pay to the holders of the Series B Shares, out of the assets
of the Corporation available for such payment of dividends
under the New York Business Corporation Law, payable in
preference and priority to any payment of any dividend on
common shares of the Corporation, dividends at the times and
in the amounts provided in this Paragraph 3.3.4. The Board
of Directors of the Corporation shall declare and pay to the
holder of Series B Shares dividends at the Dividend Rate
described in Paragraph 3.3.4(c) below on a quarterly basis;
provided that the Board of Directors may in its discretion
postpone the declaration and payment of one or more
quarterly dividends so long as dividends are declared and
paid on at least an annual basis.
(b) CALCULATION OF DIVIDENDS. Dividends for each Series B
Share will be calculated cumulatively on a quarterly basis
at the rate
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and in the manner prescribed herein from and including the
"Commencement Date" with respect to such Series B Shares to,
but excluding, the date on which the Series B Shares are
redeemed or the Liquidation Price has been received with
respect to the Series B Shares, whether or not such
dividends have been declared and whether or not there are
(at the time such dividends are calculated or become payable
or at any other time) profits, surplus or other funds of the
Corporation legally available for the payment of dividends.
For the purposes of this Subparagraph 3.3.4(b), the
"Commencement Date" with respect to any Series B Share shall
be deemed to be the date of issuance regardless of the
number of times transfer of such Series B Share is made on
the share records maintained by or for the Corporation and
regardless of the number of certificates which may be issued
to evidence such Series B Share (whether by reason of
transfer of such Series B Share or for any other reason.)
(c) DIVIDEND RATE. Dividends payable on the Series B Shares
shall be calculated cumulatively with respect to each
quarter in which dividends are due on each Series B Share at
a rate of 10% of the Liquidation Value per annum ("Dividend
Rate"). To the extent not paid on the first day of each
January, April, July, and October (each a "Dividend
Reference Date"), an amount equal to all dividends which
have been calculated on Series B Shares then outstanding
during the quarterly period (pro rated for a shorter period
as appropriate) ending on the day immediately preceding such
Dividend Reference Date shall be added to the Redemption
Price (as described in Paragraph 3.3.7 hereof) of such
Series B Share and will remain a part thereof until (but
only until) such dividends are paid. Any subsequent
dividends which are paid to the holder of the Series B
Shares in respect thereof shall, in all instances, be
applied first to the payment of amounts of dividends which
have been added on previous Dividend Reference Dates to the
Redemption Price until the Redemption Price of all Series B
Shares shall be equal to the original Redemption Price, as
adjusted, herein stated.
(d) FORM OF PAYMENT. The Dividend Rate shall be payable
quarterly in cash or in common shares of the Corporation, as
determined by the holders of a majority of the outstanding
Series B Shares, by notice to the Corporation at least
thirty (30) days prior to the applicable Dividend Reference
Date. In the absence of such notice, it shall be presumed
that the dividend for the
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applicable quarter shall be payable in cash. In the event
that payment in the form of common shares is elected by the
holders of the Series B Shares, the number of common shares
issuable shall be determined by dividing the amount of the
dividend by the average Market Value (as hereinafter
defined) of the Corporation's common shares over the ten
consecutive trading days ending on the trading day
immediately prior to the Dividend Reference Date. "Market
Value" shall mean the average of the high and low prices of
the common shares, as reported in The Wall Street Journal,
on the American Stock Exchange (or a similar consolidated
transactions report for the exchange or other market on
which the common shares is then trading, if not the American
Stock Exchange) for the relevant date, or if no sales of
common shares were made on such exchange on such date, the
average of the high and low prices of such shares as
reported in such composite transaction report for the
preceding day on which sales of shares were made on such
exchange. If the common shares are not listed on a national
securities exchange at the time Market Value is to be
determined, then Market Value shall be determined by the
Board of Directors of the Corporation in good faith pursuant
to such method as the Board of Directors deems appropriate
and equitable. Under no circumstances shall the Market
Value of a common share be less than its par value. All
fractional shares shall be paid in cash. All unpaid cash
dividends shall be cumulative.
(e) PRIORITY. So long as any Series B Shares shall be
outstanding, without the consent of the holders of a
majority of the outstanding Series B Shares, the Corporation
shall not declare or pay on the common shares of the
Corporation any dividend whatsoever, whether in cash,
property or otherwise, nor shall the Corporation make any
distribution on the common shares, nor shall any common
shares be purchased or redeemed by the Corporation or any
subsidiary thereof, unless (1) all dividends to which the
holders of Series B Shares have been entitled for all
previous dividend periods shall have been paid or declared
and a sum of money sufficient for the payment thereof set
apart, and (2) all Series B Shares which the Corporation was
theretofore obligated to redeem in accordance with Paragraph
3.3.7 hereof shall have been redeemed.
3.3.5. LIQUIDATION. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of
the Corporation, the holders of Series B Shares then outstanding shall
be entitled to be paid out of the assets of the Corporation available
for distribution to its shareholders an
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amount equal to one thousand dollars ($1,000.00) for each Series
B Share outstanding (such amount, as it may be adjusted from time to
time to give effect to any share splits or combinations,
recapitalizations or other similar events, the "Liquidation Value")
plus an amount equal to all accumulated but unpaid dividends thereon
to the date fixed for the liquidation, dissolution or winding up,
before any payment shall be made or any assets distributed to the
holders of common shares. Except as provided in the preceding
sentence, holders of Series B Shares shall not be entitled to any
distribution in the event of liquidation, dissolution or winding up of
the affairs of the Corporation. If the assets of the Corporation are
not sufficient to pay in full the liquidation payments payable to the
holders of the Series B Shares, then the holders of all such shares
shall share ratably in accordance with the respective amounts to which
the holders of outstanding Series B Shares would be entitled if all
amounts payable thereon were paid in full. The liquidation payment
with respect to each outstanding fractional Series B Share (if any)
shall be equal to a ratably proportionate amount of the liquidation
payment with respect to each outstanding Series B Share.
3.3.6. CONVERSION. The Series B Shares shall not be
convertible into or exchangeable for shares of any other series or
class of shares of the Corporation.
3.3.7. REDEMPTION. The Series B Shares shall be redeemable as
follows:
(a) OPTIONAL REDEMPTION. The Series B Shares shall be
redeemable, at the option of the Corporation, in whole or in
part, at any time without penalty, at a redemption price
equal to One Thousand Dollars ($1,000) per share (the
"Redemption Price") plus an amount equal to all accumulated
but unpaid dividends thereon to the date fixed for
redemption.
(b) MANDATORY REDEMPTION. The Series B Shares shall be
redeemed, out of funds legally available therefor, at the
Redemption Price plus an amount equal to all accumulated but
unpaid dividends thereon to the date fixed for redemption on
the following dates and in the following amounts:
(iv) All outstanding shares on or before September 30, 2000.
(c) REDEMPTION PROCEDURES. When the Corporation redeems the
Series B Shares, the following procedures shall apply:
(i) When less than all of the outstanding Series B Shares
are being redeemed, the shares subject to redemption
shall be determined in the sole discretion of the
Corporation.
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<PAGE>
(ii) Notice of redemption shall be given by first class
mail, postage prepaid, mailed not less than 30 days nor
more than 60 days prior to the date on which Series B
Shares are to be redeemed (any such date, a "redemption
date"), to the holder of record of the shares to be
redeemed at such holder's address as the same appears
on the share register of the Corporation. Such notice
shall state: (a) the redemption date; (b) the
redemption price; (c) the number of shares subject to
redemption; and (d) the place or places where
certificates for such shares are to be surrendered for
payment of the redemption price.
(iii) Notice having been mailed as aforesaid, from and
after the redemption date (unless default shall be made
by the Corporation in providing money for the payment
of the redemption price of the shares called for
redemption) said shares shall no longer be deemed to be
outstanding and shall have the status of authorized but
unissued Series B Shares, and shall not be reissued as
Series B Shares, and all rights of the holder thereof
as a shareholder of the Corporation (except the right
to receive from the Corporation the redemption price)
shall cease. Upon surrender in accordance with said
notice of the certificates for any shares so redeemed
(properly endorsed or assigned for transfer, if the
Board of Directors of the Corporation shall so require
and the notice shall so state), such shares shall be
redeemed by the Corporation at the redemption price
aforesaid.
FOURTH: The office of the Corporation shall be located in the City of East
Syracuse, County of Onondaga, State of New York.
FIFTH: The Secretary of State of the State of New York is designated as
the agent of the Corporation upon whom process in any action or proceeding
against it may be served and the address to which the Secretary of State shall
mail a copy of process in any action or proceeding against the Corporation which
may be served upon it is 6315 Fly Road, East Syracuse, New York 13057.
SIXTH: The duration of the Corporation shall be perpetual.
SEVENTH: No Director shall be personally liable to the Corporation or any
of its shareholders for monetary damages for breach of duty as a Director,
except for liability if a judgment or other final adjudication adverse to such
Director establishes that such Director's acts or omissions were in bad faith or
involved intentional misconduct or a knowing violation of law or that such
Director personally gained in fact a financial profit or other advantage to
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<PAGE>
which such Director was not legally entitled or that such Director's acts
violated Section 719 of the New York Business Corporation Law. If the
Corporation hereafter may by law be permitted to further eliminate or limit the
personal liability of Directors, then pursuant hereto the liability of a
Director shall; at such time, automatically be further eliminated or limited to
the fullest extent permitted by law. Any repeal or modification of this Article
SEVENTH by the shareholders of the Corporation shall not adversely affect any
right or protection of a Director of the Corporation existing at the time of
such repeal or modification with respect to acts or omissions occurring prior to
such repeal or modification.
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<PAGE>
EXHIBIT 4(o)
INVESTMENT AGREEMENT
THIS INVESTMENT AGREEMENT (this "Agreement") is made as of the 12th
day of September, 1997 by and among: (i) PICO PRODUCTS, INC., a New York
corporation (the "Parent"); (ii) PICO MACOM, INC., a Delaware corporation
("PMI"), and such other parties as listed on Schedule A upon execution of a
joinder as hereinafter provided in Section 4.23(a); (the Parent, PMI, and such
other parties (the "Subsidiaries") who have executed the joinder in the form set
forth as Exhibit A hereto, are hereinafter collectively referred to as
"Borrowers"); and (iii) ALLIED CAPITAL CORPORATION, ALLIED INVESTMENT
CORPORATION, and ALLIED CAPITAL CORPORATION II, each a Maryland corporation
(collectively, "Allied").
RECITALS:
A. Pursuant to a Stock Purchase Agreement dated June 30, 1997 by and
among Allied and certain shareholders of the Parent, Allied acquired the right
to receive from the Parent One Hundred Fifty Thousand Dollars ($150,000) under
the 8% Subordinated Notes (the "Purchased Notes") in the original aggregate
principal amount of $500,000, due February 10, 1997.
B. Allied wishes to invest an additional sum of One Million Three
Hundred Thirty-Five Thousand Dollars ($1,335,000) by installments in Borrowers.
C. This Investment Agreement simultaneously restructures the terms
of the Purchased Notes. The aggregate investment in the principal amount of One
Million Four Hundred Eighty-Five Thousand Dollars ($1,485,000) shall be referred
to herein as the "Investment". In exchange for the Investment, Allied will
receive from the Borrowers certain junior secured subordinated debentures and
warrants to purchase shares of the Common Stock of the Parent.
D. The parties desire to set forth herein their understandings and
agreements pertaining to this transaction.
NOW, THEREFORE, in consideration of the foregoing Recitals and the
mutual covenants contained herein, and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, Allied and the
respective successors and assigns of Allied with respect to any of the
Debentures or any of the Equity Interest (as these terms are hereinafter
defined) (individually, a "Holder" and collectively, the "Holders") and the
Borrowers hereby agree as follows:
ARTICLE I: DEFINITIONS
1.01 DEFINITIONS. In addition to the terms defined elsewhere herein,
when used herein, the following capitalized terms shall have the meanings
indicated:
<PAGE>
"ACT OF BANKRUPTCY," when used in reference to any Person, shall
mean the occurrence of any of the following with respect to such Person: (i)
such Person shall have made an assignment for the benefit of his or its
creditors; (ii) such Person shall have admitted in writing his or its inability
to pay his or its debts as they become due; (iii) such Person shall have filed a
voluntary petition in bankruptcy; (iv) such Person shall have been adjudicated a
bankrupt or insolvent; (v) such Person shall have filed any petition or answer
seeking for himself or itself any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any present or
future Applicable Law pertinent to such circumstances; (vi) such Person shall
have filed or shall file any answer admitting or not contesting the material
allegations of a bankruptcy, insolvency or similar petition filed against such
Person; (vii) such Person shall have sought or consented to, or acquiesced in,
the appointment of any trustee, receiver, or liquidator of such Person or of all
or any substantial part (20% or more) of the properties of such Person;
(viii) 60 days shall have elapsed after the commencement of an action against
such Person seeking reorganization, arrangement, composition, readjustment or
similar relief under any present or future Applicable Law without such action
having been dismissed or without all orders or proceedings thereunder affecting
the operations or the business of such Person having been stayed, or if a stay
of any such order or proceedings shall thereafter be set aside and the action
setting it aside shall not be timely appealed; or (ix) 60 days shall have
expired after the appointment, without the consent or acquiescence of such
Person of any trustee, receiver or liquidator of such Person or of all or any
substantial part of the assets and properties of such Person without such
appointment having been vacated.
"ACT OF DISSOLUTION," when used in reference to any Person (other
than an individual) shall mean the occurrence of any action initiating, or any
event that results in, the dissolution, liquidation, winding-up or termination
of such Person.
"AFFILIATE," when used in reference to any Person, shall mean any
Person that, directly or indirectly through one or more intermediaries,
controls, is controlled by, or is under common control with, the Person in
question.
"APPLICABLE LAW(S)," when used in the singular, shall mean any
applicable federal, state or local law, ordinance, order, regulation, rule or
requirement of any governmental or quasi-governmental agency, instrumentality,
board, commission, bureau or other authority having jurisdiction, and, when used
in the plural, shall mean all such applicable federal, state and local laws,
ordinances, orders, regulations, rules and requirements.
"APPLICABLE UCC" shall mean the Uniform Commercial Code, as
enacted in the State of Maryland, as amended through the date hereof.
"BUSINESS" shall mean , the business currently operated by
Borrowers.
"CHATTEL PAPER" shall mean, collectively, all of the Parent's and
PMI's now owned and hereafter acquired "chattel paper," as that term is defined
in Section 9-105(1)(b) of the Applicable UCC.
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<PAGE>
"COLLATERAL" shall mean, collectively, all of the now-owned and
hereafter acquired tangible and intangible property of the Parent and PMI,
including all of the following: (i) all Receivables; (ii) all Chattel Paper,
(iii) all Equipment; (iv) all Goods; (v) all Instruments; (vi) all Inventory;
(vii) all General Intangibles; (viii) all Proceeds; (ix) all Real Property; (x)
all books and records of the Parent and PMI, including those relating to any of
the foregoing; (xi) all monies, deposit accounts, and rights to money of any
kind; (xii) all additions or accessions to any of the foregoing; (xiii) all
substitutions for any of the foregoing; and (xiv) all replacements, products and
proceeds of the foregoing.
"COMMON STOCK" shall mean any or all (as the context may require)
of the shares of the authorized common stock of the Parent.
"ELIGIBLE INVENTORY" shall mean all Inventory of PMI consisting
of raw materials and finished goods reduced by (i) any Inventory of PMI as to
which a representation or warranty with respect thereto set forth in the Senior
Loan Agreement is not, or does not continue to be, true and accurate, and (ii)
any Inventory of PMI which is otherwise unacceptable to Senior Holder in its
reasonable credit judgment.
"EQUIPMENT" shall mean all of Parent's and PMI's now owned and
hereafter acquired equipment and fixtures, and all replacements and
substitutions therefor and thereof, and all accessions thereto, including,
without limitation, every item which is or may be necessary or convenient in
relation to the operation of the Business.
"EQUITY INTEREST" shall mean, collectively, all of the Warrants
and all of the Warrant Shares.
"GAAP" shall mean generally accepted accounting principles, for
the period or periods in question.
"GOODS" shall mean, collectively, all of the Parent's and PMI's
now owned and hereafter acquired "goods," as that term is defined in Section 9-
105(1)(h) of the Applicable UCC.
"GENERAL INTANGIBLES" shall mean, collectively, all of the
Parent's and PMI's now owned and hereafter acquired general intangibles,
including without limitation, all of the Licenses; all rights under governmental
ordinances or agreements with Governmental Authorities; things in action;
contractual rights; goodwill; literary rights; rights to performance; and all of
the Intellectual Property.
"GOVERNMENTAL AUTHORITY(IES)," when used in the singular, shall
mean any federal, state or local governmental or quasi-governmental
instrumentality, agency, board, commission or department or any regulatory
agency, bureau, commission or authority and, when used in the plural, shall mean
all such entities.
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<PAGE>
"INELIGIBLE RECEIVABLES" shall mean any Receivable of PMI that
does not meet the eligibility requirements as set forth in the Senior Loan
Agreement from time to time and any other Receivables which the Senior Holder
has determined to be unsatisfactory, but shall in any event include the
following Receivables: (i) any Receivable which has remained unpaid for more
than 90 days; (ii) any Receivable as to which any one or more of the following
events occurs: any party directly or indirectly liable for the payment of a
Receivable shall die or be judicially declared incompetent; any such party is
the subject of an Act of Dissolution or an Act of Bankruptcy; (iii) all
Receivables owed by an account debtor if PMI or Parent either owns in whole or
material part, or directly or indirectly controls, such account debtor; and (iv)
any Receivable which is unenforceable against the account debtor for any reason.
"INSTRUMENTS" shall mean, collectively, all of the Parent's and
PMI's now owned or hereafter acquired instruments, notes, items of payment,
negotiable documents, and documents of title.
"INTELLECTUAL PROPERTY" shall mean, collectively, all of the
Parent's or PMI's now owned and hereafter acquired intellectual property,
including, without limitation the following: (a) all patents (including all
rights corresponding thereto throughout the world, and all improvements
thereon); (b) all trademarks (including service marks, trade names and trade
secrets, and all goodwill associated therewith), (c) all copyrights (including
all renewals, extensions and continuations thereof); (d) all applications for
patents, trademarks or copyrights and all applications otherwise relating in any
way to the subject matter of such patents, copyrights and trademarks; (e) all
patents, copyrights, trademarks or applications therefor arising after the date
of this Agreement; (f) all reissues, continuations, continuations-in-part and
divisions of the property described in the preceding clauses (a), (b), (c), (d),
and (e), including, without limitation, any claims by the Parent or PMI against
third parties for infringement thereof; and (g) all rights to sue for past,
present and future infringements or violations of any such patents, trademarks,
and copyrights.
"INVENTORY" shall mean, collectively, all of the Parent's and
PMI's now owned and hereafter acquired inventory and all products, replacements,
and substitutions therefor and thereof, and all accessions thereto, and all
books, records, computer software and logs relating to and necessary or
appropriate to the conduct of the Business.
"INVENTORY BORROWING BASE" shall mean, the lesser of: (i)
$5,500,000 or (ii) at the time of computation, 65% of the dollar value of
Eligible Inventory, such dollar value to be calculated at the lower of actual
cost or market value and accounted for on a "first in, first out" basis, less
the amount of any reserves established by the Senior Holder with respect
thereto.
"INVESTMENT DOCUMENTS" shall mean, collectively, this Agreement,
the Debentures, the Security Documents, the Warrants, and all other instruments
and documents executed and delivered in connection with the Investment.
4
<PAGE>
"LICENSES" shall mean, collectively, all rights, licenses,
permits and authorizations now or hereafter issued by any Governmental Authority
in connection with the operation or conduct of the Business.
"OBLIGATIONS" shall mean, collectively, all of the Borrowers'
indebtedness, liabilities and obligations arising under this Agreement, each of
the Security Documents and each of the other Investment Documents and any
renewals, modifications, and extensions thereof, including, but not limited to,
the principal, interest, late charges and other sums due and owing under the
Debentures and the Security Documents, and any other obligations of the
Borrowers to any of the Holders, including such other or additional financing
that any of the Holders may extend to the Borrowers at any time in the Holders'
sole discretion.
"PERMITTED ENCUMBRANCES" shall mean any lien, mortgage, security
interest or other encumbrance that results from any of the following: (i) this
Agreement and the other Investment Documents; (ii) taxes and assessments not
delinquent or actively being contested in good faith by any Borrower and for
which such Borrower has adequate reserves; (iii) deposits or pledges for goods
or services made in the ordinary course of the Business; (iv) a lease with a
bona fide lessor of tangible personal property to any Borrower or an agreement
with a bona fide seller of tangible personal property to any Borrower (where the
lease or sale is not made in contravention of the terms of this Agreement);
(v) purchase money obligations (where the purchase money obligation is not
undertaken in contravention of the terms of this Agreement); (vi) the Senior
Debt, but any such lien, mortgage, security interest or other encumbrance may
exist only against the assets and capital stock of PMI; (vii) obligations
resulting from the upgrade of the Borrowers' computer system in an amount not to
exceed $250,000; and (viii) other obligations in an amount not to exceed
$200,000 per year.
"PERSON" shall mean any individual, corporation, partnership,
joint venture, limited liability company, unincorporated association, trust, or
other legal entity.
"PROCEEDS" shall mean all cash and noncash proceeds (including
insurance proceeds) resulting from any complete or partial Transfer of the
Collateral or any portion thereof or otherwise relating to or generated by, any
of the Collateral.
"REAL PROPERTY" shall mean, collectively, all real property owned
by the Parent or PMI or in which the Parent or PMI has a leasehold interest and
all real property hereafter acquired by the Parent or PMI in fee or by means of
a leasehold interest, including all real property on which the Business is now
or hereafter conducted, together with all goods located on any such real
property that are or may become "fixtures" under the law of the jurisdiction in
which such real property is located.
"RECEIVABLE" shall mean all of Parent's and PMI's now owned and
hereafter acquired rights to payment for goods sold or leased or for services
rendered.
"RECEIVABLES BORROWING BASE" shall mean, at the time of its
computation, an amount up to 85% the aggregate amount of the outstanding
Receivables of PMI (adjusted with
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<PAGE>
respect to any discounts, allowances, credits, rebates, or adjustments
granted by PMI with respect to such Receivables) less the amount of
Ineligible Receivables and any reserves established by Senior Holder with
respect thereto.
"SECURITY DOCUMENTS" shall have the meaning given to it in
Section 2.02 below.
"SENIOR DEBT" shall have the meaning given to it in Section 2.03
below.
"SENIOR HOLDER" shall have the meaning given to it in Section
2.03 below.
"SENIOR LOAN" shall have the meaning given to it in Section 2.03
below.
"SENIOR LOAN AGREEMENT" shall mean that certain Loan and Security
Agreement dated as of May 25, 1994, by and between PMI and HSBC Business Loans,
Inc., as amended from time to time, or any another agreement with respect to the
Senior Loan in effect from time to time.
"TRANSFER" shall mean the sale, assignment, lease, transfer,
mortgaging, encumbering or other disposition, whether voluntary or involuntary,
and whether or not consideration is received therefor.
"TRANSFER OF THE BUSINESS" shall mean one or a series of
transactions undertaken by the Borrowers resulting in either: (i) the Transfer
of all or substantially all of the assets of all of the Borrowers to any other
Person, other than transfers between or among Borrowers; (ii) a merger or
consolidation of the Parent with another Person where the Parent is not the
surviving or successor entity (other than a merger or consolidation of the
Parent into or with another Borrower, or a merger the primary purpose of which
is the change in state of incorporation of a Borrower); or (iii) the acquisition
in one or a series of transactions which results in one or more Persons either
beneficially owning in excess of 50% of the outstanding capital stock of the
Parent or any successor, or being able to elect a majority of the board of
directors of the Parent or any successor.
"WARRANTS" shall mean, collectively, all those separate and
detachable stock purchase warrants described in Section 2.08 hereof.
"WARRANT SHARE(S)," when used in the singular, shall mean any
share of Common Stock acquired by a Holder pursuant to such Holder's exercise of
its rights under any of the Warrants, and, when used in the plural, shall mean,
collectively, all such shares.
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<PAGE>
ARTICLE II: TERMS OF INVESTMENT
2.01 INVESTMENT COMMITMENT AND FUNDING SCHEDULE.
(a) The Borrowers will borrow and the Holders will invest in the
Borrowers an aggregate principal amount of ONE MILLION FOUR HUNDRED EIGHTY-FIVE
THOUSAND DOLLARS ($1,485,000). At the closing under this Agreement (the
"Closing"), the Borrowers will borrow, and the Holders will initially advance to
the Borrowers a sum of Eight Hundred Thirty-five Thousand Dollars ($835,000).
This Agreement also restructures the terms of the Purchased Notes, and the
principal amount of the Purchased Notes shall be included in the Debentures
issued to Holders at Closing. The initial aggregate investment in the principal
amount of Nine Hundred Eighty-five Thousand Dollars ($985,000) shall be
evidenced by, and repaid according to the terms of, three Junior Subordinated
Secured Debentures (collectively, the "Debentures") in form and substance
acceptable to Holders. The initial principal amount of the investment as of
Closing will be allocated among the Holders as follows:
Allied Capital Corporation $216,700
Allied Investment Corporation $374,300
Allied Capital Corporation II $394,000
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TOTAL: $985,000
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(b) Provided that there is no Event of Default at the time of
subsequent funding, the remaining unfunded portion of the Investment up to Five
Hundred Thousand Dollars ($500,000) will be funded by Allied in installments if
the Company satisfies any of the following criteria:
(i) in the event that the Parent provides Allied with a written
engagement letter for an information systems consultant, a budget for the
services to be rendered, and an itemized list of information systems purchases
supported by the consultant's recommendations, Allied will fund up to an amount
equal to the reasonable fees of the consultant and the cost of the purchased
information systems infrastructure at such times and in such amounts as set
forth in the engagement letter and/or budget, with the agreement that Allied
will be given a copy of the final report at such time when it is issued by such
consultant; and
(ii) in the event the Parent or PMI provides Allied with a
written employment agreement of a senior management executive, Allied will fund
up to an amount equal to the relocation costs of the executive and the salary
payable to the executive for the first year of employment.
(c) In connection with each such additional advance by Holders in
accordance with Section 2.01(b), the Borrowers will execute and deliver to
Holders Debentures in the aggregate principal amount of the advance, plus a pro
rata amount of Warrants issued in accordance with Section 2.08 hereof.
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2.02 COLLATERAL. Repayment of the Debentures and other Obligations
shall be secured ratably by third priority liens on, and security interests in,
all of the Collateral. To evidence and create the above-described liens and
security interests, the Borrowers, as appropriate, shall execute and deliver to
Allied at Closing all of the following documents and such additional documents
as Allied or its counsel may reasonably deem to be necessary or appropriate
(collectively, the "Security Documents"):
(a) A security agreement in form and substance acceptable to
Holders covering all of the Collateral, except as specifically covered by the
other Security Documents;
(b) UCC-1 Financing Statements in form and substance acceptable
to Holders to be filed in each of offices in each of the jurisdictions described
in the Security Agreement; and
(c) A collateral assignment of the lease for premises in
Lakeview Terrace, California held by PMI and any renewals or extensions thereof
or substitutions or replacements therefor, pursuant to an instrument in form and
substance acceptable to Holders, with the consent of the lessor thereto as set
forth therein;
(d) Amendments to Stock Pledge Agreements dated November 21,
1996, pledging all shares of capital stock of the Subsidaries; and
(e) Amendment to the investment agreement by and between Allied
and the Borrowers dated November 21, 1996.
The liens and security interests in the Collateral created by the
Security Documents shall be continuing in nature, and shall attach when: (i)
each Borrower has executed and delivered the Security Documents; (ii) any
Borrower has acquired rights in the Collateral; and (iii) any of the Holders has
made a complete or partial disbursement of proceeds under the Debentures to the
Borrowers, the Borrowers' designated payee, or an escrow agent.
2.03 JUNIOR DEBT. The Allied Investment and Allied's rights under the
Debentures and this Investment Agreement and the Security Documents shall be
subordinate, as to lien priority and right of payment with respect to common
Collateral, only to the following senior debt (the "Senior Debt"): (a) that
certain senior loan (as such loan may be modified, renewed, extended and
refinanced, the "Senior Loan") from HSBC Business Loans, Inc. ("HSBC") in an
outstanding principal amount not to exceed the sum of (A) the Receivables
Borrowing Base, plus (B) the Inventory Borrowing Base. (HSBC or any bank or
other lender which assumes or refinances the Senior Loan being referred to
herein as the "Senior Holder"); (b) those certain capitalized lease obligations
not to exceed Seven Hundred and Fifty Thousand Dollars ($750,000) in the
aggregate, as more fully described in Exhibit 2.03 attached hereto; and (c)
those certain Subordinated Secured Debentures with an aggregate principal amount
of Five Million Dollars ($5,000,000) issued pursuant to an investment agreement
by and between Allied and the Borrowers dated November 21, 1996 (the "Senior
Debentures"). In connection with the Senior Loan, the Senior Holder and Allied
shall enter into, at or prior to Closing, a subordination
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agreement in form and substance acceptable to Holders (the "Senior Loan
Subordination Agreement"). In connection with the Senior Debentures, holders
of the Senior Debentures and Allied shall enter into, at or prior to Closing,
a subordination agreement in form and substance acceptable to Holders (the
"Senior Debentures Subordination Agreement").
2.04 PRIORITY OF LIEN AND SECURITY INTERESTS. Allied's liens on, and
security interests in, the Collateral shall be prior to all other liens,
security interests or encumbrances, except for the liens, security interests and
encumbrances which secure the rights of the holders of the Senior Debt.
2.05 PREPAYMENT. The Debentures may be prepaid at any time, in whole
or in part, without premium or penalty.
2.06 DUE ON SALE. The Borrowers' obligations under the Debentures and
this Agreement are not assumable, and the Debentures and all of the other
Obligations are payable in full immediately upon a Transfer of the Business.
2.07 ATTORNEY-IN-FACT. Each Borrower hereby appoints as its
attorney-in-fact, in the name of such Borrower and on its behalf, for the sole
purpose of signing financing statements, continuation statements or other
recordable documents reasonably necessary to provide notice of the security
interest granted herein in the applicable public records. This power is coupled
with an interest and is irrevocable so long as any Obligations remain
outstanding. This appointment may be discharged by any officer or attorney of .
2.08 WARRANTS.
(a) In return for the Investment, the Parent will issue and sell to
Allied warrants entitling the Holders to purchase up to an aggregate of
1,297,800 shares of Common Stock, subject to adjustments as provided therein
(the "Warrants"). The Warrants shall be in form and substance acceptable to
Allied and shall be evidenced by (i) warrants for 1,027,800 shares not subject
to Section 2.12 hereof; and (ii) warrants for 270,000 shares in the aggregate
which shall evidence the agreement that the Warrant Shares are subject to the
call provision pursuant to Section 2.12 hereof. The aggregate purchase price
for the Warrants shall be One Hundred Dollars ($100.00), and the per share
exercise for the Warrants shall be as set forth in the Warrants. The Warrants
shall expire on that date which is the later of: (i) three years from the date
on which all Obligations with respect to the Debentures are satisfied in full;
or (ii) six years from the date hereof.
(b) At Closing, in return for its initial funding, Allied will be
issued (i) warrants to purchase 681,431 shares of Common Stock of the Parent,
not subject to Section 2.12 hereof, and (ii) warrants for 179,010 shares in the
aggregate which shall evidence the agreement that Warrant Shares are subject to
the call provision pursuant to Section 2.12 hereof. The per share exercise
price for the Warrants shall be as set forth in the Warrants.
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(c) In connection with each additional advance by Holders in
accordance with Section 2.01(b) hereof, Allied will be issued the remaining
Warrants to purchase up to 437,359 shares of Common Stock on a pro rata basis
from time to time.
2.09 REGISTRATION RIGHTS. The Warrant Shares shall be treated for all
purposes as "Registrable Securities" under the Registration Rights Agreement, by
and among the Parent, Allied and the other parties named therein, dated November
21, 1996.
2.10 CLOSING. Closing must occur on or before the close of business
on the date hereof, unless extended in writing by Allied, in Allied's sole
discretion.
2.11 CONDITIONS PRECEDENT TO HOLDERS' OBLIGATIONS. The obligation of
Allied to make the Investment is subject to the satisfaction of the following
conditions precedent at or prior to the Closing (unless waived in writing by
Allied prior to Closing):
(a) Each of the representations and warranties contained in this
Agreement must be true and accurate in all material respects as of the date of
Closing, and each Borrower must have performed all of its respective obligations
hereunder, including execution and delivery of all of the documents,
instruments, opinions and certificates required by this Agreement in such forms
as are satisfactory to Allied and its counsel;
(b) Allied shall have completed a due diligence report that
reflects favorably on the Borrowers, its management, and the market for the
Business generally. In this regard, each Borrower covenants and agrees to
furnish to Allied such information as Allied may request in order to enable
Allied to complete the required due diligence;
(c) Allied shall have received written evidence satisfactory to
it that the Sinkler Corporation has made an investment in the Borrowers
evidenced by the purchase of shares of the Parent's Series B Redeemable
Preferred Stock and Warrants for an aggregate purchase price of not less than
$165,000 (the "Junior Investment"); and
(d) Allied shall have received each of the following items:
(i) the Debentures in the amount of initial funding, duly
executed by each Borrower;
(ii) each of the Security Documents, duly executed by each
Borrower, as appropriate;
(iii) an opinion of counsel, duly executed by counsel to
the Borrowers, in form and substance acceptable to Allied;
(iv) the Senior Loan Subordination Agreement, duly executed
by the Senior Holder;
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(v) the Senior Debentures Subordination Agreement, duly
executed by holders of the Senior Debentures;
(vi) the Warrants in the amount set forth in Section 2.08(b)
hereof, duly executed by the Parent;
(vii) a written commitment from members of the Board of
Directors of the Parent in a form reasonably satisfactory to Allied committing
such members to purchase $335,000 of participation interest in the Investment,
to be funded in proportion to the advances made by Allied from time to time
within 45 days after Closing, subject only to the completion of a participation
agreement reasonably satisfactory to counsel for Allied and the participants;
and
(viii) an Officer's Certificate, certifying as to (a) the
Borrowers' Constituent Documents, as defined in Section 3.01, (b) the
resolutions of each Borrower authorizing the transactions contemplated in this
Agreement and the other Investment Documents, and (c) the incumbency and
specimen signatures of certain officers of the Borrowers.
2.12 CALL. Within 90 days after all of the Obligations have been
fully paid, the Parent may purchase from the Holders up to 270,000 shares of the
Warrant Shares, at a price per share equal to $3.00, or, if the Warrants have
not been exercised, may have the right to purchase up to 270,000 shares of
Warrants, at a price per share equal to $3.00 less the exercise price per share.
2.13 TERMINATION OF WARRANTS UPON EARLY REPAYMENT. In the event all
of the Obligations and all obligations under the Senior Debentures are fully
paid within 90 days from the date hereof (except for such payment in connection
with the sale of all or substantially all of the assets of any of the Borrowers,
or any merger, consolidation or similar transaction involving any of the
Borrowers), the Warrants together with all the warrants issued to Allied
pursuant to an investment agreement by and between Allied and the Borrowers,
dated November 21, 1996 (the "Prior Warrants"), shall be canceled and shall be
of no further force and effect.
ARTICLE III: REPRESENTATIONS AND WARRANTIES
A. To induce Holders to enter into this transaction, the Borrowers,
jointly and severally, represent and warrant to Holders as follows, except as
disclosed in the Parent's Form 10-K for the fiscal year ended July 31, 1996 (the
"Form 10-K") and Forms 10-Q for the fiscal quarters ended October 31, 1996,
January 1, 1997 and April 31, 1997, which representations and warranties shall
survive the execution and delivery of this Agreement and the funding of the
Investment:
3.01 ORGANIZATION; SUBSISTENCE. Each Borrower is a corporation
duly formed, validly organized and subsisting in the jurisdiction of its
formation. True, correct and complete copies of the articles of incorporation,
by-laws, all other constituent documents of each
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Borrower, and all amendments and supplements to any of the foregoing
(collectively, the "Borrowers' Constituent Documents") have been previously
delivered to Allied, and all of the Borrowers' Constituent Documents are in
full force and effect as of the date hereof.
3.02 QUALIFICATION. Each Borrower is duly qualified to conduct
business as it is currently being conducted and is subsisting as a foreign in
all jurisdictions in which the nature of its business or location of its owned
and leased property and assets requires such qualification (evidence of which
has been previously delivered), except where the failure to so qualify or
subsist would not have a material adverse effect on such Borrower, its business,
or its prospects.
3.03 POWER AND AUTHORITY. Each Borrower has full power and
authority to enter into this Agreement and each of the other Investment
Documents, to incur the Obligations as contemplated hereby and to carry out the
provisions of this Agreement and each of the other Investment Documents. The
Parent has full power and authority Each of the Parent and PMI have taken all
action necessary for the execution and delivery of this Agreement and each of
the other Investment Documents and for the performance by such Borrower of each
of its obligations hereunder and thereunder, as evidenced by corporate
resolution(s) or other authorization previously delivered.
3.04 ENFORCEABILITY. Upon execution and delivery by each of the
parties thereto, this Agreement and each of the other Investment Documents shall
be the legal, valid and binding obligations of each Borrower, to the extent such
Borrower is a party thereto, and shall be enforceable against such Borrower in
accordance with their respective terms.
3.05 LITIGATION. No Borrower is currently a party to or, to its
knowledge, threatened by any suits, actions, claims, investigations by
Governmental Authorities or legal, administrative, arbitration or mediation
proceedings, except as set forth in the schedule of litigation attached hereto
as EXHIBIT 3.05 (the "Litigation Schedule"). No Borrower knows of any basis or
grounds for any such suit, action, claim, investigation or proceeding. No
Borrower has initiated any litigation against any third parties (other than
where a Borrower is a creditor seeking collection of one or more Receivables),
except as set forth on EXHIBIT 3.05.
3.06 ORDERS; DECREES; JUDGMENTS. There are no outstanding
orders, judgments, writs, injunctions or decrees of any court, Governmental
Authority or arbitration or mediation panel or tribunal against or affecting any
Borrower, any of the Collateral, or any of the other properties, assets or
business of the Borrowers.
3.07 NON-CONTRAVENTION. Except for matters set out in the
Litigation Schedule, no Borrower is in breach of, default under, or in violation
of: (a) any Applicable Law, decree, or order which may materially and adversely
affect them; or (b) any deed, lease, loan agreement, commitment, bond, note,
deed of trust, restrictive covenant, license, indenture, contract, or other
agreement, instrument or obligation to which any of them is a party or by which
any of them is bound or to which any of their respective assets (including, but
not limited to, the Collateral) are subject. Neither the execution and delivery
of this Agreement and the
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Investment Documents nor the performance by any Borrower of its
respective obligations hereunder and thereunder will cause any such breach,
default or violation or will require the consent or approval of any court or
Governmental Authority, except as expressly contemplated by the terms of this
Agreement.
3.08 BORROWERS' BUSINESS. [INTENTIONALLY DELETED]
3.09 TITLE. Each Borrower has good, complete, indefeasible and
marketable title to, and ownership of, all of the Collateral and to all other
real or personal property it purports to own (if any), free and clear of all
liens, defects, claims, security interests and encumbrances other than the
Permitted Encumbrances.
3.10 TAXES. Except as set forth on EXHIBIT 3.10 attached hereto,
each Borrower has filed all federal, state and local tax returns which are
required to be filed, and each Borrower has duly paid or fully reserved for all
taxes or installments thereof (including any interest or penalties) as and when
due pursuant to the filed returns or pursuant to any levy or assessment received
by such Borrower.
3.11 FINANCIAL CONDITION.
(a) A true and complete copy of the Form 10-K, including
the audited consolidated financial statements summarizing the financial
condition and results of operations of the Parent, as consolidated, for the
fiscal year ended July 31, 1996 (the "Audited Financials"), has been provided to
Allied by the Borrowers. The Audited Financials were prepared in accordance
with GAAP, are true and correct in all material respects, and fairly present the
Parent's financial condition and results of operations of the Parent, as
consolidated, at such dates and for the periods then ended. The auditors have
issued an unqualified opinion to the Parent concerning the Audited Financials, a
copy of which is included with the Audited Financials.
(b) The unaudited consolidated financial statements
summarizing the financial condition and results of operations of the Parent, as
consolidated, for the month ended June 30, 1997 (the "Interim Financials") are
true and correct in all material respects, and fairly present the Parent's
financial condition and results of operations of the Parent, as consolidated,
subject to normal, non-material audit adjustments, except as disclosed on
EXHIBIT 3.11 attached hereto.
3.12 SOLVENCY. As of the date hereof, giving effect to the
transactions contemplated by this Agreement, the present fair saleable value of
the Borrowers' assets is greater than the amount required to pay the Borrowers'
total indebtedness (contingent or otherwise), and is greater than the amount
that will be required to pay such indebtedness as it matures and as it becomes
absolute and matured. The transactions contemplated hereby were effectuated
without actual intent to hinder, delay or defraud present or future creditors of
the Borrowers; it is the Borrowers' express intention that they will maintain a
solvent financial condition on a consolidated basis, giving effect to the
Obligations incurred hereunder, as long as
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any of the Obligations remain outstanding or any Borrower is obligated to the
Holders in any other manner whatsoever. Upon consummation of the Investment,
each Borrower will have sufficient capital to carry on its business and
transactions as planned to be conducted in the future.
3.13 MATERIAL LEASES. Attached hereto as EXHIBIT 3.13 is an
accurate and complete list of all leases of Real Property and all other material
leases to which any Borrower is a party or by which any Borrower or any of the
assets of any Borrower is bound, together with all amendments or supplements
thereto (collectively, the "Leases"). True and complete copies of each of the
Leases have been provided or made available to Allied prior to the date hereof.
Each of the Leases is valid, binding and enforceable in accordance with its
terms and remains in full force and effect. No Borrower is in default or
alleged to be in default with respect to any of its obligations under any of the
Leases (nor would be in default or alleged to be in default with the giving of
notice, passage of time, or both), and, to the best of the Borrowers' knowledge,
no party other than a Borrower is in default with respect to such party's
obligations under any of the Leases (or would be in default or alleged to be in
default with the giving of notice, passage of time, or both). No Borrower's
possession of any property leased by it has been disturbed, nor has any claim
been asserted against any Borrower that is or could be adverse to such
Borrower's interests under any of the Leases. None of the Leases is subject to
any rights of set-off, recoupment or similar deduction or offset and, except as
noted on EXHIBIT 3.13 attached hereto, the collateral assignment of the
Borrowers' rights under each of the Leases will not impair or conflict with the
validity or enforceability of any of the Leases. No Borrower has assigned or
encumbered any of its rights, title or interest in or under any of the Leases
nor agreed to any oral modifications of any of the provisions of any of the
Leases.
3.14 MATERIAL CONTRACTS. Attached hereto as EXHIBIT 3.14 is
an accurate and complete list of all material contracts (including all those
representing 20% or more of the Borrowers' total revenue, profit or volume)
to which any Borrower is a party or by which any Borrower or the assets of
any Borrower is bound (collectively, the "Contracts"). True and complete
copies of each of the Contracts have been provided or made available to
Allied prior to the date hereof. Each of the Contracts is valid, binding and
enforceable in accordance with its terms and remains in full force and
effect. No Borrower is in default or alleged to be in default with respect
to any of its obligations under any of the Contracts (nor would be in default
or alleged to be in default with the giving of notice, passage of time, or
both), and, to the best of the Borrowers' knowledge, no party other than the
Borrowers is in default with respect to such party's obligations under any of
the Contracts (or would be in default or alleged to be in default with the
giving of notice, passage of time, or both). No claim has been asserted
against any Borrower that is or could be adverse to such Borrower's interests
under any of the Contracts. None of the Contracts is subject to any rights
of set-off, recoupment or similar deduction or offset and, except as noted on
EXHIBIT 3.14 attached hereto, the collateral assignment of the Borrowers'
rights under each of the Contracts will not impair or conflict with the
validity or enforceability of any of the Contracts. No Borrower has assigned
or encumbered any of its rights, title or interest in or under any of the
Contracts nor agreed to any oral modifications of any of the provisions of
any of the Contracts.
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3.15 [INTENTIONALLY DELETED]
3.16 [INTENTIONALLY DELETED]
3.17 DISCLOSURE. Neither (i) this Agreement and all Exhibits
hereto; nor (ii) any reports or information filed by the Borrowers pursuant to
the Securities Exchange Act of 1934 during the 18 months preceding the Closing
Date (upon which Allied is entitled to rely in making the investment pursuant to
this Investment Agreement), contains any untrue statement of material fact or
omits to state a material fact necessary to make the statements therein not
misleading.
3.18 OTHER DEBTS. Except for the liabilities included in the
Audited Financials and the Interim Financials, no Borrower has any indebtedness,
liabilities or obligations of any nature (whether liquidated or unliquidated,
mature or not yet mature, absolute or contingent, secured or unsecured), arising
out of any transaction entered into or any state of facts existing prior hereto,
including, without limitation, liabilities or obligations on account of taxes or
government charges, penalties, interest or fines thereon or in respect thereof,
and no Borrower knows, or has reasonable grounds to know, of any basis for any
claim against any Borrower as of the date of this Agreement or of any debt,
liability or obligation.
3.19 NO MATERIAL CHANGE. Since the ending date of the Interim
Financials, no Borrower has: (i) suffered any material change in its condition
(financial or otherwise) or its overall business prospects; (ii) entered into
any material transactions or incurred any debt, obligation or liability (whether
liquidated or unliquidated, mature or not yet mature, absolute or contingent,
secured or unsecured) other than the Obligations; (iii) sustained any material
loss or damage to its Real Property or personal property, whether or not
insured; (iv) suffered any material interference with its business or
operations, present or proposed; and (v) made any Transfer, abandonment or other
disposition of any of its Real Property or personal property or any interest
therein or relating thereto, that is material to the financial position or
prospects of such Borrower, except as disclosed on EXHIBIT 3.19 attached hereto.
3.20 NO SIDE AGREEMENTS. No Borrower, nor any of the officers,
directors, shareholders or managers of such Borrower are party to any agreement,
either written or oral, with any Person (including any of the Holders) whereby
such Borrower, or any of the officers, directors, shareholders or managers of
such Borrower, acting in such capacities, have agreed to do anything beyond the
requirements of formal, written contracts executed by such Borrower. Other than
this Agreement, the other Investment Documents, and any documents relating to
the Permitted Encumbrances, no Borrower, nor any of the officers, directors,
shareholders or managers of such Borrower is a party to any agreement calling
for any action by any Borrower or such party outside the ordinary course of
their respective businesses. To the best of the Borrowers' knowledge, there
exists no agreement or understanding calling for any payment or consideration
from a customer or supplier of any Borrower to officers, directors, shareholders
or managers of such Borrower with respect to any transaction between such
Borrower and such supplier or customer. No Affiliate of any Borrower, directly
or indirectly, transacts any business with any Borrower, except for employment
arrangements as disclosed on
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EXHIBIT 3.27 below and arrangements disclosed in reports filed pursuant to
the Securities Exchange Act of 1934.
3.21 SBA FORMS AND REPRESENTATIONS. The Parent has previously
delivered accurate and complete copies of the Size Status Declaration (SBA Form
480), the Assurance of Compliance for Non-Discrimination (SBA Form 652), the
Portfolio Financing Report (SBA Form 1031), and the Economic Impact Assessment
(collectively, the "SBA Forms"). Each of the representations, statements and
certifications made in each of the SBA Forms is accurate and complete and does
not fail to state a material fact necessary to make such representations,
statements and certifications not misleading. The Parent is a "small business
concern" as defined in the Small Business Investment Act of l958, as amended
(the "SBA Act"), and the rules and regulations of the U.S. Small Business
Administration (the "SBA") issued or promulgated thereunder. There exists no
agreement, expressed or implied, no condition, state of facts or relationship
between the Parent and any other entity or entities which would prevent it from
qualifying as a "small business concern" under the SBA Act.
3.22 INVESTMENT COMPANY ACT REPRESENTATIONS. No Borrower is, or
intends to become, an "investment company", as such term is defined in the
Investment Company Act of 1940, as amended (the "1940 Act"), and no Borrower,
nor any of the respective officers, directors, partners or controlling persons
of any of them is an "associate" of any Holder, as such terms are defined in
Section 107.3 of the amended Regulations promulgated under the SBA Act, nor an
"affiliated person" of any Holder, as such term is defined in Section 2(a)(3) of
the 1940 Act.
3.23 GENERAL LEGAL COMPLIANCE. No Borrower is in violation of
any Applicable Law that would apply to it or to its business, the violation of
which would have a material adverse effect either individually or in the
aggregate on any Borrower, its business, or its prospects.
3.24 ENVIRONMENTAL LEGAL COMPLIANCE. Without limiting the
generality of the representation and warranty made in Section 3.23 above, no
Borrower is in violation of any applicable Environmental Law (as defined below),
which violation would have a material adverse effect either individually or in
the aggregate on any Borrower or its business or prospects, and no Borrower has
been notified of any action, suit, proceeding or investigation which calls into
question compliance by any Borrower with any Environmental Laws or which seeks
to suspend, revoke or terminate any license, permit or approval necessary for
the generation, handling, storage, treatment or disposal of any Hazardous
Material, in each case, except as set forth in EXHIBIT 3.24 attached hereto. As
used in this Agreement, the term "Environmental Law" shall mean, collectively,
the Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, 42 U.S.C. Section 9601 ET SEQ. ("CERCLA"); the Solid Waste
Disposal Act, as amended, 42 U.S.C. Section 6901 ET SEQ.("SWDA") including the
Resource Conservation and Recovery Act of 1976, as amended, 42 U.S.C. Section
6901 ET SEQ. ("RCRA"); the Clean Water Act, as amended, 42 U.S.C. Section 1251
ET SEQ. ("CWA"); the Clean Air Act, as amended, 42 U.S.C. Section 7401 ET SEQ.;
any "superfund" or "superlien" law; and any other Applicable Law regulating,
relating to, or imposing liability or standards of conduct concerning,
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any hazardous, toxic or dangerous waste, substance or material, and the term
"Hazardous Material" shall mean and include any hazardous, toxic or dangerous
waste, substance or material, the generation, handling, storage, disposal,
treatment or emission of which is subject to any Environmental Law.
3.25 EMPLOYEE BENEFIT MATTERS. Except as set forth on EXHIBIT
3.25 attached hereto, there is no existing single-employer plan defined in
Section 4021(a) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") as to which any Borrower is an "employer" or a "substantial
employer" as defined in Sections 3(5) and 4001(a)(2) of ERISA, respectively.
EXHIBIT 3.25 is an accurate and complete list of each plan described in Section
4021(a) of ERISA as to which any Borrower is liable to make contributions or for
the payment of benefits. Each Borrower has delivered or made available to
Allied true and complete copies of each of the plans listed on EXHIBIT 3.25. To
the best knowledge of the Borrowers, there have been no "reportable events" as
set forth in Section 4043(b) of ERISA with respect to any such plan, and no
termination of any such plan since the effective date of ERISA which could
result in any tax, penalty or liability being imposed upon any Borrower. No
Borrower has participated in, and the execution and delivery of this Agreement
by each Borrower will not involve, any "prohibited transaction" (as defined in
Section 4975 of the Internal Revenue Code of 1986, as amended) that could
subject any Borrower to any tax or penalty imposed by Section 4975 of the
Internal Revenue Code of 1986, as amended. To the best knowledge of the
Borrowers, no predecessor-in-interest to any Borrower has participated in any
"prohibited transaction" (as defined in Section 4975 of the Internal Revenue
Code of 1986, as amended) that could subject any Borrower to any tax or penalty
imposed by Section 4975 of the Internal Revenue Code of 1986, as amended. Since
the effective date of ERISA, no Borrower, nor any predecessor-in-interest to any
Borrower, has incurred any "accumulated funding deficiency", as such term is
defined in Section 302 of ERISA, to which any Borrower could be subject or for
which it might be liable. No Borrower is a party to, and none of the operations
of any Borrower is covered by, a "multi-employer plan", as defined in Section
3(37) of ERISA.
3.26 COLLECTIVE BARGAINING. No Borrower is a party to or subject
to any collective bargaining agreements or union contracts. There are no labor
disputes pending or threatened against any Borrower or, to the best knowledge of
the Borrowers, between any Borrower and its employees which have affected, or so
far as the Borrowers can reasonably foresee may affect, materially and adversely
the business or condition of the Borrowers or the Business.
3.27 EMPLOYEES. Attached hereto as EXHIBIT 3.27 is an accurate
and complete list of all employment and compensation contracts, including all
retirement benefit agreements not disclosed on EXHIBIT 3.25, between the
Borrowers and officers and executives of the Borrowers. The Borrowers have
delivered to the Holders accurate and complete copies of all such contracts. No
of any Borrower has advised such Borrower (orally or in writing) that he or she
intends to terminate employment with such Borrower, other than as set forth in
Exhibit 3.27.
3.28 INSURANCE. Attached hereto as EXHIBIT 3.28 is an accurate
and complete list of all insurance policies and binders presently providing
coverage to any Borrower
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or any assets of any Borrower, including all insurance providing coverage
with respect to any of the Collateral. The Borrowers have furnished or made
available to Allied appropriate insurance certificates and accurate and
complete copies of the insurance binders or policies for all of the insurance
listed in EXHIBIT 3.28. The coverage provided by such insurance is adequate
for the conduct of the Business.
3.29 LICENSES. Attached hereto as EXHIBIT 3.29 is an accurate
and complete list of the Licenses held by the Borrowers. The Licenses held by
the Borrowers constitute all licenses, permits, approval and authorizations
needed to properly operate the Business. No Borrower is in default or in
noncompliance with respect to any License.
3.30 BROKERS. No Borrower has any knowledge of any investment
banking, brokerage, or finders fees due for the transactions contemplated
hereby, except for (i) the fees due Shipley Raidy Capital Partners, LP, if any
(all of which shall be paid by the Parent) and (ii) the fees due Mitchell
Capital (all of which shall be paid by Allied). Each Borrower will indemnify
the Holders for any claims with respect to any such fees, other than claims
relating to the fees due Mitchell Capital.
3.31 SUBSIDIARIES. Attached hereto as EXHIBIT 3.31 is an
accurate and complete list of all direct or indirect subsidiaries of any
Borrower, designating certain subsidiaries as inactive (collectively, the
"Inactive Entities"). Except for director-qualifying shares and except as
disclosed on EXHIBIT 3.31, all shares of subsidiaries are owned by a Borrower
and are validly issued, fully paid and non-assessable. The Inactive Entities
have no material assets and conduct no business operations, and Borrowers have
no intention of causing any Inactive Entity to obtain any material assets or
conduct any business operations.
3.32 EQUITY. No Borrower has granted any pre-emptive rights
relating to any of its securities. The shares issuable upon exercise of the
Warrants have been duly authorized and reserved and, upon exercise, will be
fully paid and non-assessable.
3.33 SECURITIES LAWS. The issuance and sale of the Warrants and
the Debentures hereunder, and the issuance of shares issuable under the
Warrants, complies and will comply, as the case may be, with all federal and
state securities laws and regulations.
3.34 CAPITALIZATION. Set forth on EXHIBIT 3.34 attached hereto
is an accurate and complete list of the following information for each Borrower:
(i) the authorized capitalization of such Borrower as of the date hereof; (ii)
the number of shares of each class of such Borrower's issued capital stock and
the number of outstanding shares thereof; and (iii) a description of all
convertible securities and all options, warrants and similar rights held with
respect to such Borrower's capital stock. All shares of capital stock of each
Borrower and all convertible securities, options, warrants and similar rights
held with respect to such Borrower's capital stock have been duly authorized and
validly issued, and are fully paid and nonassessable (in the case of capital
stock). Except as listed in EXHIBIT 3.34 attached hereto, there are no
outstanding options, warrants, convertible securities or other stock purchase
rights issued by any of the Borrowers as of the date hereof.
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B. To induce the Borrowers to enter into this transaction, Allied
represents and warrants to the Borrowers as set forth below (which
representations and warranties shall survive the execution and delivery of this
Agreement and the funding of this transaction).
B-3.01 INVESTMENT INTENT. Allied: (i) is acquiring the
Warrants and Debentures being purchased by it hereunder and will, upon
conversion of the Warrants, acquire the Warrant Shares, for its own account for
the purpose of investment and not with a view to or for sale in connection with
any distribution thereof; (ii) understands that the Warrants, the Debentures and
the Warrant Shares have not been registered under the Securities Act by reason
of their issuance in a transaction exempt from the registration requirements of
the Securities Act pursuant to Section 4(2) thereof and may not be offered or
sold except pursuant to an effective registration statement or an available
exemption from the registration requirements under the Securities Act; and (iii)
is an "accredited investor" as defined in Regulation D as promulgated under the
Securities Act. Allied agrees that the certificates representing the
Debentures, the Warrants and the Warrant Shares will bear restrictive legends to
the effect of clause (ii) of the preceding sentence and that the Parent may
require an opinion of counsel, in form and substance reasonably satisfactory to
the Parent, to the effect that any proposed transfer will not result in any
violation of the Securities Act and the rules and regulations thereunder.
B-3.02 PURCHASED NOTES. Allied is the owner of the Purchased
Notes, free and clear of any liens, claims or encumbrances of any nature, and
has the power and authority to amend, waive, revoke or otherwise modify the
terms of the Purchased Notes and the Investment Agreements pursuant to which the
Purchased Notes were issued without authorization, consent or approval of any
person.
ARTICLE IV: AFFIRMATIVE COVENANTS
Until the Debentures are repaid in full and each of the other
Obligations has been satisfied in full and discharged (other than those
Obligations arising from the Warrants), and until the Warrants expire (with
respect to Sections 4.18 and 4.19 only), each Borrower covenants and agrees with
the Holders to do all of the following:
4.01 MONTHLY FINANCIALS. The Borrowers shall forward, or cause to be
forwarded to Holders, the Parent's consolidated monthly and year-to-date
financial statements, comparing actual to budgeted performance, prepared in
accordance with GAAP (including a monthly and year-to-date balance sheet, profit
and loss statement and cash flow statement) within 45 days following the end of
each month (other than a month marking the Borrowers' fiscal year end), together
with a monthly one-page management summary description of operations.
4.02 CERTIFICATION OF NON-DEFAULT. The Borrowers shall provide to the
Holders in writing each fiscal quarter an officer's certificate, signed by the
Chief Executive Officer or Chief Financial Officer, certifying that no Event of
Default has occurred under this Agreement, or if any such Event of Default
exists, stating the nature of such Event of Default.
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4.03 CERTIFICATION OF OPTIONS EXERCISED BY EMPLOYEES. The Borrowers
shall provide to the Holders in writing each fiscal quarter an officer's
certificate, signed by the Chief Executive Officer or Chief Financial Officer,
certifying the number of shares of Common Stock issued during such quarter upon
the exercise of options held by employees.
4.04 ANNUAL AUDIT. The Borrowers shall forward, or cause to be
forwarded, to Holders the Parent's consolidated audited year-end balance sheet,
profit and loss statement and cash flow statement, without qualification
thereof, within 90 days of such fiscal year-end, which shall be prepared at the
Borrowers' sole expense by an independent accounting firm acceptable to the
Holders according to GAAP. For purpose of this Agreement, unless notice is
expressly given to the contrary by Holders, all national and regional firms
shall be considered acceptable to the Holders.
4.05 PROJECTED FINANCIALS. Prior to each fiscal year-end, the
Borrowers shall provide the Holders with projected financial statements for the
Borrowers for the coming three years and monthly projections for the Borrowers
for the coming year, in the same format as used for the financial statements
required pursuant to Section 4.01 above.
4.06 NOTICE OF FILINGS. Within 30 days of filing, the Borrowers shall
provide the Holders with copies of all material returns and documents filed by
any Borrower with any Governmental Authority, including, without limitation, the
U.S. Internal Revenue Service, the U.S. Environmental Protection Agency, the
U.S. Occupational Safety and Health Administration, the SBA, and the U.S.
Securities and Exchange Commission (the "SEC").
4.07 NOTICE OF LITIGATION. The Borrowers shall notify the Holders of
any litigation involving a claim for damages in excess of $100,000 to which any
Borrower is a party by mailing to the Holders, by U.S. registered mail, within
30 days of receipt thereof, a copy of the Complaint, Motion for Judgment or
other such pleadings served on or by any Borrower; PROVIDED, HOWEVER, that the
Borrowers shall not be obliged by this Section 4.07 to give notice of suits
where a Borrower is a creditor seeking collection of one or more Receivables.
Borrowers shall also notify the Holders of any litigation of which the Borrower
has knowledge and to which any Borrower is not a party but which could
substantially affect the Collateral or the operation of the Business, by mailing
to the Holders, by U.S. registered mail, a copy of all pleadings obtained by the
Borrowers in regard to such litigation, or if no pleadings are obtained, a
letter setting out the facts known about the litigation within 30 days of
receipt thereof.
4.08 NOTICE OF DEFAULTS OR JUDGMENTS. The Borrowers shall give the
Holders notice of any default declared with respect to any Lease, Contract, or
loan of any Borrower or any judgment entered against any Borrower, by mailing an
accurate and complete copy thereof to Holders within 10 days of receipt thereof
by such Borrower.
4.09 FINANCIAL COVENANTS.
(a) PMI shall maintain each of the following levels of financial
performance, measured in accordance with GAAP:
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(i) Net Working Capital of not less than $3,500,000,
determined at the end of each fiscal quarter;
(ii) Working Capital Ratio of not less than 1.30:1,
determined at the end of each fiscal quarter;
(iii) Tangible Net Worth of not less than $7,500,000,
determined at the end of each fiscal quarter;
(iv) Debt to Tangible Net Worth ratio of not more than
2.25:1, determined at the end of each fiscal quarter; and
(v) Net Income After Taxes of not less than $900,000, for
each fiscal year.
Notwithstanding the foregoing provision, all covenants contained in
this Section 4.09(a) are waived during the first sixty (60) days following
Closing. In addition, if PMI renegotiates the financial covenants applicable to
PMI or the Parent with the Senior Holder during the 60 day period, those
renegotiated financial covenants are hereby incorporated in this Agreement as if
set forth in full and the financial covenants set forth above are terminated.
No future amendments to or waivers of the renegotiated financial covenants by
the Senior Holder will apply to this Agreement unless separately consented to by
Allied. In the event that no financial covenants are renegotiated with the
Senior Holder within 60 days after Closing, the waiver by the Holders set forth
above shall terminate and the provisions of this Section 4.09(a) will apply to
PMI, from and after such date.
As used in this Section 4.09(a), the following terms shall have the
meanings indicated with respect to PMI:
(1) "NET WORKING CAPITAL" shall mean the amount by which
current assets (excluding any Intangible Assets, as defined below) exceed
current liabilities;
(2) "WORKING CAPITAL RATIO" shall mean the ratio of current
assets (excluding any Intangible Assets) to current liabilities;
(3) "TANGIBLE NET WORTH" shall mean the (i) the sum of
stockholders' equity and the principal balance of any debt subordinate to the
Senior Loan, less (ii) the book value of Intangible Assets;
(4) "DEBT TO TANGIBLE NET WORTH" shall mean the ratio of
total liabilities, excluding the principal balance of any debt that is
subordinate to the Senior Loan, to Tangible Net Worth;
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(5) "NET INCOME AFTER TAXES" shall mean, with respect to
any fiscal year, net income after provisions for taxes for such fiscal year; and
(6) "INTANGIBLE ASSETS" shall mean (i) all loans or
advances to, and other receivables owing from, any officers, employees,
subsidiaries and other affiliates, (ii) all investments, whether in a
subsidiary, a joint venture or otherwise, (iii) goodwill, (iv) any other assets
deemed intangible under GAAP; and (v) any other assets determined to be
intangible by Holders in its reasonable credit judgment.
(b) Parent shall maintain each of the following levels of
financial performance, measured on a consolidated basis in accordance with GAAP:
(i) Total revenues of not less than $8,000,000, determined
for the quarter ending on October 31, 1997 (the "First Quarter");
$8,300,000, determined for the quarter ending on January 31, 1998 (the
"Second Quarter"), $9,000,000, determined for the quarter ending on
April 30, 1998 (the "Third Quarter"); $9,200,000, determined for the
quarter ending on July 31, 1998 (the "Fourth Quarter"); $9,500,000,
determined for the quarter ending on October 31, 1998 (the "Fifth
Quarter") and quarterly thereafter;
(ii) EBITDA of not less than $425,000 for the First Quarter;
$525,000 for the Second Quarter; $625,000 for the Third Quarter;
$625,000 for the Fourth Quarter; $650,000 for the Fifth Quarter and
quarterly thereafter;
(iii) The ratio of EBITDA to Total Interest Expense
shall be equal to or greater than 1.0:1 for the First Quarter; 1.1:1
for the Second Quarter; 1.2:1 for the Third Quarter, 1.3:1 for the
Fourth Quarter; 1.4:1 for the Fifth Quarter; 1.5:1, determined for the
quarter ending January 31, 1999 and quarterly thereafter; and
(iv) The ratio of Total Debt to EBITDA shall be less than or
equal to 8.5:1 for the annualized First Quarter; 7.75:1 for the
annualized results of the combined First Quarter and Second Quarter;
7.0:1 for the annualized results of the combined First Quarter, Second
Quarter and Third Quarter; 6.5:1 for the combined First Quarter,
Second Quarter, Third Quarter and Fourth Quarter; 6.0:1 for the
quarter ending October 31, 1998 based on immediately preceding four-
quarter period; 5.5:1 for the quarter ending January 31, 1999 based on
the immediately preceding four-quarter period; 5.0:1 for each fiscal
quarter thereafter, based on immediately preceding four-quarter
period.
As used in this Section 4.09(b), the following terms shall have the
meanings indicated with respect to the Parent, on a consolidated basis:
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(1) "EBITDA" shall mean earnings before interest expense
(excluding interest on any trade debt incurred as permitted under Section 5.08),
tax expense on federal and state income taxes, depreciation expense, and
amortization expense;
(2) "TOTAL INTEREST EXPENSE" shall mean the aggregate
amount of installment interest payments paid or payable in respect of the
Debentures and the instruments evidencing the Senior Debt; and
(3) "TOTAL DEBT" shall mean the sum of the principal amount
of the Senior Loan, the Senior Debentures and the Debentures.
4.10 INSURANCE. At all times until all of the Obligations have been
satisfied in full, the Borrowers shall maintain all insurance listed in EXHIBIT
3.28 or equivalent replacement insurance in full force and effect.
4.11 USE OF PROCEEDS. The Borrowers shall use the proceeds of the
Investment for transaction costs and working capital for U.S. operations
(including the purposes set forth in Section 2.01(b)). From time to time
following the Closing, upon the request of Allied, the Borrowers shall furnish
to Allied a written certification of the Borrowers, signed by the Chief
Executive Officer or Chief Financial Officer, certifying that the net proceeds
of the Investment are being used for the purposes permitted by the terms of this
Section 4.11. Each Borrower hereby authorizes Allied and its designated
representatives to conduct a review of such Borrower's books and records
sufficient to satisfy Allied, in the exercise of Allied's reasonable discretion,
that the proceeds of the Investment are being used for the purposes permitted by
the terms of this Section 4.11.
4.12 PAYMENTS AND OBLIGATIONS. The Borrowers shall make all payments
of principal, interest and other charges as and when due under the Debentures,
shall timely make all payments of any other monetary Obligations, shall perform
or comply with, as the case may be, all of the other Obligations, and shall
perform and comply in all respects with all applicable terms, conditions and
covenants of all this Agreement and the other Investment Documents.
4.13 INFORMATION REQUESTS. The Borrowers shall furnish from time to
time to Holders all information Holders may reasonably request to enable Holders
to prepare and file any form required of Holders by the SEC or any other
Governmental Authority.
4.14 CREDIT CHECKS; ACCESS TO RECORDS. The Borrowers shall permit any
authorized representative(s) of Holders and their attorney(s) and accountant(s)
to obtain credit and other background information on each Borrower and its
management, and to inspect, examine and make copies and abstracts of the books
of account and records of such Borrower at reasonable times during normal
business hours. The Borrowers shall allow Holders or their agent(s) to
interview the Borrowers' outside accountants, who, by this covenant, are hereby
irrevocably instructed to respond to such inquiries as fully as if made by the
Borrowers themselves.
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4.15 MAINTAIN COPIES; FINANCING STATEMENTS. The Borrowers shall
maintain an original or a true copy of this Agreement and any modifications
hereof, which shall be available for inspection as called for herein or in the
Debentures. The Borrowers agree that a photographic or other reproduction of
this Agreement or of a financing statement is sufficient as a financing
statement.
4.16 MAINTAIN EXISTENCE. The Borrowers shall take or cause to be
taken all steps and perform or cause to be performed all actions necessary or
appropriate to preserve and keep in full force and effect their existence as s
and their right to conduct their business in a prudent and lawful manner in all
jurisdictions in which they currently conduct business, other than in connection
with a merger the primary purpose of which is the change in state of
incorporation of a Borrower.
4.17 PROTECT THE COLLATERAL. The Borrowers shall take or cause to be
taken all steps and perform or cause to be performed all actions necessary and
appropriate to administer, supervise, preserve and protect the Collateral and to
maintain the Holders' perfected security interest in the Collateral.
4.18 COMMON STOCK RESERVES/LISTING OF WARRANT SHARES.
(a) The Parent shall maintain such shares of Common Stock as
authorized but unissued, as may be necessary to permit the Holders of the
Warrants to acquire all of the Warrant Shares at any time.
(b) Upon exercise of the Warrants and the lifting or expiration
of all restrictions on transfer applicable to any shares issuable under the
Warrants and the Prior Warrants, the Parent shall use its best efforts to
promptly obtain listing of such shares on the American Stock Exchange.
4.19 REPLACEMENT OF WARRANTS. The Parent shall perform all acts
required under the Warrants, including the re-issuance or replacement of
Warrants to any of the Holders upon transfer, exchange, loss or destruction
thereof.
4.20 BOARD MEETINGS. The Parent shall hold meetings of its board of
directors at its offices or another designated location on an as-needed basis,
but not less frequently than four times per fiscal year. Holders shall be
notified in writing of the date and time for each board meeting at least two
weeks prior thereto. If the Parent schedules a board meeting without two weeks
notice, Holders shall be notified of the date and time for such board meeting as
soon after the scheduling as possible.
4.21 [INTENTIONALLY DELETED]
4.22 DELIVERY OF SECURITY DOCUMENTS. In the event Allied waives the
condition precedent set forth in Section 2.11(d)(ii) with respect to the
delivery of certain Security
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Documents, the Borrowers shall deliver to Allied such Security Documents,
fully executed, within 30 days of Closing.
4.23 EXECUTION OF JOINDER AND ALLONGE.
(a) Within 90 days of Closing, each Subsidiary listed on Schedule A
shall take all action necessary for the execution and delivery of the joinders
to this Agreement and each of the other Investment Documents in the form set
forth as EXHIBIT A hereto and the Allonge to Debentures in the form set forth as
EXHIBIT B hereto, and for the performance by such Borrower of each of its
obligations hereunder and thereunder and shall so execute and deliver all such
joinders and Allonge to Debentures.
(b) In connection with each advance made by Holders after execution
and delivery of the documents described in Section 4.23(a), each Subsidiary
listed in EXHIBIT A shall be included as a Borrower under each Debenture
evidencing such advance.
4.24 BORROWERS' BUSINESS. From and after the Closing, the Borrowers
will be primarily engaged in the operation of the Business and no other business
or businesses.
4.25 INFORMATION SYSTEMS CONSULTANT. At a time that is mutually
agreeable to Holders and the Borrowers after January 1, 1998, the Borrowers will
permit Holders to engage an information systems consultant, at the Borrowers'
expense, not to exceed $20,000 to review the Borrowers' information and
inventory control systems and issue a report thereon to the Holders and the
Borrowers. The Borrowers will cooperate with the consultant in conducting the
review and provide access to the Borrowers' information systems and facilities
for the purpose of conducting such review.
ARTICLE V: NEGATIVE COVENANTS
Until the Debentures are repaid in full and each of the other
Obligations has been satisfied in full and discharged (other than those
Obligations arising from the Warrants), and (solely with respect to Section 5.03
below) until each of the Holders no longer holds any Warrants or has the right
to receive any Warrants, each Borrower jointly and severally covenants and
agrees with the Holders not to do any of the following, without the prior
written consent of the Holders (which consent may be withheld by Holders in
Holders' discretion for any reason whatsoever):
5.01 CONSOLIDATION, MERGER AND SALE OF ALL ASSETS. The Parent will
not, nor will it permit any of its Subsidiaries to, merge or consolidate into or
with any other Person or convey, sell, lease or otherwise dispose of all or
substantially all of its assets to another Person, or permit any Person to merge
or consolidate into or with the Parent or any Subsidiary or convey, sell, lease
or otherwise dispose of all or substantially all of its assets to the Parent or
any Subsidiary; provided that (i) any Subsidiary may merge into, or convey,
sell, lease or dispose of its assets to the Parent or another Subsidiary, (ii)
the Parent may merge into any Subsidiary or any subsidiary formed solely for the
purpose of changing the Parent's state of incorporation, (iii)
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a Person other than a Subsidiary may merge into, or convey, sell, lease or
dispose of its assets to, the Parent, if the Parent is the surviving or
acquiring corporation, and (iv) a Person other than the Parent or a
Subsidiary may merge into, or convey, sell, lease or dispose of its assets
to, a Subsidiary if (A) such Subsidiary is the surviving or acquiring
corporation or (B) the surviving or acquiring entity, if not such Subsidiary,
becomes a wholly-owned subsidiary of the Parent (so long as such surviving or
acquiring entity becomes a party to this Agreement and the Parent pledges the
stock of such entity); in each case, so long as in any such transaction the
rights and powers of the Holders will not, in their reasonable discretion, be
adversely affected thereby and immediately after such transaction no Event of
Default shall exist hereunder. For the purposes of this Section 5.01, the
failure of Holders to object within 10 business days following the receipt of
notice of any such proposed transaction shall be deemed an acknowledgment
that Holders are not adversely affected thereby.
5.02 SALE OF ASSETS; LIQUIDATION.
(a) The Parent will not, nor will it permit any of its
subsidiaries to, convey, sell, lease or otherwise dispose of any assets,
directly or indirectly, in a single transaction or in a series of transactions
occurring during any one fiscal year of the Parent, except (i) as permitted
under Section 5.01 hereof, or (ii) for sales or other dispositions of property
in the ordinary course of business.
(b) The Parent will not, nor will it permit any of its
subsidiaries to, liquidate, dissolve or wind up its affairs nor institute,
consent to or fail promptly to contest proceedings for any such purpose,
provided however, that any such subsidiary may be liquidated into the Parent or
into a wholly-owned subsidiary of the Parent in a transaction permitted by
Section 5.01 or by this Section 5.02, and any Inactive Entity may be liquidated
or dissolved.
5.03 DISTRIBUTIONS. No Borrower shall make or cause to be made any
redemption or repurchase of any capital stock or rights with respect thereto or
securities exchangeable for any capital stock or any distribution of cash,
capital stock or other property of such Borrower to any of its shareholders
(whether such distribution would be characterized as a dividend or otherwise),
other than (i) to another Borrower in such Borrower's capacity as a shareholder
of a Subsidiary; (ii) to the holder of the Junior Investment in order to redeem
the Parent's Series A Redeemable Preferred Stock or in the form of dividends, in
accordance with the terms thereof, provided that (A) only scheduled redemptions
and dividends shall be permitted and (B) in no event shall any redemption or
dividend occur if an Event of Default has occurred or would occur as a result of
such action; and (iii) in any transaction in which Holders may participate pro
rata in such transaction based upon the number of Warrant Shares held or
eligible to be acquired upon exercise of the Warrants, and such Borrower has
provided Holders with 10 business days' notice of such transaction.
5.04 NO ENCUMBRANCES. No Borrower shall permit to exist against any
of the Collateral or any of its other material assets (if any) any lien,
mortgage, pledge, security interest, title retention device, or other
encumbrance junior or senior to the liens and security interests of Holders
under the Security Documents, except for the Permitted Encumbrances.
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5.05 INSIDE TRANSACTIONS. No Borrower shall purchase or sell any
property or services, or borrow or lend money or property from or to, or co-
invest in, any transaction with any officer, director, shareholder, employee or
Affiliate of any Borrower, except on terms no more favorable than a Borrower
would offer to a third party.
5.06 CHANGE OF BUSINESS. No Borrower shall: (i) change the primary
nature of its business operations; (ii) expend or invest any funds in any manner
not related to such Borrower's business operations; (iii) establish any
subsidiary or invest in or transfer assets to an "inactive" subsidiary (unless
such subsidiary becomes a party to this Agreement and such Borrower pledges the
stock of such subsidiary); or (iv) make any investment in any Affiliate which
would, in the reasonable discretion of Holders, adversely affect the rights and
powers of Holders. No provision of this Section 5.06 shall be interpreted as
limiting the ability of the Parent to make investments in the Subsidiaries in
the ordinary course of business. For the purposes of this Section 5.06, the
failure of Holders to object within 10 business days following the receipt of
notice of any such proposed investment under clause (iv) shall be deemed an
acknowledgment that Holders are not adversely affected thereby.
5.07 JUDGMENTS. No Borrower shall permit any judgment in excess of
$100,000, or any series of judgments aggregating in excess of $100,000, obtained
against such Borrower to remain unpaid for over 20 days without obtaining a stay
of execution or appropriate surety bond.
5.08 ADDITIONAL DEBTS AND LIABILITIES. No Borrower shall incur any
additional indebtedness or liabilities, purchase any additional life insurance
from business income or assets (other than in connection with the compensation
of employees, as approved by the board of directors), or create or incur any
contingent liability (including guaranties or endorsements) other than: (i)
trade debt incurred in the normal and ordinary course of such Borrower's
business; (ii) depositing checks and other instruments for the payment of money
acquired in the ordinary course of business; and (iii) indebtedness relating to
the Permitted Encumbrances. For the purposes of this Section 5.08, the term
"indebtedness" shall include all obligations for borrowed money, obligations
arising from installment purchases of property or services, capitalized lease
obligations, and the face amount of letters of credit and all drafts drawn
thereunder.
5.09 NO ADVERSE ACTIONS. No Borrower shall, by amendment to such
Borrower's Constituent Documents or through any reorganization,
reclassification, consolidation, merger, sale of assets, Act of Dissolution,
issuance or Transfer of securities or any other action, avoid or seek to avoid
the observance or performance of any of the terms, covenants and conditions of
this Agreement or any of the other Investment Documents, but shall at all times
carry out in good faith all such terms and take all such actions as may be
necessary or appropriate to protect the rights of the Holders hereunder and
under each of the Investment Documents.
ARTICLE VI: FEES, EXPENSES AND INDEMNIFICATION
6.01 FEES AND EXPENSES OF ALLIED. The Borrowers shall pay:
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(a) All reasonable fees and disbursements for work done for the
Holders by the Holders' attorneys and legal staff, not to exceed Thirty-five
Thousand Dollars ($35,000); and
(b) A processing fee equal to all out-of-pocket costs and
expenses incurred by the Holders or Allied Capital Advisers, Inc. in connection
with performing a due diligence examination of the Borrowers and the Business.
All amounts described in this Section 6.01 shall be due and payable in
full by the Borrowers at the Closing. Allied acknowledges receipt of a
prepayment of Fifteen Thousand Dollars ($15,000) from the Borrowers, which will
be applied at closing to the fees and expenses described in this Section 6.01.
6.02 OTHER FEES AND EXPENSES. The Borrowers shall pay, as and when
due, all of the following fees and expenses: (a) the fees and expenses of their
own counsel; (b) any recordation, transfer, documentary or other taxes or costs
of, or incidental to, any recording or filing of any of the Security Documents
(including any financing statements) concerning the Collateral; and (c) any
income, excise, franchise or other taxes incident to the transactions described
herein.
6.03 INDEMNIFICATION. In addition to its indemnification provisions
contained elsewhere herein and in the other Investment Documents, the Borrowers
agree to indemnify, defend and hold harmless each of the Holders and each of
their respective officers, directors, partners, employees, agents and
controlling persons (collectively, the "Indemnified Parties") from and against
any and all losses, claims, damages, liabilities and related expenses, including
attorneys' fees and expenses, asserted by any third parties unaffiliated with
the Holders against any of the Indemnified Parties arising out of, in any way in
connection with, or as a result of: (i) this Agreement and the other Investment
Documents, (ii) the performance by the Holders of their obligations hereunder
and thereunder and consummation of the transactions contemplated hereby and
thereby; (iii) the occurrence of any Event of Default hereunder or any event
that would constitute an Event of Default but for the giving of notice and/or
passage of time; (iv) any federal, state or local transfer or recording taxes or
filing fees which may become payable in connection with this transaction; (v)
the spilling, leaking, pumping, pouring, unsettling, discharging, leaching or
releasing of any Hazardous Materials on any of the Real Property or any other
property owned by any Borrower; (vi) any violations by the Borrowers of any
other Environmental Law, regulation or ordinance; or (vii) any claim,
litigation, investigation or proceeding relating to any of the foregoing,
whether or not any of the Indemnified Parties is a party thereto; PROVIDED,
HOWEVER, any such indemnity shall not apply to any such losses, claims, damages,
liabilities or related expenses arising from (i) the gross negligence or willful
misconduct of any of the Holders, or (ii) the violation by any of the Holders of
any Applicable Law or contractual restriction with any third party governing the
Investment.
6.04 SURVIVAL; TIMING OF PAYMENTS. The provisions of this Article VI
and any other indemnification provisions contained in this Agreement and the
other Investment Documents shall survive and remain operative and in full force
and effect regardless of the
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termination of this Agreement or expiration of the term of this Agreement,
the consummation of the transactions contemplated hereby, the repayment of
the Debentures and satisfaction and discharge of the other Obligations, the
invalidity or unenforceability of any term or provision of this Agreement,
the Debentures or any Security Documents, or any investigation made by or on
behalf of any of the Holders. Except as provided to the contrary, all
amounts due under this Article VI shall be payable on written demand therefor.
ARTICLE VII: DEFAULT PROVISIONS
The occurrence of any of the events specified below in this Article
VII (any such, an "Event of Default") shall constitute an immediate breach of,
and default under, this Agreement entitling the Holders to exercise all of the
rights and remedies specified in this Agreement, in the Security Documents, in
any other Investment Document, and under all Applicable Laws, without the
obligation to furnish any further notice or opportunity to cure (beyond that
specified in the applicable sections of this Article VII), all of which are
hereby expressly waived by each Borrower:
7.01 MONETARY DEFAULTS. Any installment payment of principal,
interest or other charge under any of the Debentures is not received by the
Holders when due, or any other monetary Obligation is not fully paid and
discharged when due.
7.02 OTHER BREACHES. Any Borrower shall fail to comply with its
affirmative or negative covenants, agreements and undertakings in this
Agreement, the Debentures or any of the Security Documents and (i) if such
failure relates to a financial covenant, such failure shall continue for a
period of 10 calendar days from the date of the delivery of written notice
thereof from Holders, or (ii) if such failure relates to a non-financial
covenant, such failure shall continue for a period of 30 calendar days from the
date of the delivery of written notice thereof from Holders.
7.03 MISREPRESENTATION. Any representation or warranty made by any
Borrower in this Agreement, in any of the Security Documents, any of the other
Investment Documents, or in any other writing supplied to Holders by the
Borrowers or on the Borrowers' behalf shall be untrue in any material respect
when made.
7.04 ACT OF BANKRUPTCY OR DISSOLUTION. Any Act of Bankruptcy shall
have occurred with respect to any Borrower, or any Act of Dissolution shall have
occurred without the Holders' prior written consent to any Borrower.
7.05 OTHER INVESTMENT DOCUMENT DEFAULTS. Any Borrower shall be in
default under any of the other Investment Documents (after taking into account
the giving of any notice and the expiration of the applicable cure period (if
any) required pursuant to the applicable terms of such other Investment Document
or Investment Documents).
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7.06 SPECIFIED CROSS DEFAULTS. Any default shall have been declared
or shall have otherwise occurred (after giving effect to any applicable notice
and/or grace periods) under the Senior Loan Agreement.
7.07 OTHER CROSS-DEFAULTS GENERALLY. Any default shall have been
declared under any loan, Lease, debt, Contract or obligation of any of the
Borrowers (other than the Obligations and the debts and obligations specified in
Section 7.06 above) and the failure to cure such default could be expected to
have a material adverse effect on the financial condition, operations or
prospects of the Borrowers taken as a whole.
ARTICLE VIII: CERTAIN REMEDIES
Upon the occurrence of an Event of Default under this Agreement,
Holders shall be entitled to exercise any or all of the following rights and
remedies, in addition to such other rights and remedies as may be provided for
in the other Investment Documents or as may be available at law or in equity,
subject to the provisions of the Senior Loan Subordination Agreement:
8.01 ACCELERATION. Following the occurrence of an Event of Default,
Holders may, at their option, accelerate the maturity of each of the Debentures
and all other Obligations and demand immediate payment in full of all amounts
payable under the Debentures and all of the Obligations, without presentment,
demand, protest, or further notice by Holders to the Borrowers, all of which are
hereby expressly waived by each Borrower.
8.02 SALE OF COLLATERAL. Following the occurrence of an Event of
Default, Holders may sell, assign, and deliver the whole or any part of the
Collateral, as more fully described in the Security Agreement or other documents
related thereto.
8.03 COLLECTIONS, COMPROMISES, ETC. Following the occurrence of an
Event of Default, Holders are empowered to collect or cause to be collected or
otherwise to be converted into money all or any part of the Collateral, by suit
or otherwise, and to surrender, compromise, release, renew, extend, exchange or
substitute any item of the Collateral in transactions with any Borrower or any
third party, irrespective of any assignment thereof by such Borrower, and
without prior notice to or consent of such Borrower or any assignee.
8.04 COSTS. The Borrowers shall pay all reasonable expenses of any
nature, whether incurred in or out of court, and whether incurred before or
after the Debentures shall become due at their maturity date or otherwise
(including, but not limited to, reasonable attorneys' fees and costs) which
Holders may deem necessary or proper in connection with the collection of any of
the Obligations or the administration, supervision, preservation, protection of
(including, but not limited to, the maintenance of adequate insurance) or the
realization upon, any of the Collateral. The Holders are authorized to pay at
any time and from time to time any or all of such expenses, to add the amount of
such payment to the amount of principal outstanding under the Debentures, and to
charge interest thereon at the rate specified in the Debentures.
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8.05 REMEDIES NON-EXCLUSIVE. None of the rights, remedies, privileges
or powers of the Holders expressly provided for herein shall be exclusive, but
each of them shall be cumulative with, and in addition to, every other right,
remedy, privilege and power now or hereafter existing in favor of the Holders,
whether pursuant to the other Investment Documents, at law or in equity, by
statute or otherwise.
ARTICLE IX: MISCELLANEOUS
9.01 NON-WAIVER. No course of dealing between a Holder and any other
party hereto or any failure or delay on the part of Holders in exercising any
rights or remedies hereunder shall operate as a waiver of any rights or remedies
of Holders under this or any other applicable instrument. No single or partial
exercise of any rights or remedies hereunder shall operate as a waiver or
preclude the exercise of any other rights or remedies hereunder.
9.02 SECURITY INTEREST NOT IMPAIRED. The security interest of the
Holders and their assigns shall not be impaired by Holders' sale, hypothecation
or re-hypothecation of a Debenture or any item of the Collateral, or by any
indulgence, including, but not limited to:
(a) Any renewal, extension, or modification which Holders may
grant with respect to the Obligations or any part thereof;
(b) Any surrender, compromise, release, renewal, extension,
exchange, or substitution which Holders may grant with respect to the Collateral
or any portion thereof; or
(c) Any indulgence granted in respect of any endorser, guarantor
or surety.
The purchaser, assignee, transferee or pledgee of the any Debenture,
Collateral, or other Investment Document sold, assigned, transferred, pledged or
repledged shall forthwith become vested with, and entitled to exercise, all
powers and rights given by this Agreement to Holders, as if said purchaser,
assignee, transferee or pledgee were originally named in this Agreement in place
of the Holders.
9.03 NOTICES. All notices or communications under this Agreement or
the Debentures shall be mailed, postage prepaid, or delivered to the following
addresses (or to such other address as shall at any time be designated by any
party in writing to the other parties):
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To Holders: Allied Capital Corporation
-and-
Allied Investement Corporation
-and-
Allied Capital Corporation II
c/o Allied Capital Corporation
1666 K Street, N.W., Ninth Floor
Washington, D.C. 20006
Attention: Carr T. Preston, Principal
With a copy to Piper & Marbury L.L.P.
1200 Nineteenth Street, N.W.
Washington, D.C. 20036
Attention: Anthony H. Rickert, Esquire
To the Borrowers: Pico Products, Inc.
12500 Foothill Blvd.
Lakeview Terrace, California 91342
Attention: Charles G. Emley, Jr., Chief
Executive Officer
with a copy to: Saul, Ewing, Remick & Saul
3800 Centre Square West
Philadelphia, PA 19102
Attention: Spencer W. Franck, Jr., Esquire
Rejection or other refusal to accept, or the inability to deliver
because of a changed address of which no notice was given, shall not affect the
effectiveness or the date of delivery for any notice sent in accordance with the
foregoing provisions. Each such notice, request or other communication shall be
deemed sufficiently given, served, sent and received for all purposes at such
time as it is delivered to the addressee (with the return receipt, the delivery
receipt, the affidavit of the messenger or the answer back being deemed
conclusive (but not exclusive) evidence of such delivery) or at such time as
delivery is refused by addressee upon presentation.
9.04 BINDING AGREEMENT. This Agreement shall bind and inure to the
benefit of each of the Holders, the Borrowers and, except as otherwise expressly
provided to the contrary herein, their respective heirs, successors and assigns.
9.05 ENTIRE AGREEMENT; INTEGRATION CLAUSE. This Agreement, the
Exhibits hereto, and the other Investment Documents set forth the entire
agreements and understandings of the parties hereto with respect to this
transaction, and any prior agreements are hereby merged herein and terminated.
Notwithstanding the foregoing, the parties hereto agree that the purchase and
the restructuring of the Purchased Notes by Allied shall not constitute a
novation of such Purchased Notes, and the Parent's obligation to repay the
$150,000 shall not be deemed
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terminated as a result of the execution and delivery of this Agreement or the
consummation of the transactions contemplated hereby, but rather Parent's
obligations and Allied's rights with respect to the Purchased Notes shall be
governed solely by the terms of this Agreement and the Debentures, and no
provision of the Investment Agreements dated as of February 10, 1993 between
the Parent and each of the Investors named therein, with respect to the
Purchased Notes nor any provision of the Purchased Notes which is
inconsistent with the terms of this Agreement and the Debentures, including
without limitation the time of payment of principal and the rate of interest,
shall be of any force and effect upon the execution and delivery of this
Agreement and the Debentures as provided herein. Allied agrees that
satisfaction of Borrowers' obligations under this Agreement and repayment of
the Investment shall satisfy Borrowers' obligations under the Purchased
Notes, which Allied shall promptly thereafter cancel and return to the Parent.
9.06 NO ORAL MODIFICATION OR WAIVERS. The terms herein may not be
modified or waived orally, but only by an instrument in writing signed by the
party against which enforcement of the modification or waiver (as the case may
be) is sought.
9.07 RELATIONSHIP OF THE PARTIES; ADVICE OF COUNSEL. This Agreement
provides for the making of an investment by Holders, in their capacity as
investors, to the Borrowers, and for the payment of interest and repayment of
principal by the Borrowers to Holders. The provisions herein for compliance
with financial covenants and delivery of financial statements are intended
solely for the benefit of the Holders to protect their interests as lenders in
assuring payments of interest and repayment of principal, and nothing contained
in this Agreement shall be construed as permitting or obligating the Holders to
act as financial or business advisors or consultants to the Borrowers, as
permitting or obligating Holders to control the Borrowers or to conduct the
Borrowers' operations, as creating any fiduciary obligation on the part of the
Holders to the Borrowers, or as creating any joint venture, agency or other
relationship between the parties other than as explicitly and specifically
stated in this Agreement. A Holder is not (and shall not be construed as) a
partner, joint venturer, alter-ego, manager, controlling person, operator or
other business participant of any kind of any Borrower; neither Holders nor the
Borrowers intend that the Holders assume such status, and, accordingly, the
Holders shall not be deemed responsible for (or a participant in) any acts or
omissions of any of the Borrowers. Each Borrower represents and warrants to the
Holders that it has had the advice of experienced counsel of its own choosing in
connection with the negotiation and execution of this Agreement and with respect
to all matters contained herein.
9.08 CONTROLLING LAW. This Agreement and each of the other Investment
Documents shall be governed by, and interpreted and construed in accordance
with, the internal laws of the State of Maryland (without regard to its
conflicts of law principles).
9.09 VENUE; PERSONAL JURISDICTION; FULL FAITH AND CREDIT; PERSONAL
SERVICE.
(a) Venue for the adjudication of any claim or dispute arising
out of this Agreement or any of the other Investment Documents shall be proper
only in the state or federal courts of the State of Maryland, and all parties to
this Agreement and the other
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Investment Documents hereby consent to such venue and agree that it shall not
be not inconvenient and not subject to review by any court other than such
courts in Maryland;
(b) Each Borrower intends and agrees that the courts of the
jurisdictions in which such Borrower is formed and in which such Borrower
conducts its business should afford full faith and credit to any judgment
rendered by a court of the State of Maryland against such Borrower under this
Agreement and the other Investment Documents, and each Borrower under this
Agreement and the other Investment Documents intends and agrees that such courts
should hold that the Maryland courts have jurisdiction to enter a valid, IN
PERSONAM judgment against such Borrower;
(c) Each Borrower agrees that service of any summons and
complaint, and other process which may be served in any suit, action or other
proceeding, may be made by mailing via U.S. certified or registered mail or by
hand-delivering a copy of such process to the Parent at its address specified
above; and
(d) Each Borrower expressly acknowledges and agrees that the
provisions of this Section 9.09 are reasonable and made for the express benefit
of each of the Holders.
9.10 WAIVER OF TRIAL BY JURY. Each party to this Agreement agrees
that any suit, action or proceeding, whether claim, defense or counterclaim,
brought or instituted by any party hereto or any successor or assign of any
party on or with respect to this Agreement or any other Investment Document or
which in any way relates, directly or indirectly, to the Debentures or any
event, transaction or occurrence arising out of or in any way connected with
this Agreement, the other Investment Documents or the dealings of the parties
with respect thereto, shall be tried only by a court and not by a jury. EACH
PARTY HEREBY EXPRESSLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY SUCH SUIT,
ACTION OR PROCEEDING, AND ACKNOWLEDGES THAT THIS IS A WAIVER OF A LEGAL RIGHT
AND THAT IT MAKES THIS WAIVER VOLUNTARILY AND KNOWINGLY AFTER CONSULTATION WITH,
OR THE OPPORTUNITY TO CONSULT WITH, COUNSEL OF ITS CHOICE.
9.11 COSTS AND FEES RELATED TO ENFORCEMENT OR A SUCCESSFUL DEFENSE.
Without limiting the Holders' entitlements under Section 8.04 above or under the
terms of any of the other Investment Documents, each Borrower (each, a
"Reimbursing Party"), hereby agrees to reimburse the Holders for any and all
costs and fees, including reasonable attorneys' fees and expenses, incurred by
any of the Holders or their Affiliates in connection with: (i) any suit,
action, claim or other activity of the Holders to collect the Obligations or any
portion thereof or to enforce any of the provisions of this Agreement or any
other Investment Document against such Reimbursing Party; and (ii) any suit,
action, claim or other liability asserted against any of the Holders or their
Affiliates by such Reimbursing Party in any case in which such Reimbursing Party
does not prevail with respect to substantially all of its or his claim.
9.12 INDEPENDENT COVENANT TO MAKE PAYMENTS. The payment and
performance by each Borrower of all of the Obligations shall be absolute and
unconditional, irrespective of
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any defense or any rights of set-off, recoupment or counterclaim such
Borrower might otherwise have against any of the Holders, and each Borrower
shall pay and perform all of the Obligations (to the extent applicable to
it), free of any deductions and without abatement, diminution, recoupment,
counterclaim or set-off. Until payment in full of all of the Obligations, no
Borrower shall: (a) suspend or discontinue any payments required pursuant to
the Debentures, this Agreement or any other Investment Documents; or (b) fail
to perform and observe all of the other terms and provisions of all of the
Investment Documents.
9.13 NOTICE OF CLAIM; WAIVER. To allow the Holders to mitigate any
alleged breach of this Agreement, the other Investment Documents, or Holders'
other duties to the Borrowers, each Borrower hereby agrees to give the Holders
written notice of any claim or defense any of them has against the Holders,
whether in tort, contract or otherwise, relating to any act or omission by any
of the Holders under this Agreement, the other Investment Documents or the
transactions related thereto, or of any defense to the payment or performance of
any of the Obligations for any reason. Each Borrower hereby agrees to provide
such notice to Holders within 60 days after such Borrower first has knowledge of
such defense.
9.14 HEADINGS. The headings of the paragraphs and sub-paragraphs of
this Agreement and the other Investment Documents are inserted for convenience
only and shall not be deemed to constitute a part of this Agreement or the other
Investment Documents.
9.15 SEVERABILITY. To the extent any provision herein violates any
applicable law, that provision shall be considered void and the balance of this
Agreement shall remain unchanged and in full force and effect.
9.16 COUNTERPARTS. This Agreement may be executed in as many
counterpart copies as may be required. It shall not be necessary that the
signature of, or on behalf of, each party appear on each counterpart, but it
shall be sufficient that the signature of, or on behalf of, each party appear on
one or more of the counterparts. All counterparts shall collectively constitute
a single agreement. It shall not be necessary in any proof of this Agreement to
produce or account for more than a number of counterparts containing the
respective signatures of, or on behalf of, all of the parties.
9.17 DELIVERIES TO HOLDERS. To the extend the terms of this Agreement
or any of the other Investment Documents requires any Borrower to deliver any
documents or other materials to any or all of the Holders, then, until such time
as Allied (or one or more Affiliates of allied) shall no longer hold complete
title to each of the Debentures, the Borrowers may fully satisfy and discharge
such requirement by delivering a single copy of the document(s) or other
material(s) in question to the Holders' notice party identified in Section 9.03
above in lieu of separate deliveries to each of the Holders. Following a
complete or partial Transfer by Allied of any its right, title or interest in
and to any of the Debentures to one or more Persons that is not an affiliate of
Allied, then the Borrowers shall be required to deliver copies of the
document(s) or other materials(s) in question to each of the Holders separately.
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9.18 CONSENT AND APPROVAL OF HOLDERS. To the extent the terms of this
Agreement or any of the other Investment Documents requires the Borrowers to
obtain the consent or approval of each of the Holders, then, until such time as
Allied (or one or more Affiliates of Allied) shall no longer hold complete title
to each of the Debentures and to each of the Warrants (or if exercised, the
Common Stock purchasable thereunder), the Borrowers may fully satisfy and
discharge such requirement by obtaining the consent or approval (in writing if
necessary) of the holder of not less than 55% of the outstanding principal
balance of the Debentures in lieu of the separate consent or approval of each of
the Holders, or if the Debentures have been repaid, the consent or approval of
the holder of not less than 55% of the Warrants or 55% of the Common Stock
purchasable thereunder (as the case may be). Following a complete or partial
Transfer by Allied of any its right, title or interest in and to any of the
Debentures, to any of the Warrants, or to any of the Common Stock purchasable
thereunder to one or more Persons that is not an Affiliate of Allied, then the
Borrowers shall be required to obtain the consent or approval (in writing if
necessary) of 55% of the interests held by Allied, as a group, and 55% of the
interests held by the transferees, as a group.
9.19 ENFORCEMENT ACTION BY HOLDERS. To the extent the terms of this
Agreement or any of the other Investment Documents permit the Holders to
exercise any right or remedy, then, until such time as Allied (or one or more
Affiliates of Allied) shall no longer hold complete title to each of the
Debentures and to each of the Warrants (or if exercised, the Common Stock
purchasable thereunder), the Holders shall take any such action only upon the
approval of not less than 55% of the outstanding principal balance of the
Debentures, or if the Debentures have been repaid, the approval of the holder of
not less than 55% of the Warrants or 55% of the Common Stock purchasable
thereunder (as the case may be). Following a complete or partial Transfer by
Allied of any its right, title or interest in and to any of the Debentures, to
any of the Warrants, or to any of the Common Stock purchasable thereunder to one
or more Persons that is not an Affiliate of Allied, then Allied, as a group, may
take any such action only upon the approval of not less than 55% of the
interests held by Allied, and the transferees, as a group, may take any such
action only upon the approval of not less than 55% of the interests held by the
transferees.
9.20 PARTICIPATION INTEREST. If the Borrowers designate participants
who are reasonably acceptable to Allied within 90 days from the date hereof,
Allied will allocate and sell participation interests of up to 50% of the
aggregate principal amount of the Investment to such participants.
9.21 WAIVER OF ANTI-DILUTION RIGHTS. Allied hereby waives its rights
to "Anti-Dilution Adjustments" under Section 4 of the Prior Warrants solely with
respect to (i) issuance by the Parent of the Warrants hereunder and
(ii) issuance by the Parent to the Sinkler Corporation of 165 shares of Series B
Redeemable Preferred Stock and 144,200 Warrants on or before the date hereof.
Except for the specific waiver contained in this Section 9.21, Allied's rights
to anti-dilution protection under the Prior Warrants remain in full force and
effect and Allied is under no obligation to grant any further waivers thereof.
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9.22 STANDSTILL AGREEMENT. Allied agrees that for a period of ten
years from the date hereof, without the prior written consent of the Parent, and
except for the securities to be issued upon exercise of the Warrants issued to
Allied hereunder, Allied will not acquire, offer to acquire or agree to acquire,
directly or indirectly, by purchase of otherwise, any Voting Securities (as
hereinafter defined) or direct or indirect rights or options to acquire any
additional Voting Securities, if and to the extent that the acquisition of such
Voting Securities will result in Allied owning in excess of 33% of the
outstanding Voting Securities of Parent at any time. As used in this Section,
the term "Voting Securities" shall mean all classes of capital stock of parent
which are then entitled to vote generally in the election of directors.
{SIGNATURES NEXT PAGE}
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IN WITNESS WHEREOF, the undersigned have executed and delivered this
Agreement as of the date first above written.
WITNESS/ATTEST: "BORROWERS":
PICO PRODUCTS, INC.
a New York corporation
By: By: (SEAL)
-------------------------- ----------------------------
Gary M. Atkinson Charles G. Emley, Jr.
Assistant Secretary Chairman and Chief Executive Officer
PICO MACOM, INC.
a Delaware corporation
By: By: (SEAL)
-------------------------- ----------------------------
Gary M. Atkinson Charles G. Emley, Jr.
Assistant Secretary Chairman and Chief Executive Officer
"ALLIED":
ALLIED CAPITAL CORPORATION,
a Maryland corporation
By: By: (SEAL)
-------------------------- ----------------------------
Carr T. Preston, Principal
ALLIED INVESTMENT CORPORATION,
a Maryland corporation
By: By: (SEAL)
-------------------------- ----------------------------
Carr T. Preston, Principal
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ALLIED CORPORATION II,
a Maryland corporation
By: By: (SEAL)
-------------------------- ----------------------------
Carr T. Preston, Principal
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EXHIBIT A
JOINDER AGREEMENT
JOINDER AGREEMENT dated as of this ____ day of _____, 1997 by
______________, a ______________ corporation (the "Additional Borrower") and
Allied Capital Corporation, Allied Investment Corporation, and Allied Capital
Corporation II, each a Maryland corporation (collectively, "Allied").
BACKGROUND: Pico Products, Inc., a New York corporation (the "Parent"),
Pico Macom, Inc., a Delaware corporation ("PMI") and such other subsidiaries of
the Parent as have heretofore executed a Joinder Agreement in this form
(collectively, the "Current Borrowers") and Allied entered into a certain
Investment Agreement dated as of _______, 1997 (the "Investment Agreement").
Pursuant to the terms of the Investment Agreement the Parent and PMI agreed to
cause the Additional Borrower named herein to become a Borrower under the
Investment Agreement by execution and delivery of a Joinder Agreement in this
form within ninety (90) days following Closing.
NOW, THEREFORE, the Current Borrowers and Additional Borrower each
intending to be legally bound hereby, agree with Allied as follows:
1. DEFINITIONS: All terms used in this Joinder Agreement as defined
terms, but not defined herein, shall have the meanings ascribed to them in the
Investment Agreement.
2. JOINDER: The Additional Borrower hereby joins in the Investment
Agreement as a joint and several obligor thereunder and party thereto, subject
to all the terms and provisions thereof. From and after the effective date of
this Joinder Agreement the term "Borrowers" as defined and used in the Agreement
and herein, shall refer to the Additional Borrower as well as to all other
Borrowers now or hereafter parties to the Investment Agreement. Without
limitation on the foregoing, the Additional Borrower expressly agrees to be
jointly and severally liable for all liabilities under the Investment Agreement
and all other amounts which may be presently due thereunder, and hereby ratifies
all actions heretofore taken and all Obligations heretofore incurred by the
Parent or other of the Borrowers under the Agreement.
3. EFFECTIVE DATE: This Joinder Agreement shall be effective as of the
date first written above.
4. MISCELLANEOUS: This Joinder Agreement may be executed in two or more
counterparts, and by different parties on different counterparts, each of which
shall be deemed an original and in making proof of this Joinder Agreement it
shall be necessary only to produce sufficient counterparts to evidence the
execution by all parties. This Joinder Agreement shall be governed by and
construed under the laws of the State of Maryland, and shall bind the successors
and assigns of the Parent and the other Borrowers and inure to the benefit of
the successors and assigns of Allied.
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IN WITNESS WHEREOF, the parties hereto have caused this Joinder Agreement
to be executed and delivered by their proper and dully authorized officers as of
the date first above written.
WITNESS/ATTEST: PICO MACOM TAIWAN CO., LTD.
a Taiwan corporation
By: By: (SEAL)
---------------------------- ------------------------
Name: Name:
Title: Title:
WITNESS/ATTEST: PICO (ST. KITTS) LTD.
a St. Christopher and Nevis corporation
By: By: (SEAL)
---------------------------- ------------------------
Name: Name:
Title: Title:
WITNESS/ATTEST: PICO (BERMUDA) LTD.
a Bermuda corporation
By: By: (SEAL)
---------------------------- ------------------------
Name: Name:
Title: Title:
WITNESS/ATTEST: PICOMACOM PRODUCTS DE
TELECOMMUNICACAO LTDA.
a Brazil limited liability company
By: By: (SEAL)
---------------------------- ------------------------
Name: Name:
Title: Title:
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EXHIBIT B
ALLONGE TO DEBENTURE
THIS ALLONGE TO DEBENTURE dated as of ___________ __, 1997 amends that
Junior Subordinated Secured Debenture dated September __, 1997 (the
"Debenture"), made by Pico Products, Inc. (the "Parent") and Pico Macom, Inc.
("PMI") (the Parent and PMI are referred to hereinafter collectively as the
"Borrowers") in favor of Allied Capital Corporation.
A. Pursuant to the terms and conditions of an investment agreement,
dated September __, 1997 (the "Investment Agreement"), Allied Capital
Corporation, together with its certain other affiliated entities (collectively,
"Allied"), have made an aggregate investment in the Borrowers through the
issuance of certain Debentures in the aggregate principal amount of One Million
Four Hundred and Eighty-Five Thousand Dollars ($1,485,000) (the "Investment").
B. Pursuant to the terms of the Investment Agreement, the Parent and
PMI agreed to cause Pico Macom Taiwan Co., Ltd., a Taiwan corporation
("Taiwan"), Pico (St. Kitts) Ltd., a St. Christopher and Nevis corporation ("St.
Kitts"), Pico (Bermuda) Ltd., a Bermuda corporation ("Bermuda"), and Picomacom
Produtos de Telecommunicacao Ltda., a Brazil limited liability company
("Brazil") (Taiwan, St. Kitts, Bermuda and Brazil are hereinafter collectively
referred to as "Additional Borrowers") to join in and become joint and several
Borrowers under the Debenture by execution and delivery of this Allonge to
Debenture within ninety (90) days following Closing.
NOW THEREFORE, in consideration of the premises and of the covenants and
agreements herein set forth, the undersigned agree that the Debenture be amended
as follows:
1. Each of the Additional Borrowers hereby joins in and agrees to be
bound by the Debenture as a Borrower thereunder and shall be jointly and
severally liable for the Obligations thereunder.
2. For all purposes of the Debenture, the term "Borrowers" shall mean and
include Pico Products, Inc., Pico Macom, Inc., Pico Macom Taiwan Co., Ltd, Pico
(St. Kitts) Ltd., Pico (Bermuda) Ltd., and Picomacom Produtos de
Telecommunicacao Ltda., jointly and severally.
3. Any capitalized terms used herein and not defined herein shall have
the meaning assigned to them in the Investment Agreement and the Debenture, as
the case may be.
4. Except as specifically amended hereby, the Debenture remains in full
force and effect in accordance with its terms.
{SIGNATURES ON FOLLOWING PAGES}
42
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Allonge to Debenture
as of the date first written above.
"BORROWERS":
PICO PRODUCTS, INC.,
a New York corporation
By: By: (SEAL)
------------------------- ----------------------------
------------------------- Charles G. Emley, Jr.
Chairman and Chief Executive Officer
PICO MACOM, INC.,
a Delaware corporation
By: By: (SEAL)
------------------------- ----------------------------
------------------------- Charles G Emley, Jr.
Chairman and Chief Executive Officer
"ADDITIONAL BORROWERS":
PICO MACOM TAIWAN CO., LTD.
a Taiwan
By: By: (SEAL)
------------------------- ----------------------------
------------------------- ----------------------------
PICO (ST. KITTS) LTD.
a St. Christopher and Nevis
By: By: (SEAL)
------------------------- ----------------------------
------------------------- ----------------------------
43
<PAGE>
PICO (BERMUDA) LTD.
a Bermuda
By: By: (SEAL)
------------------------- ----------------------------
------------------------- ----------------------------
PICOMACOM PRODUTOS DE
TELECOMMUNICACAO LTDA.
a Brazil limited liability company
By: By: (SEAL)
------------------------- ----------------------------
------------------------- ----------------------------
44
<PAGE>
EXHIBIT 4(p)
THIS DEBENTURE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR APPLICABLE SECURITIES LAWS. THIS DEBENTURE MAY NOT BE OFFERED,
SOLD, ASSIGNED, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OF THE DEBENTURE UNDER SUCH
ACT AND UNDER ANY APPLICABLE STATE SECURITIES LAWS, OR UPON SATISFACTION BY THE
ISSUER HEREOF THAT SUCH REGISTRATION IS NOT REQUIRED AS TO SUCH SALE OR OFFER.
THIS DEBENTURE IS SUBJECT TO THE TERMS OF A SUBORDINATION AGREEMENT (AS FROM
TIME TO TIME AMENDED, RESTATED, SUPPLEMENTED OR OTHERWISE MODIFIED), DATED AS OF
SEPTEMBER 12, 1997, BY AND BETWEEN HSBC BUSINESS LOANS, INC., HOLDER, AND THE
OTHER PARTIES NAMED THEREIN. THIS DEBENTURE IS ALSO SUBJECT TO THE TERMS OF A
SUBORDINATION AGREEMENT, DATED AS OF SEPTEMBER 12, 1997, BY AND BETWEEN THE
HOLDERS OF THE SUBORDINATED SECURED DEBENTURES DATED NOVEMBER 21, 1996, HOLDER,
AND THE OTHER PARTIES NAMED THEREIN.
JUNIOR SUBORDINATED SECURED DEBENTURE
$216,700 September 12, 1997
FOR VALUE RECEIVED, the undersigned, PICO PRODUCTS, INC., a New York
Corporation ("Parent"), PICO MACOM, INC., a Delaware corporation ("PMI") (the
Parent and PMI are hereinafter collectively referred to as "Borrowers"), jointly
and severally promise to pay ALLIED CAPITAL CORPORATION, a Maryland corporation
(the "Holder") or its registered assigns the principal sum of TWO HUNDRED
SIXTEEN THOUSAND AND SEVEN HUNDRED DOLLARS ($216,700), together with interest
thereon as set forth below, at its offices or such other place as the Holder may
designate in writing.
1. INVESTMENT AGREEMENT. This Junior Subordinated Secured Debenture
(the "Debenture") is one of three junior subordinated secured debentures to be
executed and delivered by the Borrowers in connection with an investment (the
"Investment") being made by the Holder and two affiliates of the Holder in the
Borrowers in the aggregate original principal amount of One Million Four
Hundred Eighty-Five Thousand Dollars ($1,485,000) pursuant to the terms and
conditions of an Investment Agreement between the Borrowers, the Holder and
certain other parties, dated of even date herewith (the "Investment Agreement").
This Junior Subordinated Secured Debenture and the other two junior subordinated
secured debentures evidencing the Investment (collectively, the "Other
Debentures") are each subject to the terms and conditions of the Investment
Agreement. A copy of the Investment Agreement may be examined during normal
business hours at the Parent's offices. Any capitalized term used herein and
not otherwise defined herein shall have the meaning given to it in the
Investment Agreement.
<PAGE>
2. INTEREST RATE PROVISIONS.
2.1 INITIAL INTEREST RATE. Except as provided in Section 2.2,
from the date hereof and thereafter until repayment of this Debenture, interest
shall accrue hereunder at the rate of ten percent (10%) per annum (the "Initial
Interest Rate"). Interest shall be calculated on the basis of a 360-day year
and shall be computed for each payment period on the principal balance for the
actual number of days outstanding.
2.2 DEFAULT INTEREST RATE. Upon the occurrence of a Non-Payment
Event, as defined below, interest shall accrue and be payable hereunder at the
rate of fifteen percent (15%) per annum (the "Default Interest Rate") until the
earlier of repayment or the curing of such Non-Payment Event. A Non-Payment
Event shall be deemed to have occurred under this Debenture if any installment
payments due under the terms of this Debenture or any of the Other Debentures
are not received by the Holder on or before that date which is 10 days following
the due date thereof, or if any default interest or other sums payable to Holder
hereunder, under the terms of the Other Debentures, under the terms of the
Investment Agreement, or under the terms of any of the Security Documents are
not paid on or before that date which is 10 days following the due date thereof.
3. PAYMENT PROVISIONS.
3.1 INTEREST PAYMENTS. Commencing on October 1, 1997 and
continuing on the first day of each calendar month thereafter up to and
including September 1, 2000, the Borrowers shall pay to Holder monthly
installments of accrued interest, in arrears, at the Initial Interest Rate on
the principal balance of this Debenture then outstanding.
3.2 PRINCIPAL PAYMENTS; MATURITY DATE. The entire unpaid
principal balance of this Debenture, together with all accrued, but unpaid
interest, and all other sums owed hereunder shall be due and payable in full
without further notice or demand on September 30, 2000 (the "Maturity Date").
3.3 PREPAYMENTS; APPLICATION OF PAYMENTS. The Borrowers may
prepay this Debenture in whole or in part at any time without premium or
penalty. All prepayments shall be applied as follows: (a) first, to accrued,
but unpaid, interest; and (b) second, to principal installments, in inverse
order of maturity.
3.4 DUE ON SALE. The entire indebtedness hereunder shall become
due and payable upon the earlier of the Maturity Date or the "Transfer of the
Business", as defined in the Investment Agreement.
4. COLLATERAL. Pursuant to the terms and conditions of the
Investment Agreement and of the various Security Documents, this Debenture is
secured by perfected liens and security interests in favor of the Holder and the
holders of the Other Debentures in and to certain Collateral.
2
<PAGE>
5. SUBORDINATION. The indebtedness represented by this Debenture is
subordinate to the Senior Debt of the Borrowers in accordance with the terms of
the investment Agreement, the Senior Loan Subordination Agreement, and the
Senior Debentures Subordination Agreement.
6. ASSIGNMENT. This Debenture and the obligations hereunder may not
be assigned by any Borrower without the prior written consent of Holder. Holder
may freely assign all or any portion of its right, title and interest in and to
the Debenture.
7. JOINT AND SEVERAL LIABILITY. If more than one party signs this
instrument, then all signatories shall be jointly and severally liable
hereunder.
8. DEFAULT AND REMEDIES. The occurrence of an Event of Default under
the Investment Agreement shall constitute a default hereunder and shall entitle
the Holder to exercise the rights and remedies specified in the Investment
Agreement and the various Security Documents, as well as those available at law
or in equity. These rights and remedies include, but are not limited to, the
right of the Holder to accelerate the maturity of this Debenture and all other
Obligations (as defined in the Investment Agreement) and to sell or otherwise
dispose of any or all of the Collateral by public or private sale.
9. WAIVERS. Each Borrower hereby waives presentment, demand,
protest, or further notice of any kind (except such notices as may be
specifically required by the express terms of the Investment Agreement).
10. CONFESSION OF JUDGMENT. IN ADDITION TO ALL OTHER RIGHTS AND
REMEDIES AFFORDED HOLDER HEREUNDER AND UNDER THE INVESTMENT AGREEMENT AND
SECURITY DOCUMENTS, EACH BORROWER HEREBY AUTHORIZES AND EMPOWERS ANY ATTORNEY,
OR THE CLERK OF ANY COURT IN THE STATE OF MARYLAND, TO APPEAR FOR SUCH BORROWER
AT ANY TIME FOLLOWING THE OCCURRENCE OF A DEFAULT UNDER THE INVESTMENT
AGREEMENT, IN ANY SUCH COURT IN AN APPROPRIATE ACTION THERE OR ELSEWHERE BROUGHT
OR TO BE BROUGHT AGAINST ANY BORROWER BY HOLDER ON THIS NOTE, WITH OR WITHOUT
DECLARATIONS FILED, AS OF ANY TERMS OR TIME OF COURT THERE OR ELSEWHERE TO BE
HELD AND THEREIN TO CONFESS OR ENTER JUDGMENT AGAINST SUCH BORROWER FOR ALL SUMS
DUE BY SUCH BORROWER TO HOLDER UNDER THIS NOTE AND THE INVESTMENT AGREEMENT,
TOGETHER WITH THE COSTS OF SUIT AND ATTORNEYS' FEES EQUAL TO FIFTEEN PERCENT
(15%) OF THE OUTSTANDING BALANCE, AND FOR SO DOING, THIS NOTE OR A COPY HEREOF
VERIFIED BY AFFIDAVIT SHALL BE A SUFFICIENT WARRANT. EACH BORROWER ACKNOWLEDGES
THAT IT HAS HAD THE ASSISTANCE OF COUNSEL IN THE REVIEW AND EXECUTION OF THE
INVESTMENT AGREEMENT AND THIS NOTE AND THE MEANING AND SIGNIFICANCE OF THE
CONFESSION OF JUDGMENT CONTAINED IN THIS PARAGRAPH HAS BEEN EXPLAINED TO SUCH
BORROWER BY SUCH COUNSEL.
3
<PAGE>
11. CONTROLLING LAW. This Debenture and all matters related hereto
shall be governed, construed and interpreted strictly in accordance with the
laws of the State of Maryland, without regard to its principles of conflicts of
law.
12. PURPOSE OF INVESTMENT. Each Borrower represents and warrants
that this Debenture evidences an investment made in the Borrowers for the
purpose of carrying on a business or commercial enterprise pursuant to Section
12-103(e) of the Commercial Law Article, Annotated Code of Maryland, as amended.
13. NO USURY. This Debenture is subject to the express condition
that at no time shall any Borrower be obligated or required to pay interest
hereunder at a rate which could subject the Holder to either civil or criminal
liability as a result of being in excess of the maximum rate which such Borrower
is permitted by law to contract or agree to pay. If, by the terms of this
Debenture, such Borrower is at any time required or obligated to pay interest at
a rate in excess of such maximum rate, the rate of interest under this Debenture
shall be deemed to be immediately reduced to such maximum rate, and interest
payable hereunder shall be computed at such maximum rate and the portion of all
prior interest payments in excess of such maximum rate shall be applied and
shall be deemed to have been payments in reduction of the principal balance of
this Debenture.
{SIGNATURES NEXT PAGE}
4
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this Debenture to be
executed and its seal affixed on the day and year first above written.
ATTEST: PICO PRODUCTS, INC.,
a New York corporation
By: By:
--------------------------- ----------------------- (SEAL)
Gary M. Atkinson Charles G. Emley, Jr.
Chairman and Chief Executive Officer
ATTEST: PICO MACOM, INC.,
a Delaware corporation
By: By:
--------------------------- ----------------------- (SEAL)
Gary M. Atkinson Charles G. Emley, Jr.
Chairman and Chief Executive Officer
5
<PAGE>
EXHIBIT 4(q)
September 12, 1997
Mr. Charles G. Emley, Jr.
Chief Executive Officer
Pico Products, Inc.
12500 Foothill Boulevard
Lakeview Terrace, CA 91342
RE: THE SINKLER CORPORATION - PICO PRODUCTS, INC.
Dear Charles:
The purpose of this letter is to confirm our agreement with respect to
the issuance and sale by Pico Products, Inc., a New York corporation
(hereinafter "Pico"), of 165 shares of Series B Redeemable Preferred Shares (the
"Stock") to The Sinkler Corporation, a Delaware Corporation ("Sinkler"), and I
am writing you as Vice-President of Sinkler pursuant to the authority of its
Board of Directors, evidence of which will be delivered at or prior to Closing
(as hereinafter defined). A substantial reason for the willingness of Sinkler
to make this investment in the Stock of Pico is the willingness of Allied
Capital to make an equity/debt investment in Pico (the "Allied Transaction") on
substantially the terms and in the amounts set forth in a certain letter dated
July 15, 1997 (the "Allied Letter") from Allied to you, and, therefore, the
affirmative covenants and undertakings that Sinkler will require of Pico are
intended to be equivalent to those provided to Allied by Pico, thereby reducing
the administrative burden of the transaction to Pico.
Subject to the foregoing and the mutual covenants herein contained and
for and in consideration of their mutual obligations herein set forth, Sinkler
and Pico, intending to be legally bound, agree as follows:
1. THE PURCHASE. Sinkler agrees at Closing to deliver to Pico the sum of
One Hundred Sixty Five Thousand ($165,000) Dollars in the form of a cashier's
check made payable to Pico's order or wire transfer to an account designated by
Pico. Pico at Closing will deliver to Sinkler one or more certificates
representing in the aggregate one hundred sixty-five (165) shares of the Stock
issued in the name of Sinkler. Sinkler further agrees to deliver to Pico at
Closing the sum of ten dollars ($10.00) in the form of a check payable to Pico's
order or wire transfer to an account designated by Pico as consideration for the
purchase by Sinkler of warrants (the "Warrants") to purchase 144,200 Pico common
shares from Pico together with certain contingent warrants to purchase Pico
common shares under certain circumstances. The designations, powers,
preferences and rights, and the qualifications, limitations and restrictions of
the Stock are set forth in the Designation Statement attached to this letter as
Exhibit "A" and are generally described below in this letter. It is understood
that in the event there shall be any inconsistency between the Designation
Statement and this letter, the provisions of the Designation Statement shall be
controlling.
<PAGE>
A. The Stock will impose on Pico the obligation to declare
quarterly dividends, payable at a rate of ten percent (10%) per annum, with
the option of Sinkler to receive Pico common shares (the "Dividend Shares")
in lieu of the payment of any cash dividend otherwise payable, upon written
notification by Sinkler to Pico thirty days prior to the scheduled dividend
payment date. If Sinkler exercises the option to take Dividend Shares, the
number of such Dividend Shares shall be determined in the manner set forth in
the Designation Statement. All unpaid cash dividends shall be cumulative.
In the event that Pico exercises its option to delay payment of a quarterly
dividend (as provided in the Designation Statement), Pico will pay Sinkler
interest on the amount of the delayed dividend payment at an annual rate
equal to First Union Bank's prime rate as in effect from time to time during
the delay in payment. The Stock will be redeemable according to the
following schedule:
All outstanding shares on or before September 28, 2000.
Notwithstanding the foregoing, Pico may call all or any portion of the Stock for
redemption at any time without penalty. The Stock will have preference in
liquidation or in any bankruptcy or reorganization proceeding ahead of the
common stock. Sinkler acknowledges that Pico will not make any payment of any
dividend or any amount on account of a redemption of the Stock during any period
of time when there shall exist an event of default under the Allied Agreement.
B. The Warrants will be separate and detachable, and
exercisable for a period of six (6) years after Closing or 36 months from the
final payment on the subordinated debentures issued by Pico pursuant to the
Allied Transaction, whichever is later. The exercise price will be equal to the
average closing price for the 90 calendar days preceding the date which is 120
calendar days following the date of filing with the SEC of the Company's Form
10-K for the fiscal year ended July 31, 1997 (the "Pricing Date"). In the event
that any or a portion of the Warrants are exercised prior to the Pricing Date,
the per share exercise price will be equal to the average trading price for the
90 calendar days preceding the actual date of exercise (the "Preliminary
Exercise Price"), subject to adjustment based on the actual Exercise Price on
the Pricing Date, provided that at the time of such determination, the Common
Stock is traded in the over-the-counter market or on a national or regional
securities exchange. In the event there is no closing price on any day during
such 90 day period, then the average of the most recent bid and asked price
shall be used as the price for such day for purposes of calculating the Exercise
Price. The Warrants will give Sinkler the same registration rights, rights to
obtain additional warrants and anti-dilution protection as given to Allied under
the Allied Transaction, provided that Sinkler shall only exercise its demand
registration rights in conjunction with Allied.
2. CONDITION PRECEDENT TO SINKLER'S OBLIGATIONS. Sinkler's obligations
under this Agreement shall depend and be conditioned upon (i) Pico's completion
of the Allied Transaction on substantially the terms and conditions set forth in
the Allied Letter and (ii) the
2
<PAGE>
sale to Sinkler by Allied of 35,000 shares of the Common Stock of Pico at a
price of $.286 per share.
3. WAIVER OF ANTI-DILUTION RIGHTS. Sinkler hereby waives its rights to
"Anti-Dilution Adjustments" under Section 4 of the Stock Purchase Warrant dated
November 21, 1996 (the "Prior Warrant") with respect to the issuance by Pico of
the Stock, Warrants and the common shares to be received upon exercise of the
Warrants, hereinafter referred to as the "Warrant Shares." Except for the
specific waiver contained in this Section 3, Sinkler's rights to anti-dilution
protection under the Prior Warrant remain in full force and effect and Sinkler
is under no obligation to grant any further waivers thereof.
4. CALL PROVISION. Within 90 days after all of the Obligations have been
fully paid, the Parent may purchase from the Holders up to 30,000 shares of the
Warrant Shares, at a price per share equal to $3.00, or, if the Warrants have
not been exercised, may have the right to purchase up to 30,000 shares of
Warrants, at a price per share equal to $3.00 less the exercise price per share.
5. REPRESENTATIONS AND WARRANTIES.
A. Pico hereby makes the same representations and warranties to
and for the benefit of Sinkler as are contained in Article III of the Investment
Agreement, dated today, between Allied Capital International Corporation and
certain affiliates, as the investors, and Pico and certain affiliates (the
"Allied Agreement"). In addition Pico represents and warrants to Sinkler that
(i) this agreement and the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Pico; and (ii) this
Agreement and the Warrants constitute the valid and binding obligations of Pico,
enforceable in accordance with their respective terms.
B. Sinkler hereby represents and warrants to Pico that
it (i) is acquiring the Stock and the Warrants (and will acquire the Warrant
Shares) for its own account for the purpose of investment and not with a view to
or for sale in connection with any distribution thereof; (ii) understands that
the Stock, the Warrants, and the Warrant Shares have not been registered under
the Securities Act of 1933 (the "Act"), as amended, by reason of their issuance
in a transaction exempt from the registration requirements of the Act pursuant
to Section 4(2) thereof and may not be offered or sold except pursuant to an
effective registration statement or an available exemption from the registration
requirements under the Act; and (iii) is an "accredited investor" as defined in
Regulation D as promulgated under the Act. Sinkler agrees that certificates
representing the Stock, the Warrants, and the Warrant Shares will bear
restrictive legends to the effect of clause (ii) of the preceding sentence and
that Pico may require an opinion of counsel, in form and substance reasonably
satisfactory to Pico, to the effect that any proposed transfer will not result
in any violation of the Act and the rules and regulations thereunder.
3
<PAGE>
6. AFFIRMATIVE COVENANTS. As long as the Stock has not been
redeemed, Pico will make the following covenants:
A. PROJECTIONS. Pico agrees to supply the same
projections to Sinkler it has agreed to supply under section 4.05 of the
Allied Agreement.
B. MATERIAL FILINGS; MATERIAL LITIGATIONS; DEFAULT
NOTICES. Pico agrees to supply Sinkler with the same information it has
agreed to supply under Sections 4.06, 4.07 and 4.08 of the Allied Agreement.
7. NEGATIVE COVENANTS.
A. As long as any of the Stock remains unredeemed, Pico
agrees to the same negative covenants for the benefit of Sinkler that it has
provided under sections 5.01, 5.02 and 5.05 of the Allied Agreement.
B. As long as any of the Stock remains unredeemed and Sinkler
has any unexercised Warrants, Pico agrees not to make any redemptions of
common shares or dividend payments on the common shares unless Sinkler is
given an opportunity to exercise its Warrants.
C. As long as any of the Stock remains unredeemed, Pico
agrees not to issue any preferred shares senior to, or of equal parity with,
the Stock, or to make any cash payment of dividends on any preferred shares
which are junior to the Stock if the amount of such cash dividends paid in
any fiscal year is greater than the Equivalent Rate multiplied by the
purchase price of such junior preferred shares. The term "Equivalent Rate"
shall mean the prime rate of First Union Bank on the date of issuance of any
such junior preferred shares plus 3.5%.
8. DEFAULT.
A. The following shall constitute events of default:
(i) Failure to declare or pay any dividend on the Stock as
required by this Agreement or the provisions of the Designation Statement.
(ii) Breach of any affirmative or negative covenant; Pico will have
10 days to cure any violation of a financial covenant after notice of default
from Sinkler and will have 30 days to cure any violation of a non-financial
covenant after notice of default from Sinkler. Pico agrees to provide
Sinkler with any notice of default which it provides under the Allied
Agreement.
4
<PAGE>
(iii) Any representation or warranty made by Pico pursuant to
Section 4A hereof shall prove to have been untrue when made in any material
respect.
(iv) The occurrence of an event described in Section 7.04, 7.05,
7.06, or 7.07 of the Allied Agreement.
In addition to all other remedies it may have at law or in equity in the
event of a Default as set forth above, which is not cured as herein provided,
Sinkler shall have the unqualified right to demand the immediate redemption
of the Stock, with which demand Pico agrees to immediately comply.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
5
<PAGE>
9. LEGAL OPINIONS.
A. Pico agrees to supply Sinkler with an opinion of the counsel,
Messrs. Saul, Ewing, Remick and Saul, to the effect that:
(i) Pico is a corporation duly incorporated and validly existing
under the laws of the State of New York.
(ii) The transaction set forth in this letter agreement and the
execution of this Agreement have been duly authorized by the Board of
Directors of Pico and do not violate any law or statute, by-law, agreement,
covenant or understanding by which Pico is bound.
B. Sinkler agrees to supply Pico with the opinion of its
counsel, Messrs. Montgomery, McCracken, Walker & Rhoads, to the effect that:
(i) The transaction set forth in this letter agreement and the
execution of this letter agreement have been duly authorized by the Board of
Directors of Sinkler; and the borrowing necessary to fund this transaction
has likewise been duly authorized by the Board of Directors of Sinkler.
10. CLOSING. Closing hereunder will take place simultaneously with
Pico's closing of the Allied Transaction and simultaneously with the
execution and delivery of this Agreement, at the offices of Messrs. Saul,
Ewing, Remick & Saul, 3800 Centre Square West, Philadelphia, Pennsylvania.
Sincerely,
By:
-----------------------
Vice President
Accepted and Agreed to:
PICO PRODUCTS, INC.
By:
-----------------------
Charles G. Emley, Jr., Chairman
and Chief Executive Officer
Date: ____________, 1997
6
<PAGE>
EXHIBIT A
PICO PRODUCTS, INC.
RESOLUTION OF THE BOARD OF DIRECTORS
APPROVING
THE DESIGNATION STATEMENT
RELATING TO SERIES B REDEEMABLE PREFERRED SHARES
WHEREAS, the Certificate of Incorporation of the Corporation authorizes
the Corporation to issue a total of 500,000 series preferred shares, par
value $.01 per share ("Preferred Shares"), which may be divided into one or
more series as the Board of Directors may determine;
WHEREAS, the Certificate of Incorporation of the Corporation expressly
vests in the Board of Directors the authority to fix and determine the
designations, powers, preferences, and rights, and the qualifications,
limitations and restrictions thereof, of the Preferred Shares;
WHEREAS, the Board of Directors has designated a series of the
Corporation's Preferred Shares consisting of one thousand (1,000) shares
designated as Series A Redeemable Preferred Stock (the "Series A Shares"),
and one thousand (1,000) shares of such Series A Redeemable Preferred Shares
have been issued by the Corporation;
WHEREAS, it is deemed advisable to designate a second series of
Preferred Shares consisting of 165 shares designated as Series B Redeemable
Preferred Shares;
NOW, THEREFORE, IT IS HEREBY RESOLVED, that pursuant to Paragraph THIRD
of the Certificate of Incorporation of the Corporation, there be and hereby
is authorized and created a series of Preferred Shares hereby designated as
Series B Redeemable Preferred Shares, to consist of 165 shares having a par
value of $0.01 per share, which series shall have the voting rights,
designations, powers, preferences, relative and other special rights, and
qualifications, limitations and restrictions set forth below:
1. DESIGNATION. The designation of the series of Preferred Shares
created hereby is Series B Redeemable Preferred Shares and the number of
shares constituting such series is 165 (the "Series B Shares").
2. RANK. The Series B Shares shall, with respect to dividend rights,
rights on redemption and rights on liquidation, winding up and dissolution
(collectively, the "Rights"), rank prior to all classes of common shares of
the Corporation and to each other class of capital shares or series of
Preferred Shares of the Corporation hereafter created which does not
expressly provide that it ranks senior to or on a parity with the Series B
Shares. The Series B Shares shall, with respect to all such Rights, be on
parity with the Series A Shares.
7
<PAGE>
3. VOTING RIGHTS. Except as otherwise provided by law, the holder of
the Series B Shares shall not be entitled to vote on any matters with the
holders of other voting capital shares.
4. DIVIDENDS. Except as otherwise provided in this Paragraph 4, the
holder of the Series B Shares shall not be entitled to receive dividends.
A. GENERAL DIVIDEND OBLIGATIONS. When and as declared by the
Board of Directors of the Corporation, the Corporation shall pay to the
holders of the Series B Shares, out of the assets of the Corporation
available for such payment of dividends under the New York Business
Corporation Law, payable in preference and priority to any payment of any
dividend on common shares of the Corporation, dividends at the times and in
the amounts provided in this Paragraph 4. The Board of Directors of the
Corporation shall declare and pay to the holder of Series B Shares dividends
at the Dividend Rate described in Paragraph 4.C. below on a quarterly basis;
provided that the Board of Directors may in its discretion postpone the
declaration and payment of one or more quarterly dividends so long as
dividends are declared and paid on at least an annual basis.
B. CALCULATION OF DIVIDENDS. Dividends for each Series B Share
will be calculated cumulatively on a quarterly basis at the rate and in the
manner prescribed herein from and including the "Commencement Date" with
respect to such Series B Shares to, but excluding, the date on which the
Series B Shares are redeemed or the Liquidation Price has been received with
respect to the Series B Shares, whether or not such dividends have been
declared and whether or not there are (at the time such dividends are
calculated or become payable or at any other time) profits, surplus or other
funds of the Corporation legally available for the payment of dividends.
For the purposes of this Subparagraph 4.B., the "Commencement Date" with
respect to any Series B Share shall be deemed to be the date of issuance
regardless of the number of times transfer of such Series B Share is made on
the share records maintained by or for the Corporation and regardless of the
number of certificates which may be issued to evidence such Series B Share
(whether by reason of transfer of such Series B Share or for any other
reason.)
C. DIVIDEND RATE. Dividends payable on the Series B Shares shall
be calculated cumulatively with respect to each quarter in which dividends
are due on each Series B Share at a rate of 10% of the Liquidation Value per
annum ("Dividend Rate"). To the extent not paid on the first day of each
January, April, July, and October (each a "Dividend Reference Date"), an
amount equal to all dividends which have been calculated on Series B Shares
then outstanding during the quarterly period (pro rated for a shorter period
as appropriate) ending on the day immediately preceding such Dividend
Reference Date shall be added to the Redemption Price (as described in
Paragraph 7 hereof) of such Series B Share and will remain a part thereof
until (but only until) such dividends are paid. Any subsequent dividends
which are paid to the holder of the Series B Shares in respect thereof shall,
in all instances, be applied first to the
8
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payment of amounts of dividends which have been added on previous Dividend
Reference Dates to the Redemption Price until the Redemption Price of all
Series B Shares shall be equal to the original Redemption Price, as adjusted,
herein stated.
D. FORM OF PAYMENT. The Dividend Rate shall be payable quarterly
in cash or in common shares of the Corporation, as determined by the holders
of a majority of the outstanding Series B Shares, by notice to the
Corporation at least thirty (30) days prior to the applicable Dividend
Reference Date. In the absence of such notice, it shall be presumed that the
dividend for the applicable quarter shall be payable in cash. In the event
that payment in the form of common shares is elected by the holders of the
Series B Shares, the number of common shares issuable shall be determined by
dividing the amount of the dividend by the average Market Value (as
hereinafter defined) of the Corporation's common shares over the ten
consecutive trading days ending on the trading day immediately prior to the
Dividend Reference Date. "Market Value" shall mean the average of the high
and low prices of the common shares, as reported in The Wall Street Journal,
on the American Stock Exchange (or a similar consolidated transactions report
for the exchange or other market on which the common shares is then trading,
if not the American Stock Exchange) for the relevant date, or if no sales of
common shares were made on such exchange on such date, the average of the
high and low prices of such shares as reported in such composite transaction
report for the preceding day on which sales of shares were made on such
exchange. If the common shares are not listed on a national securities
exchange at the time Market Value is to be determined, then Market Value
shall be determined by the Board of Directors of the Corporation in good
faith pursuant to such method as the Board of Directors deems appropriate and
equitable. Under no circumstances shall the Market Value of a common share
be less than its par value. All fractional shares shall be paid in cash.
All unpaid cash dividends shall be cumulative.
E. PRIORITY. So long as any Series B Shares shall be
outstanding, without the consent of the holders of a majority of the
outstanding Series B Shares, the Corporation shall not declare or pay on the
common shares of the Corporation any dividend whatsoever, whether in cash,
property or otherwise, nor shall the Corporation make any distribution on the
common shares, nor shall any common shares be purchased or redeemed by the
Corporation or any subsidiary thereof, unless (i) all dividends to which the
holders of Series B Shares have been entitled for all previous dividend
periods shall have been paid or declared and a sum of money sufficient for
the payment thereof set apart, and (ii) all Series B Shares which the
Corporation was theretofore obligated to redeem in accordance with Paragraph
7 hereof shall have been redeemed.
5. LIQUIDATION. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation, the
holders of Series B Shares then outstanding shall be entitled to be paid out
of the assets of the Corporation available for distribution to its
shareholders an amount equal to one thousand dollars ($1,000.00) for each
Series B Share outstanding (such amount, as it may be adjusted from time to
time to give effect to any share splits or combinations, recapitalizations or
other similar events, the "Liquidation Value") plus an
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<PAGE>
amount equal to all accumulated but unpaid dividends thereon to the date
fixed for the liquidation, dissolution or winding up, before any payment
shall be made or any assets distributed to the holders of common shares.
Except as provided in the preceding sentence, holders of Series B Shares
shall not be entitled to any distribution in the event of liquidation,
dissolution or winding up of the affairs of the Corporation. If the assets
of the Corporation are not sufficient to pay in full the liquidation payments
payable to the holders of the Series B Shares, then the holders of all such
shares shall share ratably in accordance with the respective amounts to which
the holders of outstanding Series B Shares would be entitled if all amounts
payable thereon were paid in full. The liquidation payment with respect to
each outstanding fractional Series B Share (if any) shall be equal to a
ratably proportionate amount of the liquidation payment with respect to each
outstanding Series B Share.
6. CONVERSION. The Series B Shares shall not be convertible into or
exchangeable for shares of any other series or class of shares of the
Corporation.
7. REDEMPTION. The Series B Shares shall be redeemable as follows:
A. OPTIONAL REDEMPTION. The Series B Shares shall be redeemable,
at the option of the Corporation, in whole or in part, at any time without
penalty, at a redemption price equal to one thousand dollars ($1,000.00) per
share (the "Redemption Price") plus an amount equal to all accumulated but
unpaid dividends thereon to the date fixed for redemption.
B. MANDATORY REDEMPTION. The Series B Shares shall be redeemed,
out of funds legally available therefor, at the Redemption Price plus an
amount equal to all accumulated but unpaid dividends thereon to the date
fixed for redemption on the following dates and in the following amounts:
All outstanding shares on or before September 28, 2000.
C. REDEMPTION PROCEDURES. When the Corporation redeems the Series
B Shares, the following procedures shall apply:
(i) When less than all of the outstanding Series B Shares are
being redeemed, the shares subject to redemption shall be determined in the
sole discretion of the Corporation.
(ii) Notice of redemption shall be given by first class mail,
postage prepaid, mailed not less than 30 days nor more than 60 days prior to
the date on which Series B Shares are to be redeemed (any such date, a
"redemption date"), to the holder of record of the shares to be redeemed at
such holder's address as the same appears on the share register of the
Corporation. Such notice shall state: (a) the redemption date; (b) the
redemption price; (c) the number of shares subject to redemption; and (d) the
place or places where certificates for such shares are to be surrendered for
payment of the redemption price.
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(iii) Notice having been mailed as aforesaid, from and after the
redemption date (unless default shall be made by the Corporation in providing
money for the payment of the redemption price of the shares called for
redemption) said shares shall no longer be deemed to be outstanding and shall
have the status of authorized but unissued Series B Shares, and shall not be
reissued as Series B Shares, and all rights of the holder thereof as a
shareholder of the Corporation (except the right to receive from the
Corporation the redemption price) shall cease. Upon surrender in accordance
with said notice of the certificates for any shares so redeemed (properly
endorsed or assigned for transfer, if the Board of Directors of the
Corporation shall so require and the notice shall so state), such shares
shall be redeemed by the Corporation at the redemption price aforesaid.
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<PAGE>
EXHIBIT 4(r)
THIS SECURITY HAS BEEN ACQUIRED IN A TRANSACTION NOT INVOLVING ANY PUBLIC
OFFERING AND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD OR TRANSFERRED EXCEPT IN
COMPLIANCE WITH THE ACT.
PICO PRODUCTS, INC.
______________________________
STOCK PURCHASE WARRANT
______________________________
Right to Purchase Certificate No. 1
149,915 shares of Common Stock Dated as of September 12, 1997
1. GRANT. For consideration of $11.50 and other value received,
PICO PRODUCTS, INC., a New York corporation (the "Company"), hereby grants to
ALLIED CAPITAL CORPORATION or its registered assigns (the "Holder"), at the
exercise price set forth in Section 3 below, the right to purchase up to
149,915 shares (the "Warrant Shares") of the Company's Common Stock, par
value $.01 per share (the "Common Stock"). The number of Warrant Shares to
be received upon the exercise of this Warrant is subject to adjustment from
time to time as hereinafter set forth.
2. EXERCISE PERIOD. The right to exercise this Warrant, in whole
or in part, shall commence as of the date hereof, and shall expire on that
date (the "Expiration Date") which is the later of: (i) three years from the
date on which all Obligations with respect to the Debentures are satisfied in
full; or (ii) six years from the date hereof.
3. EXERCISE PRICE. (a) The per share exercise price (the
"Exercise Price") of this Warrant shall be equal to the average closing price
for the 90 calendar days preceding the date which is 120 calendar days
following the date of filing with the Securities and Exchange Commission of
the Company's Form 10-K for the fiscal year ended July 31, 1997 (the "Pricing
Date"). In the event there is no closing price on any day during such 90 day
period, then the average of the most recent bid and asked price shall be used
as the price for such day for purposes of calculating the Exercise Price.
(b) In the event that any or a portion of this Warrant is
exercised prior to the Pricing Date, the per share exercise price of this
Warrant will be equal to the average closing price (or average of the most
recent bid and asked price in the event there is no closing price on any such
day) for the 90 calendar days preceding the actual date of exercise (the
"Preliminary Exercise Price"), subject to adjustment based on the actual
Exercise Price on the Pricing Date as
<PAGE>
determined in accordance with Section 3(a) hereof; provided that at the time
of such determination, the Common Stock is traded in the over-the-counter
market or on a national or regional securities exchange.
4. ANTI-DILUTION ADJUSTMENTS. The number of Warrant Shares to be
received by the Holder upon exercise of this Warrant and the Exercise Price
shall be subject to adjustment from time to time as follows:
(a) If the Company shall issue, or be deemed to have issued
(pursuant to subsection (3) of Section 4(b)), any shares of Common Stock,
(other than "Excluded Stock" as defined below) for a consideration
(determined in the manner provided in subsections (1), (2) and (3) of Section
4(b)) per share less than the Exercise Price, the Exercise Price to be in
effect following such issuance shall be adjusted to a price (calculated to
the nearest cent) determined by dividing:
(I) an amount equal to the sum of (x) the number of shares of
Common Stock outstanding immediately prior to such issue (including as
outstanding all shares of Common Stock issuable upon exercise of the
Warrants) multiplied by the then existing Exercise Price, and (y) the
consideration, if any, received by the Company upon such issue; by
(II) the total number of shares of Common Stock outstanding
immediately after such issue (including as outstanding all shares of
Common Stock issuable upon exercise of the Warrants).
No adjustment of the Exercise Price however shall be made in an
amount less than $.001 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 $.001 per share or more.
(b) For the purposes of Section 4(a), the following provisions
shall be applicable:
(1) In the case of the issuance of Common Stock for cash, the
consideration shall be deemed to be the amount of cash paid therefor without
deducting any discounts, commissions or expenses paid or incurred by the
Company in connection with the issuance and sale thereof.
(2) In the case of the issuance of Common Stock for a
consideration in whole or in part other than cash, the consideration other
than cash shall be deemed to be the fair value thereof as determined in good
faith by the Board of Directors; provided, however, that if, at the time of
such determination, the Common Stock is traded in the over-the-counter market
or on a national or regional securities exchange, such fair market value as
determined by the Board of Directors shall be the "fair market value" (as
defined in Section 9(b) below) of the shares of Common Stock being issued.
2
<PAGE>
(3) In the case of the issuance of (i) options to purchase or
rights to subscribe for Common Stock (other than Excluded Stock), (ii)
securities by their terms convertible into or exchangeable for Common Stock
(other than Excluded Stock), or (iii) options to purchase or rights to
subscribe for securities by their terms convertible into or exchangeable for
Common Stock (other than Excluded Stock):
(A) the aggregate maximum number of shares of Common
Stock deliverable upon exercise of such options to purchase or rights to
subscribe for Common Stock shall be deemed to have been issued at the time
such options or rights were issued and for consideration equal to the
aggregate consideration (determined in the manner provided in subsections (1)
and (2) of this Section 4(b)), if any, received (or to be received) by the
Company upon the issuance of such options or rights and upon exercise thereof
for the Common Stock covered thereby;
(B) the aggregate maximum number of shares of Common
Stock deliverable upon conversion of or in exchange for any such convertible
or exchangeable securities, or upon the exercise of options to purchase or
rights to subscribe for such convertible or exchangeable securities and
subsequent conversion or exchange thereof, shall be deemed to have been
issued at the time such securities were issued or such options or rights were
issued and for consideration equal to the aggregate consideration received
(or to be received) by the Company for any such securities and related
options or rights (excluding any cash received on account of accrued interest
or accrued dividends), and upon the conversion or exchange of such securities
or the exercise of any related options or rights (the consideration in each
case to be determined in the manner provided in subsections (1) and (2) of
this Section 4(b)); and
(C) on any change in the number of shares of Common
Stock deliverable upon exercise of any such options or rights or conversion
of or exchange for such convertible or exchangeable securities, or on any
change in the minimum purchase price of such options, rights or securities
(other than a change resulting from the anti-dilution provisions, if any, of
such options, rights or securities, unless the event giving rise to such
adjustment does not also give rise to an adjustment in the Exercise Price
pursuant to the terms of this Section 4), then the Exercise Price shall
forthwith be readjusted to such Exercise Price as would have been obtained
had the adjustment made upon (x) the issuance of such options, rights or
securities not exercised, converted or exchanged prior to such change, as the
case may be, been made upon the basis of such change or (y) the options or
rights related to such securities not converted or exchanged prior to such
change, as the case may be, been made upon the basis of such change.
(c) "Excluded Stock" shall mean:
(1) all shares of Common Stock issued and outstanding on the
effective date hereof;
(2) all shares of Common Stock into which securities issued
and outstanding on the date hereof are convertible (including shares issuable
to each of City National
3
<PAGE>
Bank, Shipley Raidy Capital Partners, LP and The Sinkler Corporation, in each
case pursuant to warrants issued either prior to or on the date hereof);
(3) subject to adjustment pursuant to stock splits, stock
dividends and the like, up to 780,750 shares of Common Stock or other
securities issued to employees of the Company under any agreement,
arrangement or plan, including any stock incentive plan, which is or may be
approved by the Board of Directors and the stockholders of the Company; and
(4) all shares of Common Stock distributed as to holders of
the Company's Series B Redeemable Preferred Stock as payment in kind of
dividends, as permitted by the terms thereof.
(d) If the number of shares of Common Stock outstanding at any
time after the date hereof is increased by a stock dividend payable in shares
of Common Stock or by a subdivision or split-up of shares of Common Stock,
then, on the date such payment is made or such change is effective, the
Exercise Price in effect immediately prior to such event shall be
proportionately decreased, and the number of Warrant Shares shall be
proportionately increased.
(e) If the number of shares of Common Stock outstanding at any
time after the date hereof is decreased by a combination of the outstanding
shares of Common Stock, then, on the effective date of such combination, the
Exercise Price in effect immediately prior to such event shall be
proportionately increased, and the number of Warrant Shares shall be
proportionately decreased.
(f) In case, at any time after the date hereof, of any capital
reorganization, or any reclassification of the Common Stock of the Company
(other than a change in par value or as a result of a stock dividend or
subdivision, split-up or combination of shares), or of the consolidation or
merger of the Company with or into another person, or of the sale or other
disposition of all or substantially all the properties and assets of the
Company as an entirety to any other person, the Holder shall, after such
reorganization, reclassification, consolidation, merger, sale or other
disposition, receive upon exercise of the Warrant, the kind and number of
shares of stock, or other securities or property or cash of the Company or of
the entity resulting from such consolidation or surviving such merger or to
which such properties and assets shall have been sold or otherwise disposed,
to which a holder of the number of shares of Common Stock deliverable upon
exercise of this Warrant would have been entitled on such reorganization,
reclassification, consolidation, merger, sale or other disposition had this
Warrant been exercised immediately prior to such event. The provisions of
this Section 4(f) shall similarly apply to successive reorganizations,
reclassifications, consolidations, mergers, sales or other dispositions.
(g) Upon any adjustment of the Exercise Price, then and in each
such case the Company shall give written notice thereof, by first class mail,
postage prepaid, addressed to the holder of this Warrant at the last
registered address of such holder as shown on the books of the Company, which
notice shall state the facts leading to, and the Exercise Price resulting
from, such adjustment.
4
<PAGE>
5. PRIOR NOTICE AS TO CERTAIN EVENTS. If at any time:
(a) the Company shall pay any dividend payable in stock upon
its Common Stock or make any distribution (other than cash dividends) to the
holders of its Common Stock;
(b) the Company shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock of any class or
any other rights;
(c) there shall be any reorganization or reclassification of
the capital stock of the Company, or a consolidation or merger of the Company
with, or a sale of all or substantially all its assets to, another entity; or
(d) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in each such case, the Company shall give prior written
notice, by first class mail, postage prepaid, addressed to the Holder at its
address shown on the books of the Company, of the date on which (i) the books
of the Company shall close or a record shall be taken for such stock
dividend, distribution or subscription rights or (ii) such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up shall take place, as the case may be. Such notice shall also
specify the date as of which the holders of the Common Stock of record shall
participate in said dividend, distribution or subscription rights or shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon such reorganization, reclassification, dissolution,
liquidation or winding up, as the case may be. Such written notice shall be
given at least 10 days prior to the action in question.
6. RESERVATION OF COMMON STOCK. The Company shall, at all times,
reserve and keep available for issuance and delivery upon the exercise of
this Warrant such number of its authorized but unissued shares of Common
Stock or other securities of the Company as will be sufficient to permit the
exercise in full of this Warrant. Upon such issuance, all such shares will
be validly issued, fully paid and nonassessable, free and clear of all liens,
security interests, charges and other encumbrances or restrictions on sale
and free and clear of all preemptive rights.
7. NO VOTING RIGHTS; LIMITATIONS OF LIABILITY. Prior to exercise,
this Warrant will not entitle the Holder to any voting rights or other rights
as a stockholder of the Company. No provision of this Warrant, in the
absence of affirmative action by the Holder to exercise this Warrant, and no
enumeration in this Warrant of the rights or privileges of the Holder, will
give rise to any liability of such Holder for the Exercise Price.
8. EXERCISE PROCEDURE. (a) This Warrant may be exercised prior to
the Expiration Date, by presenting it and tendering the Exercise Price, at
the option of the Holder (i) in legal tender, or (ii) by bank cashier's or
certified check, at the principal office of the Company along with written
subscription substantially in the form of Exhibit "A" attached hereto. The
date on which this Warrant is thus surrendered, accompanied by tender or
payment as hereinbefore or
5
<PAGE>
hereinafter provided, is referred to herein as the "Exercise Date." The
Company shall forthwith at its sole expense (including the payment of issue
taxes), issue and deliver to Holder certificates for the proper number of
Warrant Shares upon exercise of this Warrant within 10 days after the
Exercise Date, and such Warrant Shares shall be deemed issued and the Holder
deemed the holder of record of such Warrant Shares, for all purposes as of
the opening of business on the Exercise Date, notwithstanding any delay in
the actual issuance.
(b) The Company shall pay any and all documentary, stamp or
similar issue or transfer taxes payable in respect of the issue or delivery
of the Warrant Shares.
(c) In the event this Warrant is partially exercised, the Company
shall forthwith issue and deliver to Holder a new Warrant of like tenor to
purchase that number of shares with respect to which such partial exercise
did not apply.
9. CASHLESS EXERCISE.
(a) RIGHT TO CONVERT. Notwithstanding anything herein to the
contrary, in lieu of payment of the applicable Exercise Price, the Holder may
elect to receive upon exercise of this Warrant, the number of Warrant Shares
reduced by a number of shares of Common Stock having the aggregate Fair
Market Value equal to the aggregate Exercise Price for the Warrant Shares.
(b) FAIR MARKET VALUE. For purposes hereof, the Fair Market Value
of a share of Common Stock is determined as follows:
(i) If the Common Stock of the Company is listed on a
national securities exchange or admitted to unlisted trading privileges on
such exchange or listed for trading on the Nasdaq Stock Market (National
Market), the Fair Market Value shall be the last reported sale price of the
Common Stock on such exchange or system on the last trading day prior to the
date of exercise of this Warrant or if no such sale is made on such day, the
average closing bid and asked prices for such day on such exchange or system.
(ii) If the Common Stock of the Company is not so listed or
admitted to unlisted trading privileges, the Fair Market Value shall be the
mean of the last reported bid and asked prices reported by the National
Quotation Bureau, Inc., on the last trading day prior to the date of the
exercise of this Warrant.
(iii) If the Common Stock of the Company is not so listed or
admitted to unlisted trading privileges and bid and asked prices are not so
reported, the Fair Market Value shall be an amount reasonably determined in
such reasonable manner as may be prescribed by the Board of Directors of the
Company.
(c) METHOD OF EXERCISE. This Warrant may be exercised in
accordance with the provisions of this Section 9 by the surrender of this
Warrant at the principal office of the Company together with a written
statement specifying that the Holder thereby intends to so
6
<PAGE>
exercise the Warrant. With the exception of the payment of the Exercise
Price, the provisions of Section 8 hereof shall apply to any such exercise.
10. SALE OF WARRANT OR SHARES. Neither this Warrant nor any of
the Warrant Shares have been registered under the Act or under the securities
laws of any state. Neither this Warrant nor any of the Warrant Shares (when
issued) may be sold, assigned, transferred, pledged or hypothecated or
otherwise disposed of in the absence of: (a) an effective registration
statement for this Warrant or the Warrant Shares, as the case may be, under
the Act and such registration or qualification as may be necessary under the
securities laws of any state, or (b) an opinion of counsel reasonably
satisfactory to the Company that such registration or qualification is not
required. The Company shall cause a certificate or certificates evidencing
all or any of the Warrant Shares issued upon exercise of the purchase rights
herein prior to said registration and qualification of such shares to bear
the following legend:
THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF ANY
STATE. THE SHARES MAY NOT BE OFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED
OR HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND
SUCH REGISTRATION OR QUALIFICATION AS MAY BE NECESSARY UNDER THE SECURITIES
LAWS OF ANY STATE, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION OR QUALIFICATION IS NOT REQUIRED.
11. TRANSFER. This Warrant shall be registered on the books of
the Company which shall be kept at the offices of the Company for that
purpose, and shall be transferable in whole or in part, but only on such
books by the Holder in person or by duly authorized attorney with written
notice substantially in the form of Exhibit "B" attached hereto, and only in
compliance with the preceding paragraph. The Company may issue appropriate
stop orders to its transfer agent to prevent a transfer in violation of the
preceding paragraph.
12. REPLACEMENT OF WARRANT. At the request of the Holder and on
production of evidence reasonably satisfactory to the Company of the loss,
theft, destruction or mutilation of this Warrant and (in the case of loss,
theft or destruction) if required by the Company, upon reasonably
satisfactory indemnification, the Company, at Holder's expense, will issue in
lieu thereof a new Warrant of like tenor.
13. INVESTMENT COVENANT. By its acceptance hereof, the Holder
represents and warrants that this Warrant is, and any Warrant Shares issued
hereunder will be, acquired for its own account for investment purposes, and
the Holder covenants that it will not distribute the same in violation of any
state or federal law or regulation.
7
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14. GOVERNING LAW. This Warrant shall be construed according to
the laws of New York (other than its conflict of law rules).
{SIGNATURES TO FOLLOW}
8
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be
signed on its behalf, in its corporate name, by its Chief Executive Officer,
and its corporate seal to be hereunto affixed and the said seal to be
attested by its Secretary, as of the ___ day of September, 1997.
ATTEST: PICO PRODUCTS, INC.
a New York corporation
By: By: [Seal]
-------------------- -----------------------
Gary M. Atkinson Charles G. Emley, Jr.
Chairman and Chief
Executive Officer
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<PAGE>
EXHIBIT A
IRREVOCABLE SUBSCRIPTION
To: PICO PRODUCTS, INC.
The undersigned hereby elects to exercise its right under the attached
Warrant by purchasing ________________ shares of the Common Stock of PICO
PRODUCTS, INC., and hereby irrevocably subscribes to such issue. The
certificates for such shares shall be issued in the name of:
----------------------------------------
(Name)
----------------------------------------
(Address)
----------------------------------------
(Taxpayer Number)
and delivered to:
----------------------------------------
(Name)
----------------------------------------
(Address)
The Exercise Price of $_____ per share is
enclosed.
or
In lieu of payment of the Exercise Price, the undersigned hereby invokes
the provisions of Section 9 of the Warrant.
Date:
------------------------------------
Signed:
----------------------------------
(Name of Holder, Please Print)
------------------------------------
(Address)
------------------------------------
(Signature)
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EXHIBIT B
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells,
assigns and transfers unto:
------------------------------------
(Name)
------------------------------------
(Address)
the attached Warrant, together with all right, title and interest
therein to purchase _____________ shares of the Common Stock of PICO
PRODUCTS, INC., and does hereby irrevocably appoint _______________________
as attorney-in-fact to transfer said Warrant on the books of PICO PRODUCTS,
INC., with full power of substitution in the premises.
Done this ______ day of ____________ 19____.
----------------------------
(Signature)
----------------------------
(Name and title)
----------------------------
----------------------------
(Address)
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EXHIBIT 4(s)
THIS SECURITY HAS BEEN ACQUIRED IN A TRANSACTION NOT INVOLVING ANY PUBLIC
OFFERING AND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD OR TRANSFERRED EXCEPT IN
COMPLIANCE WITH THE ACT.
PICO PRODUCTS, INC.
______________________________
STOCK PURCHASE WARRANT
SUBJECT TO CALL
______________________________
Right to Purchase Certificate No. 1
39,382 shares of Common Stock Dated as of September 12, 1997
1. GRANT. For consideration of $3.00 and other value received,
PICO PRODUCTS, INC., a New York corporation (the "Company"), hereby grants to
ALLIED CAPITAL CORPORATION or its registered assigns (the "Holder"), at the
exercise price set forth in Section 3 below, the right to purchase up to
39,382 shares (the "Warrant Shares") of the Company's Common Stock, par value
$.01 per share (the "Common Stock"). The number of Warrant Shares to be
received upon the exercise of this Warrant is subject to adjustment from time
to time as hereinafter set forth.
2. EXERCISE PERIOD. The right to exercise this Warrant, in whole
or in part, shall commence as of the date hereof, and shall expire on that
date (the "Expiration Date") which is the later of: (i) three years from the
date on which all Obligations with respect to the Debentures are satisfied in
full; or (ii) six years from the date hereof.
3. EXERCISE PRICE. (a) The per share exercise price (the
"Exercise Price") of this Warrant shall be equal to the average closing price
for the 90 calendar days preceding the date which is 120 calendar days
following the date of filing with the Securities and Exchange Commission of
the Company's Form 10-K for the fiscal year ended July 31, 1997 (the "Pricing
Date"). In the event there is no closing price on any day during such 90 day
period, then the average of the most recent bid and asked price shall be used
as the price for such day for purposes of calculating the Exercise Price.
(b) In the event that any or a portion of this Warrant is
exercised prior to the Pricing Date, the per share exercise price of this
Warrant will be equal to the average closing price (or average of the most
recent bid and asked price in the event there is no closing price on any such
day) for the 90 calendar days preceding the actual date of exercise (the
"Preliminary
<PAGE>
Exercise Price"), subject to adjustment based on the actual Exercise Price on
the Pricing Date as determined in accordance with Section 3(a) hereof;
provided that at the time of such determination, the Common Stock is traded
in the over-the-counter market or on a national or regional securities
exchange.
4. ANTI-DILUTION ADJUSTMENTS. The number of Warrant Shares to be
received by the Holder upon exercise of this Warrant and the Exercise Price
shall be subject to adjustment from time to time as follows:
(a) If the Company shall issue, or be deemed to have issued
(pursuant to subsection (3) of Section 4(b)), any shares of Common Stock,
(other than "Excluded Stock" as defined below) for a consideration
(determined in the manner provided in subsections (1), (2) and (3) of Section
4(b)) per share less than the Exercise Price, the Exercise Price to be in
effect following such issuance shall be adjusted to a price (calculated to
the nearest cent) determined by dividing:
(I) an amount equal to the sum of (x) the number of shares of
Common Stock outstanding immediately prior to such issue (including
as outstanding all shares of Common Stock issuable upon exercise of
the Warrants) multiplied by the then existing Exercise Price, and
(y) the consideration, if any, received by the Company upon such
issue; by
(II) the total number of shares of Common Stock outstanding
immediately after such issue (including as outstanding all shares
of Common Stock issuable upon exercise of the Warrants).
No adjustment of the Exercise Price however shall be made in an
amount less than $.001 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 $.001 per share or more.
(b) For the purposes of Section 4(a), the following provisions
shall be applicable:
(1) In the case of the issuance of Common Stock for cash, the
consideration shall be deemed to be the amount of cash paid therefor without
deducting any discounts, commissions or expenses paid or incurred by the
Company in connection with the issuance and sale thereof.
(2) In the case of the issuance of Common Stock for a
consideration in whole or in part other than cash, the consideration other
than cash shall be deemed to be the fair value thereof as determined in good
faith by the Board of Directors; provided, however, that if, at the time of
such determination, the Common Stock is traded in the over-the-counter market
or on a national or regional securities exchange, such fair market value as
determined by the Board of
2
<PAGE>
Directors shall be the "fair market value" (as defined in Section 9(b) below)
of the shares of Common Stock being issued.
(3) In the case of the issuance of (i) options to purchase or
rights to subscribe for Common Stock (other than Excluded Stock), (ii)
securities by their terms convertible into or exchangeable for Common Stock
(other than Excluded Stock), or (iii) options to purchase or rights to
subscribe for securities by their terms convertible into or exchangeable for
Common Stock (other than Excluded Stock):
(A) the aggregate maximum number of shares of Common
Stock deliverable upon exercise of such options to purchase or rights to
subscribe for Common Stock shall be deemed to have been issued at the time
such options or rights were issued and for consideration equal to the
aggregate consideration (determined in the manner provided in subsections (1)
and (2) of this Section 4(b)), if any, received (or to be received) by the
Company upon the issuance of such options or rights and upon exercise thereof
for the Common Stock covered thereby;
(B) the aggregate maximum number of shares of Common
Stock deliverable upon conversion of or in exchange for any such convertible
or exchangeable securities, or upon the exercise of options to purchase or
rights to subscribe for such convertible or exchangeable securities and
subsequent conversion or exchange thereof, shall be deemed to have been
issued at the time such securities were issued or such options or rights were
issued and for consideration equal to the aggregate consideration received
(or to be received) by the Company for any such securities and related
options or rights (excluding any cash received on account of accrued interest
or accrued dividends), and upon the conversion or exchange of such securities
or the exercise of any related options or rights (the consideration in each
case to be determined in the manner provided in subsections (1) and (2) of
this Section 4(b)); and
(C) on any change in the number of shares of Common
Stock deliverable upon exercise of any such options or rights or conversion
of or exchange for such convertible or exchangeable securities, or on any
change in the minimum purchase price of such options, rights or securities
(other than a change resulting from the anti-dilution provisions, if any, of
such options, rights or securities, unless the event giving rise to such
adjustment does not also give rise to an adjustment in the Exercise Price
pursuant to the terms of this Section 4), then the Exercise Price shall
forthwith be readjusted to such Exercise Price as would have been obtained
had the adjustment made upon (x) the issuance of such options, rights or
securities not exercised, converted or exchanged prior to such change, as the
case may be, been made upon the basis of such change or (y) the options or
rights related to such securities not converted or exchanged prior to such
change, as the case may be, been made upon the basis of such change.
(c) "Excluded Stock" shall mean:
(1) all shares of Common Stock issued and outstanding on the
effective date hereof;
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<PAGE>
(2) all shares of Common Stock into which securities issued
and outstanding on the date hereof are convertible (including shares issuable
to each of City National Bank, Shipley Raidy Capital Partners, LP and The
Sinkler Corporation, in each case pursuant to warrants issued either prior to
or on the date hereof);
(3) subject to adjustment pursuant to stock splits, stock
dividends and the like, up to 780,750 shares of Common Stock or other
securities issued to employees of the Company under any agreement,
arrangement or plan, including any stock incentive plan, which is or may be
approved by the Board of Directors and the stockholders of the Company; and
(4) all shares of Common Stock distributed as to holders of
the Company's Series B Redeemable Preferred Stock as payment in kind of
dividends, as permitted by the terms thereof.
(d) If the number of shares of Common Stock outstanding at any
time after the date hereof is increased by a stock dividend payable in shares
of Common Stock or by a subdivision or split-up of shares of Common Stock,
then, on the date such payment is made or such change is effective, the
Exercise Price in effect immediately prior to such event shall be
proportionately decreased, and the number of Warrant Shares shall be
proportionately increased.
(e) If the number of shares of Common Stock outstanding at any
time after the date hereof is decreased by a combination of the outstanding
shares of Common Stock, then, on the effective date of such combination, the
Exercise Price in effect immediately prior to such event shall be
proportionately increased, and the number of Warrant Shares shall be
proportionately decreased.
(f) In case, at any time after the date hereof, of any capital
reorganization, or any reclassification of the Common Stock of the Company
(other than a change in par value or as a result of a stock dividend or
subdivision, split-up or combination of shares), or of the consolidation or
merger of the Company with or into another person, or of the sale or other
disposition of all or substantially all the properties and assets of the
Company as an entirety to any other person, the Holder shall, after such
reorganization, reclassification, consolidation, merger, sale or other
disposition, receive upon exercise of the Warrant, the kind and number of
shares of stock, or other securities or property or cash of the Company or of
the entity resulting from such consolidation or surviving such merger or to
which such properties and assets shall have been sold or otherwise disposed,
to which a holder of the number of shares of Common Stock deliverable upon
exercise of this Warrant would have been entitled on such reorganization,
reclassification, consolidation, merger, sale or other disposition had this
Warrant been exercised immediately prior to such event. The provisions of
this Section 4(f) shall similarly apply to successive reorganizations,
reclassifications, consolidations, mergers, sales or other dispositions.
(g) Upon any adjustment of the Exercise Price, then and in each
such case the Company shall give written notice thereof, by first class mail,
postage prepaid, addressed to the holder of this Warrant at the last
registered address of such holder as shown on the books of the
4
<PAGE>
Company, which notice shall state the facts leading to, and the Exercise
Price resulting from, such adjustment.
5. PRIOR NOTICE AS TO CERTAIN EVENTS. If at any time:
(a) the Company shall pay any dividend payable in stock upon
its Common Stock or make any distribution (other than cash dividends) to the
holders of its Common Stock;
(b) the Company shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock of any class or
any other rights;
(c) there shall be any reorganization or reclassification of
the capital stock of the Company, or a consolidation or merger of the Company
with, or a sale of all or substantially all its assets to, another entity; or
(d) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in each such case, the Company shall give prior written
notice, by first class mail, postage prepaid, addressed to the Holder at its
address shown on the books of the Company, of the date on which (i) the books
of the Company shall close or a record shall be taken for such stock
dividend, distribution or subscription rights or (ii) such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up shall take place, as the case may be. Such notice shall also
specify the date as of which the holders of the Common Stock of record shall
participate in said dividend, distribution or subscription rights or shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon such reorganization, reclassification, dissolution,
liquidation or winding up, as the case may be. Such written notice shall be
given at least 10 days prior to the action in question.
6. RESERVATION OF COMMON STOCK. The Company shall, at all times,
reserve and keep available for issuance and delivery upon the exercise of
this Warrant such number of its authorized but unissued shares of Common
Stock or other securities of the Company as will be sufficient to permit the
exercise in full of this Warrant. Upon such issuance, all such shares will
be validly issued, fully paid and nonassessable, free and clear of all liens,
security interests, charges and other encumbrances or restrictions on sale
and free and clear of all preemptive rights.
7. NO VOTING RIGHTS; LIMITATIONS OF LIABILITY. Prior to exercise,
this Warrant will not entitle the Holder to any voting rights or other rights
as a stockholder of the Company. No provision of this Warrant, in the
absence of affirmative action by the Holder to exercise this Warrant, and no
enumeration in this Warrant of the rights or privileges of the Holder, will
give rise to any liability of such Holder for the Exercise Price.
8. EXERCISE PROCEDURE. (a) This Warrant may be exercised prior
to the Expiration Date, by presenting it and tendering the Exercise Price,
at the option of the Holder (i) in legal
5
<PAGE>
tender, or (ii) by bank cashier's or certified check, at the principal office
of the Company along with written subscription substantially in the form of
Exhibit "A" attached hereto. The date on which this Warrant is thus
surrendered, accompanied by tender or payment as hereinbefore or hereinafter
provided, is referred to herein as the "Exercise Date." The Company shall
forthwith at its sole expense (including the payment of issue taxes), issue
and deliver to Holder certificates for the proper number of Warrant Shares
upon exercise of this Warrant within 10 days after the Exercise Date, and
such Warrant Shares shall be deemed issued and the Holder deemed the holder
of record of such Warrant Shares, for all purposes as of the opening of
business on the Exercise Date, notwithstanding any delay in the actual
issuance.
(b) The Company shall pay any and all documentary, stamp or
similar issue or transfer taxes payable in respect of the issue or delivery
of the Warrant Shares.
(c) In the event this Warrant is partially exercised, the Company
shall forthwith issue and deliver to Holder a new Warrant of like tenor to
purchase that number of shares with respect to which such partial exercise
did not apply.
9. CASHLESS EXERCISE.
(a) RIGHT TO CONVERT. Notwithstanding anything herein to the
contrary, in lieu of payment of the applicable Exercise Price, the Holder may
elect to receive upon exercise of this Warrant, the number of Warrant Shares
reduced by a number of shares of Common Stock having the aggregate Fair
Market Value equal to the aggregate Exercise Price for the Warrant Shares.
(b) FAIR MARKET VALUE. For purposes hereof, the Fair Market Value
of a share of Common Stock is determined as follows:
(i) If the Common Stock of the Company is listed on a
national securities exchange or admitted to unlisted trading privileges on
such exchange or listed for trading on the Nasdaq Stock Market (National
Market), the Fair Market Value shall be the last reported sale price of the
Common Stock on such exchange or system on the last trading day prior to the
date of exercise of this Warrant or if no such sale is made on such day, the
average closing bid and asked prices for such day on such exchange or system.
(ii) If the Common Stock of the Company is not so listed or
admitted to unlisted trading privileges, the Fair Market Value shall be the
mean of the last reported bid and asked prices reported by the National
Quotation Bureau, Inc., on the last trading day prior to the date of the
exercise of this Warrant.
(iii) If the Common Stock of the Company is not so listed or
admitted to unlisted trading privileges and bid and asked prices are not so
reported, the Fair Market Value shall be an amount reasonably determined in
such reasonable manner as may be prescribed by the Board of Directors of the
Company.
6
<PAGE>
(c) METHOD OF EXERCISE. This Warrant may be exercised in
accordance with the provisions of this Section 9 by the surrender of this
Warrant at the principal office of the Company together with a written
statement specifying that the Holder thereby intends to so exercise the
Warrant. With the exception of the payment of the Exercise Price, the
provisions of Section 8 hereof shall apply to any such exercise.
10. CALL.
(a) CALL RIGHTS. Within 90 days after all of the Obligations with
respect to the Debentures have been fully paid (the "Call Period"), the
Company may purchase from the Holder all or any portion of the Warrant
Shares, at a price per share equal to $3.00 (the "Call Price"), or, if the
Warrants have not been exercised, may have the right to purchase warrants to
acquire all or any portion of the Warrant Shares, at a price per share equal
to $3.00 less the exercise price per share.
(b) CALL PROCEDURE. The Company shall give Holder 15 days prior
written notice of its intent to exercise its call rights. The call rights
may then be exercised by tendering the Call Price in legal tender or by bank
cashier's or certified check at the principal office of the Holder. The date
on which the legal tender is thus surrendered is referred to herein as the
Call Date. The Holder shall deliver this Warrant or the certificate(s)
representing the shares purchased hereunder (as the case may be) within ten
days after the Call Date, and such shares shall be deemed transferred to the
Company for all purposes as of the opening of business on the Call Date
notwithstanding any delay in the actual transfer of certificate(s). In the
event that less than all of the warrants subject to this Section 10(a) hereof
are called, the balance of the warrants subject to call will be promptly
reissued to the Holder without the legend referencing the call rights. The
call rights with respect to such warrants will terminate immediately.
(c) LEGEND. The Company shall cause a certificate evidencing
shares of Common Stock acquired pursuant to this Warrant to bear the
following legend:
THE SHARES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT
TO CERTAIN CALL PROVISIONS DESCRIBED IN THAT CERTAIN
WARRANT GRANTED BY THE COMPANY DATED AS OF SEPTEMBER 12, 1997.
Upon expiration of the Call Period, the Company shall cause a
certificate evidencing such shares to be reissued without the above-described
legend.
11. SALE OF WARRANT OR SHARES. Neither this Warrant nor any of
the Warrant Shares have been registered under the Act or under the securities
laws of any state. Neither this Warrant nor any of the Warrant Shares (when
issued) may be sold, assigned, transferred, pledged or hypothecated or
otherwise disposed of in the absence of: (a) an effective registration
statement for this Warrant or the Warrant Shares, as the case may be, under
the Act and such registration or qualification as may be necessary under the
securities laws of any state, or (b) an
7
<PAGE>
opinion of counsel reasonably satisfactory to the Company that such
registration or qualification is not required. The Company shall cause a
certificate or certificates evidencing all or any of the Warrant Shares
issued upon exercise of the purchase rights herein prior to said registration
and qualification of such shares to bear the following legend:
THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER
THE SECURITIES LAWS OF ANY STATE. THE SHARES MAY NOT BE OFFERED,
SOLD, ASSIGNED, TRANSFERRED, PLEDGED OR HYPOTHECATED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND SUCH REGISTRATION
OR QUALIFICATION AS MAY BE NECESSARY UNDER THE SECURITIES LAWS OF
ANY STATE, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION OR QUALIFICATION IS NOT REQUIRED.
12. TRANSFER. This Warrant shall be registered on the books
of the Company which shall be kept at the offices of the Company for that
purpose, and shall be transferable in whole or in part, but only on such
books by the Holder in person or by duly authorized attorney with written
notice substantially in the form of Exhibit "B" attached hereto, and only in
compliance with the preceding paragraph. The Company may issue appropriate
stop orders to its transfer agent to prevent a transfer in violation of the
preceding paragraph.
13. REPLACEMENT OF WARRANT. At the request of the Holder and on
production of evidence reasonably satisfactory to the Company of the loss,
theft, destruction or mutilation of this Warrant and (in the case of loss,
theft or destruction) if required by the Company, upon reasonably
satisfactory indemnification, the Company, at Holder's expense, will issue in
lieu thereof a new Warrant of like tenor.
14. INVESTMENT COVENANT. By its acceptance hereof, the Holder
represents and warrants that this Warrant is, and any Warrant Shares issued
hereunder will be, acquired for its own account for investment purposes, and
the Holder covenants that it will not distribute the same in violation of any
state or federal law or regulation.
15. GOVERNING LAW. This Warrant shall be construed according to
the laws of New York (other than its conflict of law rules).
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be
signed on its behalf, in its corporate name, by its Chief Executive Officer,
and its corporate seal to be hereunto affixed and the said seal to be
attested by its Secretary, as of the ___ day of September, 1997.
ATTEST: PICO PRODUCTS, INC.
a New York corporation
By: By: [Seal]
----------------------- --------------------------
Gary M. Atkinson Charles G. Emley, Jr.
Chairman and Chief Executive Officer
9
<PAGE>
EXHIBIT A
IRREVOCABLE SUBSCRIPTION
To: PICO PRODUCTS, INC.
The undersigned hereby elects to exercise its right under the attached
Warrant by purchasing ________________ shares of the Common Stock of PICO
PRODUCTS, INC., and hereby irrevocably subscribes to such issue. The
certificates for such shares shall be issued in the name of:
------------------------------
(Name)
------------------------------
(Address)
------------------------------
(Taxpayer Number)
and delivered to:
------------------------------
(Name)
------------------------------
(Address)
The Exercise Price of $____ per share is enclosed.
OR
In lieu of payment of the Exercise Price, the
undersigned hereby invokes the provisions of Section 9
of the Warrant.
Date:
------------------
Signed:
------------------------------
(Name of Holder, Please Print)
------------------------------
(Address)
------------------------------
(Signature)
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<PAGE>
EXHIBIT B
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto:
--------------------------------
(Name)
--------------------------------
(Address)
the attached Warrant, together with all right, title and interest
therein to purchase _____________ shares of the Common Stock of PICO
PRODUCTS, INC., and does hereby irrevocably appoint _______________________
as attorney-in-fact to transfer said Warrant on the books of PICO PRODUCTS,
INC., with full power of substitution in the premises.
Done this ______ day of ____________ 19____.
--------------------------------
(Signature)
--------------------------------
(Name and title)
--------------------------------
--------------------------------
(Address)
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<PAGE>
EXHIBIT 4(t)
FIRST AMENDMENT TO INVESTMENT AGREEMENT
THIS FIRST AMENDMENT TO INVESTMENT AGREEMENT is made as of the 12th day
of September, 1997 by and among: (i) PICO PRODUCTS, INC., a New York
corporation (the "Parent"); (ii) PICO MACOM, INC., a Delaware corporation
("PMI"), and such other parties as listed on Schedule A upon execution of a
joinder as hereinafter provided; (the Parent, PMI, and such other parties
(the "Subsidiaries") who have executed the joinder in the form set forth as
Exhibit A hereto, are hereinafter collectively referred to as "Borrowers");
and (iii) ALLIED CAPITAL CORPORATION ("ACC"), ALLIED INVESTMENT CORPORATION
("AIC"), ALLIED INVESTMENT CORPORATION II ("AICII") and ALLIED CAPITAL
CORPORATION II ("ACCII"), each a Maryland corporation (collectively,
"Allied").
RECITALS:
A. Pursuant to the terms and conditions of an Investment Agreement,
dated as of the date hereof, among the Borrowers and certain other parties
named therein, ACC, AIC and ACCII made an aggregate investment of One Million
Four Hundred Eighty-Five Thousand Dollars ($1,485,000) (the "Allied
Investment") in the Borrowers to be evidenced by certain junior secured
subordinated debentures.
B. Pursuant to the terms and conditions of an Investment Agreement
dated November 21, 1996 (the "1996 Investment Agreement"), among the
Borrowers and Allied, Allied made an aggregate investment of Five Million
Dollars ($5,000,000) in the Borrowers which were evidenced by certain senior
secured subordinated debentures.
C. Pursuant to the Investment Agreement dated as of the date hereof,
the Borrowers and Allied agreed to enter into this agreement to amend the
1996 Investment Agreement.
NOW THEREFORE, in consideration of the foregoing Recitals, the mutual
covenants herein contained, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
hereby agree as follows:
1. Section 4.09 of the 1996 Investment Agreement will be replaced in
its entirety by the following:
"4.09 FINANCIAL COVENANTS.
(a) PMI shall maintain each of the following levels of
financial performance, measured in accordance with GAAP:
(i) Net Working Capital of not less than $3,500,000,
determined at the end of each fiscal quarter;
(ii) Working Capital Ratio of not less than 1.30:1,
determined at the end of each fiscal quarter;
<PAGE>
(iii) Tangible Net Worth of not less than $7,500,000,
determined at the end of each fiscal quarter;
(iv) Debt to Tangible Net Worth ratio of not more than
2.25:1, determined at the end of each fiscal quarter; and
(v) Net Income After Taxes of not less than $900,000,
for each fiscal year.
Notwithstanding the foregoing provision, all covenants contained in
this Section 4.09(a) are waived with respect to the fiscal year ended July
31, 1997 and during the first sixty (60) days following September 12, 1997.
In addition, if PMI renegotiates the financial covenants applicable to PMI or
the Parent with the Senior Holder during the 60 day period, those
renegotiated financial covenants are hereby incorporated in this Agreement as
if set forth in full and the financial covenants set forth above are
terminated. No future amendments to or waivers of the renegotiated financial
covenants by the Senior Holder will apply to this Agreement unless separately
consented to by Allied. In the event that no financial covenants are
renegotiated with the Senior Holder within 60 days after September 12, 1997,
the foregoing 60-day waiver by the Holders set forth above shall terminate
and the provisions of this Section 4.09(a) will apply to PMI, from and after
such date.
As used in this Section 4.09(a), the following terms shall have the
meanings indicated with respect to PMI:
(1) "NET WORKING CAPITAL" shall mean the amount by which
current assets (excluding any Intangible Assets, as defined below) exceed
current liabilities;
(2) "WORKING CAPITAL RATIO" shall mean the ratio of
current assets (excluding any Intangible Assets) to current liabilities;
(3) "TANGIBLE NET WORTH" shall mean the (i) the sum of
stockholders' equity and the principal balance of any debt subordinate to the
Senior Loan, less (ii) the book value of Intangible Assets;
(4) "DEBT TO TANGIBLE NET WORTH" shall mean the ratio of
total liabilities, excluding the principal balance of any debt that is
subordinate to the Senior Loan, to Tangible Net Worth;
(5) "NET INCOME AFTER TAXES" shall mean, with respect to
any fiscal year, net income after provisions for taxes for such fiscal year;
and
(6) "INTANGIBLE ASSETS" shall mean (i) all loans or
advances to, and other receivables owing from, any officers, employees,
subsidiaries and other affiliates, (ii) all investments, whether in a
subsidiary, a joint venture or otherwise, (iii) goodwill, (iv) any
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<PAGE>
other assets deemed intangible under GAAP; and (v) any other assets
determined to be intangible by Holders in its reasonable credit judgment.
(b) Parent shall maintain each of the following levels of
financial performance, measured on a consolidated basis in accordance with
GAAP:
(i) Total revenues of not less than $8,000,000,
determined for the quarter ending on October 31, 1997 (the "First
Quarter"); $8,300,000, determined for the quarter ending on January
31, 1998 (the "Second Quarter"), $9,000,000, determined for the
quarter ending on April 30, 1998 (the "Third Quarter"); $9,200,000,
determined for the quarter ending on July 31, 1998 (the "Fourth
Quarter"); $9,500,000, determined for the quarter ending on October
31, 1998 (the "Fifth Quarter") and quarterly thereafter;
(ii) EBITDA of not less than $425,000 for the First
Quarter; $525,000 for the Second Quarter; $625,000 for the Third
Quarter; $625,000 for the Fourth Quarter; $650,000 for the Fifth
Quarter and quarterly thereafter;
(iii) The ratio of EBITDA to Total Interest Expense
shall be equal to or greater than 1.0:1 for the First Quarter;
1.1:1 for the Second Quarter; 1.2:1 for the Third Quarter, 1.3:1
for the Fourth Quarter; 1.4:1 for the Fifth Quarter; 1.5:1,
determined for the quarter ending January 31, 1999 and quarterly
thereafter; and
(iv) The ratio of Total Debt to EBITDA shall be less than
or equal to 8.5:1 for the annualized First Quarter; 7.75:1 for the
annualized results of the combined First Quarter and Second
Quarter; 7.0:1 for the annualized results of the combined First
Quarter, Second Quarter and Third Quarter; 6.5:1 for the combined
First Quarter, Second Quarter, Third Quarter and Fourth Quarter;
6.0:1 for the quarter ending October 31, 1998 based on immediately
preceding four-quarter period; 5.5:1 for the quarter ending January
31, 1999 based on the immediately preceding four-quarter period;
5.0:1 for each fiscal quarter thereafter, based on immediately
preceding four-quarter period.
As used in this Section 4.09(b), the following
terms shall have the meanings indicated with respect to the Parent,
on a consolidated basis:
(1) "EBITDA" shall mean earnings before
interest expense (excluding interest on any trade debt incurred as
permitted under Section 5.08), tax expense on federal and state
income taxes, depreciation expense, and amortization expense;
(2) "TOTAL INTEREST EXPENSE" shall mean the
aggregate amount of installment interest payments paid or payable
in respect of the Debentures and the instruments evidencing the
Senior Debt; and
3
<PAGE>
(3) "TOTAL DEBT" shall mean the sum of the
principal amount of the Senior Loan, the Senior Debentures and the
Debentures."
2. Allied hereby waives its right to a collateral assignment
of the life insurance policy in the amount of $1,500,000 insuring
the life of Everett Keech, as provided for in Section 4.21 of the
1996 Investment Agreement
3. Allied hereby acknowledges and renders its consent, as
required by Section 5.02(b) of the 1996 Investment Agreement, to
the winding up of affairs of Pico Products Asia Limited, a Hong
Kong corporation.
4. Within 90 days of from the date hereof, each subsidiary
listed on Schedule A hereto shall take all corporate action
necessary for the execution and delivery of the joinders to this
amendment in the form set forth as Exhibit A hereto and shall so
execute and deliver all such joinders.
5. Except as specifically amended hereby, the 1996
Investment Agreement remains in full force and effect in accordance
with its terms.
6. This Amendment to Investment Agreement may be executed in
multiple counterparts, each of which shall be deemed to be an
original, and all such counterparts shall constitute one instrument.
{SIGNATURES TO FOLLOW}
4
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed and
delivered this Amendment to Investment Agreement as of the date
first above written.
WITNESS/ATTEST: "BORROWERS":
PICO PRODUCTS, INC.
a New York corporation
By: By:
---------------------------- ------------------------- (SEAL)
Gary M. Atkinson Charles G. Emley, Jr.
Assistant Secretary Chairman and Chief Executive Officer
PICO MACOM, INC.
a Delaware corporation
By: By:
---------------------------- ------------------------- (SEAL)
Gary M. Atkinson Charles G. Emley, Jr.
Assistant Secretary Chairman and Chief Executive Officer
"ALLIED":
ALLIED CAPITAL CORPORATION,
a Maryland corporation
By: By:
---------------------------- ------------------------- (SEAL)
Carr T. Preston, Principal
ALLIED INVESTEMENT CORPORATION,
a Maryland corporation
By: By:
---------------------------- ------------------------- (SEAL)
Carr T. Preston, Principal
5
<PAGE>
ALLIED INVESTMENT CORPORATION II,
a Maryland corporation
By: By:
---------------------------- ------------------------- (SEAL)
Carr T. Preston, Principal
ALLIED CAPITAL CORPORATION, II,
a Maryland corporation
By: By:
---------------------------- ------------------------- (SEAL)
Carr T. Preston, Principal
6
<PAGE>
SCHEDULE A
PICO MACOM TAIWAN CO., LTD.
PICO (ST. KITTS) LTD.
PICO (BERMUDA) LTD.
PICOMACOM PRODUTOS DE TELECOMMUNICACAO LTDA.
7
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EXHIBIT A
JOINDER AGREEMENT
JOINDER AGREEMENT dated as of this ____ day of _____, 1997 by
______________, a ______________ corporation (the "Additional Borrower") and
Allied Capital Corporation, Allied Investment Corporation, Allied Investment
Corporation II, and Allied Capital Corporation II, each a Maryland
corporation (collectively, "Allied").
BACKGROUND: Pico Products, Inc., a New York corporation (the "Parent"),
Pico Macom, Inc., a Delaware corporation ("PMI") and such other subsidiaries
of the Parent as have heretofore executed a Joinder Agreement in this form
(collectively, the "Current Borrowers") and Allied entered into a certain
Investment Agreement dated as of September 12, 1997 (the "Investment
Agreement"). Pursuant to the terms of the Investment Agreement the Parent
and PMI agreed to cause the Additional Borrower named herein to join in the
Amendment to a certain investment agreement by and among Allied and the
Borrowers dated November 21, 1996 (the "1996 Investment Agreement"), within
90 days from September 12, 1997, amending the 1996 Investment Agreement.
NOW, THEREFORE, the Current Borrowers and Additional Borrower each
intending to be legally bound hereby, agree with Allied as follows:
1. DEFINITIONS: All terms used in this Joinder Agreement as defined
terms, but not defined herein, shall have the meanings ascribed to them in
the Amendment to Investment Agreement dated September 12, 1997.
2. JOINDER: The Additional Borrower hereby joins in the Amendment to
Investment Agreement as a joint and several obligor thereunder and party
thereto, subject to all the terms and provisions thereof. From and after the
effective date of this Joinder Agreement the term "Borrowers" as defined and
used in the Agreement and herein, shall refer to the Additional Borrower as
well as to all other Borrowers now or hereafter parties to the Investment
Agreement. Without limitation on the foregoing, the Additional Borrower
expressly agrees to be jointly and severally liable for all liabilities under
the 1996 Investment Agreement and all other amounts which may be presently
due thereunder, and hereby ratifies all actions heretofore taken and all
Obligations heretofore incurred by the Parent or other of the Borrowers under
the Agreement.
3. EFFECTIVE DATE: This Joinder Agreement shall be effective as of
the date first written above.
4. MISCELLANEOUS: This Joinder Agreement may be executed in two or
more counterparts, and by different parties on different counterparts, each
of which shall be deemed an original and in making proof of this Joinder
Agreement it shall be necessary only to produce sufficient counterparts to
evidence the execution by all parties. This Joinder Agreement shall be
8
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governed by and construed under the laws of the State of Maryland, and shall
bind the successors and assigns of the Parent and the other Borrowers and
inure to the benefit of the successors and assigns of Allied.
{SIGNATURES TO FOLLOW}
9
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IN WITNESS WHEREOF, the parties hereto have caused this Joinder
Agreement to be executed and delivered by their proper and dully authorized
officers as of the date first above written.
WITNESS/ATTEST: PICO MACOM TAIWAN CO., LTD.
a Taiwan corporation
By: By:
---------------------------- ------------------------- (SEAL)
Name: Name:
Title: Title:
WITNESS/ATTEST: PICO (ST. KITTS) LTD.
a St. Christopher and Nevis corporation
By: By:
---------------------------- ------------------------- (SEAL)
Name: Name:
Title: Title:
WITNESS/ATTEST: PICO (BERMUDA) LTD.
a Bermuda corporation
By: By:
---------------------------- ------------------------- (SEAL)
Name: Name:
Title: Title:
WITNESS/ATTEST: PICOMACOM PRODUCTS DE
TELECOMMUNICACAO LTDA.
a Brazil limited liability company
By: By:
---------------------------- ------------------------- (SEAL)
Name: Name:
Title: Title:
10
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EXHIBIT 11.1
PICO PRODUCTS, INC.
COMPUTATION OF PER SHARE EARNINGS
YEARS ENDED JULY 31, 1997 AND 1996 AND 1995
(IN THOUSANDS EXCEPT PER SHARE DATA)
1997 1996 1995
-------- ------- -------
Net income (loss) attributable
to common stock $(5,972) $ (400) $ 526
Net income (loss) used to compute
fully diluted earnings
per share $(5,972) $ (400) $ 526
-------- ------- -------
Primary earnings (loss) per share:
Weighted average number
of common shares outstanding 4,113 3,798 3,636
Dilutive effect of stock options
and warrants after application
of treasury stock method - - 604
-------- ------- -------
Number of shares used to compute
primary earnings per share 4,113 3,798 4,240
Primary earnings (loss) per share $ (1.45) $ (0.11) $ 0.12
-------- ------- -------
-------- ------- -------
Fully diluted earnings (loss) per share:
Weighted average number
of common share outstanding 4,113 3,798 3,636
Dilutive effect of stock options
and warrants after application
of treasury stock method - - 604
-------- ------- -------
Number of shares used to compute
fully diluted earnings per share 4,113 3,798 4,240
Fully diluted earnings (loss) per share $(1.45) $ (0.11) $ 0.12
-------- ------- -------
-------- ------- -------
<PAGE>
EXHIBIT 24(a)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No. 33-
78550 of Pico Products, Inc. on Form S-8 of our report dated November 7, 1997
appearing in this Annual Report on Form 10-K of Pico Products, Inc. for the year
ended July 31, 1997.
DELOITTE & TOUCHE LLP
Los Angeles, California
November 7, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
<CASH> 22
<SECURITIES> 0
<RECEIVABLES> 5,821
<ALLOWANCES> 200
<INVENTORY> 11,961
<CURRENT-ASSETS> 17,945
<PP&E> 3,397
<DEPRECIATION> 2,432
<TOTAL-ASSETS> 19,896
<CURRENT-LIABILITIES> 14,582
<BONDS> 4,915
917
0
<COMMON> 42
<OTHER-SE> (859)
<TOTAL-LIABILITY-AND-EQUITY> 19,896
<SALES> 35,448
<TOTAL-REVENUES> 35,461
<CGS> 30,471
<TOTAL-COSTS> 39,911
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 124
<INTEREST-EXPENSE> 1,399
<INCOME-PRETAX> (5,972)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,972)
<EPS-PRIMARY> (1.45)
<EPS-DILUTED> (1.45)
</TABLE>
