<PAGE>
Registration No. 333-3837
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1/A3
AMENDMENT NO. 3
TO
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
NAI TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
New York 3575 11-1798773
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification Number)
organization)
2405 Trade Centre Avenue
Longmont, Colorado 80503
(303) 776-5674
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
Richard A. Schneider
NAI Technologies, Inc.
2405 Trade Centre Avenue
Longmont, Colorado 80503
(303) 776-5674
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
Sarah Hewitt, Esq.
Whitman Breed Abbott & Morgan
200 Park Avenue
New York, New York 10166
(212) 351-3000
Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(b)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED AUGUST 15, 1996
PROSPECTUS
12% Convertible Subordinated Promissory Notes Due 2001
4,119,700 Warrants to Purchase Common Stock
8,904,336 Shares of Common Stock
NAI TECHNOLOGIES, INC.
This Prospectus relates to the offering from time to time of up to (i)
$6,342,000 principal amount of 12% Convertible Subordinated Promissory Notes due
2001 (the "Notes") of NAI Technologies, Inc. (the "Company") by the holders
thereof (the "Noteholders"), (ii) 4,119,700 Warrants to Purchase Common Stock
(the "Warrants") of the Company by the holders thereof (the "Warrantholders"),
and (iii) an aggregate of 8,904,336 shares (the "Shares") of common stock, par
value $.10 per share (the "Common Stock"), of the Company by the holders thereof
(the "Shareholders"), consisting of (1) 3,171,000 shares of Common Stock which
may be issued upon the conversion of the Notes, (2) 4,119,700 shares of Common
Stock which may be issued upon the exercise of the Warrants, (3) 1,000,000
shares of Common Stock (the "Holmes Shares") previously issued to Charles S.
Holmes upon the conversion of a Note in the aggregate unpaid principal amount of
$2,000,000 held by him, (4) 250,000 shares of Common Stock of the Company
previously issued to The Bank of New York and Chemical Bank (the "Bank Lenders")
pursuant to that certain Amended and Restated Credit Agreement, dated as of
April 12, 1995, as amended to date (the "Credit Agreement"), by and between the
Company and the Bank Lenders, and (5) 363,636 shares of Common Stock of the
Company previously issued to Active Investors II Ltd. ("Active Investors")
pursuant to that certain Common Stock Purchase Agreement, dated as of November
3, 1994 (the "Stock Purchase Agreement"), by and between the Company and Active.
The Noteholders, the Warrantholders, the Shareholders, the Bank Lenders and
Active are sometimes collectively referred to as the "Selling Securityholders."
The Notes, the Warrants and the Shares are sometimes collectively referred to as
the "Securities." The Company will not receive any of the proceeds from the sale
of the Securities by the Selling Securityholders. The Company is paying the
expenses of registration of the Securities.
The Notes are subordinated to all existing and future Senior Indebtedness
(as hereinafter defined) of the Company, including indebtedness under the Credit
Agreement. See "DESCRIPTION OF SECURITIES -- Subordination."
It is anticipated that sales of the Securities will be made in one of three
ways: (i) through broker-dealers, (ii) through agents or (iii) directly to one
or more purchasers. The period of distribution of the Securities may occur over
an extended period of time. See "PLAN OF DISTRIBUTION."
The Common Stock of the Company is traded on The Nasdaq Stock Market
("Nasdaq") under the symbol NATL. On August 13, 1996, the closing price of the
Common Stock on Nasdaq was $3.563 per share. The Company intends to list the
Warrants on Nasdaq but does not intend to list the Notes on Nasdaq or any
securities exchange. Prior to this offering, there has been no public market for
the Notes or the Warrants offered hereby and no assurance can be given that one
will develop after the commencement of this Offering. See "DESCRIPTION OF
SECURITIES--Trading Information."
See "Risk Factors" beginning on page 8 for a discussion of certain factors
that should be considered in connection with an investment in the Securities.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is August __, 1996.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company may be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at its New York
Regional Office, 7 World Trade Center, New York, New York 10048 and at its
Chicago Regional Office, Suite 1400, 500 West Madison Street, Chicago, Illinois
60661-2511. Copies of such material may also be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. In addition, copies of such reports, proxy
statements and other information concerning the Company may also be inspected
and copied at the offices of The Nasdaq Stock Market at 1735 K Street, N.W.,
Washington, D.C. 20006-1506 on which the Common Stock is traded.
TABLE OF CONTENTS
Page
----
AVAILABLE INFORMATION...................................................... 2
TABLE OF CONTENTS.......................................................... 2
SUMMARY.................................................................... 4
RISK FACTORS............................................................... 8
USE OF PROCEEDS............................................................ 12
CAPITALIZATION............................................................. 13
DIVIDEND POLICY............................................................ 13
SELECTED FINANCIAL DATA.................................................... 14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................... 15
THE COMPANY................................................................ 24
MANAGEMENT................................................................. 34
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............. 41
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................. 43
DESCRIPTION OF SECURITIES.................................................. 44
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................... 50
SELLING SECURITYHOLDERS.................................................... 58
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PLAN OF DISTRIBUTION....................................................... 65
LEGAL MATTERS.............................................................. 66
EXPERTS.................................................................... 66
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES............ 67
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SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Prospectus. This summary is not intended to be complete and is qualified
in its entirety by the more detailed information appearing elsewhere in this
Prospectus and in the documents referred to herein, all of which should be
carefully reviewed. Capitalized terms used herein are defined on the pages of
this Prospectus referred to in the Glossary found on page 91.
The Company
NAI Technologies, Inc., through its wholly-owned subsidiaries (the
"Company"), designs, manufactures and markets rugged computer systems, advanced
peripheral products, intelligent terminals, high performance work stations,
TEMPEST computer systems (which suppress certain radiation to prevent external
detectors from reading the data being transcribed) and telecommunications test
equipment and transmission products.
The Company operates in two distinct operating segments: an Electronic
Systems segment and a Telecommunications segment. The Electronic Systems
segment, comprised of three subsidiaries, Codar Technology, Inc. ("Codar"), NAI
Technologies-Systems Division Corporation ("Systems"), and Lynwood Scientific
Developments Limited ("Lynwood"), and all of the Company's defense, military and
government-related businesses, provides rugged computer products specifically
designed for deployment in harsh environments that require special attention to
system configurations. This segment's customer base includes United States and
foreign armed services and intelligence agencies. The Telecommunications segment
consists of one company, Wilcom, Inc. ("Wilcom"), which provides transmission
enhancement products and rugged, hand-held test equipment for analog, digital
and fiber-optic communications and data-interchange networks. This segment has
developed and is marketing a product which enables telephone companies to
enhance the capacity of copper lines for improved voice and data transmission.
This segment's customer base includes the Regional Bell Operating Companies
("RBOCs") and independent telephone companies. The Company sells its products
directly to these customers and serves as a subcontractor to larger prime
contractors serving the same customer base.
The Company was incorporated in the State of New York in 1954. The
Company's principal executive office is located at 2405 Trade Centre Avenue,
Longmont, Colorado 80503, and its telephone number is (303) 776-5674.
The Offering
Securities Offered $6,342,000 aggregate principal amount of
Notes 4,119,700 Warrants to Purchase Common Stock
8,904,336 shares of Common Stock
See "DESCRIPTION OF SECURITIES."
Terms of the Notes:
Maturity Date January 15, 2001.
Interest Rate 12% per annum. In the event of a Chapter 11
or Chapter 7 bankruptcy case in which the Company
is the debtor, the Notes will bear interest from
the date
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of commencement of the case at a default rate per
annum equal to the lesser of 18% or the highest
such rate allowable by law.
Interest Payment Dates January 15, April 15, July 15 and October 15 of
each year, commencing April 15, 1996.
Conversion Each Note is convertible into shares of Common
Stock at the option of the holder, at any time in
whole or in part at a conversion price equal to
$2.00 per share, subject to adjustment in certain
events (the "Conversion Price"). The Conversion
Price will be adjusted to $1.50 or $1.00,
respectively, if earnings before interest, taxes,
depreciation and amortization ("EBITDA") of the
Company fall below $6,000,000 or $4,750,000 in
1996. Should the Company sell the stock or assets
of a subsidiary in 1996, such amounts will be
reduced by certain agreed amounts, depending on
the time of sale. The Conversion Price and the
number of shares of Common Stock to be received
upon conversion are subject to adjustment upon the
occurrence of certain events. See "DESCRIPTION OF
SECURITIES--The Notes."
The Company may at its option require the
conversion of the Notes, at any time prior to
maturity, provided that the closing bid price for
the Common Stock exceeds $6.00 per share for the
30 consecutive trading days prior to the giving of
notice of conversion.
Prepayment The Notes are subject to prepayment, in whole and
not in part, at the option of the Company, at any
time after the third anniversary of the date of
issuance, without premium or penalty. Upon the
occurrence of a "change in control" of the
Company, each holder of the Notes will have the
right to require that the Company repurchase such
holder's Notes in whole and not in part, without
premium or penalty, at a purchase price in cash in
an amount equal to 100% of the principal amount
thereof, together with accrued and unpaid
interest, if any, to the date of purchase,
pursuant to an offer made in accordance with the
procedures described in the Notes.
Subordination; Sinking
Fund The indebtedness evidenced by the Notes is
subordinated to all existing and future Senior
Indebtedness (as hereinafter defined) of the
Company. The Notes do not provide for a sinking
fund.
Certain Covenants The Notes contain certain covenants
prohibiting the Company from: (i) creating any
liens on its assets, (ii) incurring or assuming
any indebtedness other than certain specific
indebtedness including the Senior Indebtedness and
all extensions, renewals and refundings thereof,
(iii) making any investments, (iv) paying
dividends on its capital stock, (v) disposing of
certain assets, (vi) engaging in certain
affiliated party transactions, and (vii) merging
or consolidating.
Events of Default "Events of Default" under the Notes include the
failure to pay principal when due or the failure
to pay interest for a period of 10 days after such
payment becomes due, the failure to pay other
indebtedness for borrowed money in
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excess of $500,000 when due or the acceleration of
such indebtedness, the failure to pay any judgment
in excess of $500,000 when due or stayed, and the
voluntary or involuntary bankruptcy of the
Company.
Terms of the Warrants:
Exercise and Terms Each Warrant entitles the holder to purchase 250
shares of Common Stock at any time and from time
to time on or before February 15, 2002, at an
exercise price equal to $2.50 per share of Common
Stock, subject to adjustment in certain events
(the "Exercise Price"). The Exercise Price will be
adjusted to $2.00 or $1.50, respectively, if the
Company's EBITDA falls below $6,000,000 or
$4,750,000 in 1996. Should the Company sell the
stock or assets of a subsidiary in 1996, such
amounts will be reduced by certain agreed amounts,
depending on the time of sale. The Exercise Price
and the number of shares of Common Stock to be
received upon exercise are subject to adjustment
upon the occurrence of certain events. Warrants
will be exercisable, at any time and from time to
time, on or before 5:30 p.m., local time, on or
before February 15, 2002 (the "Expiration Date")
by delivery of an exercise notice duly completed
and tendering of the aggregate Exercise Price.
Each Warrant may be exercised in whole or in part
so long as any exercise in part would not involve
the issuance of fractional shares of Common Stock.
See "DESCRIPTION OF SECURITIES--The Warrants."
Terms of the Common Stock:
Terms Holders of shares of Common Stock are entitled to
one vote for each share of Common Stock held. The
holders of Common Stock are not entitled to
preemptive or subscription rights. Upon
liquidation, dissolution or winding up of the
Company, the holders of the Common Stock are
entitled to share ratably in all assets available
for distribution after payment in full of
creditors and after the preferential rights of
holders of shares of Preferred Stock then
outstanding, if any, have been satisfied. The
affirmative vote of the holders of 80% of all
Common Stock of the Company is required for the
adoption or authorization of certain extraordinary
matters. See "DESCRIPTION OF SECURITIES-- Common
Stock."
Trading The Common Stock is traded on Nasdaq under the
symbol NATL.
Offering Period From time to time after the date hereof.
Use of Proceeds The Company will not receive any proceeds from the
sale of the Securities by the Selling
Securityholders.
Risk Factors Reference is made to "RISK FACTORS" which contains
material information that should be considered in
connection with the Securities being offered
hereby.
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Summary Financial Data
The summary financial data set forth below for the fiscal years 1991
through 1995 are derived from the consolidated financial statements of the
Company which financial statements have been audited by KPMG Peat Marwick LLP,
independent certified public accountants, whose report on the Company's
consolidated financial statements for the three years ended December 31, 1995 is
included elsewhere in this Prospectus. The selected financial data for the six
months ended July 1, 1995 and June 29, 1996 have been derived from the Company's
unaudited consolidated financial statements included in the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended June 29, 1996. Such unaudited
consolidated financial statements in the opinion of the Company's management
reflect all adjustments (consisting of normal recurring adjustments) necessary
for a fair presentation of interim data.
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended
----------------------- ----------------
1991 1992 1993 1994 1995 July 1, June 29,
---- ---- ---- ---- ---- ------- --------
(in thousands except share and per share data and 1995 1996
ratios) ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data
Net sales $ 59,412 $ 67,315 $ 81,024 $ 54,520 $ 60,008 $ 26,771 $ 33,857
Operating earnings (loss)(1) 6,308 8,407 8,960 (14,589) (8,875) (5,826) 1,789
Net earnings (loss)(1) 3,900 5,051 5,455 (11,591) (11,619) (6,899) 365
Per share data:
Net earnings (loss)(2) .63 .80 .80 (1.69) (1.57) (0.94) 0.05
Cash dividends(3) -- -- -- -- -- -- --
Ratio of earnings to fixed charges 8.14 13.88 11.55 * * * 1.36
Balance Sheet Data (at end of
period)
Working capital $ 14,134 $ 17,094 $ 19,105 $ 16,665 $ 10,044 $ -- $ 14,255
Total assets at end of period 33,817 43,704 60,715 53,720 48,012 -- 48,891
Long-term debt 5,017 7,158 10,797 13,990 15,573 -- 15,951
Shareholders' equity 18,897 23,911 30,593 20,296 10,086 -- 13,515
Average market price
per common share at
end of period 4-9/16 8-3/16 6-1/4 2-11/16 1-1/2 3-1/4 3-5/8
Weighted average common
shares outstanding(2) 6,222 6,309 6,843 6,580 7,382 7,459 8,459
</TABLE>
(1) Includes $7,321 in restructuring costs in 1994.
(2) Prior year per share data has been restated to reflect 4% stock dividends
declared in February 1992, 1993 and 1994 and a three-for-two stock split
declared in August 1993.
(3) There have been no cash dividends paid during the above five fiscal years.
* Earnings are inadequate to cover fixed charges. The coverage deficiency is
$15,983 for 1994, $11,242 for 1995, and $6,789,000 for July 1, 1995.
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RISK FACTORS
Before purchasing any of the Securities offered hereby, prospective
investors should consider, among other things, the following factors.
This Registration Statement on Form S-1, including Risk Factors and
Management's Discussion, contains "forward looking statements" within the
meaning of the federal securities laws, including; management's belief that the
Company will meet its obligations under current debt instruments, working
capital needs and anticipated capital expenditures therefore, the company's
expectations as to funding its operations over the next twelve months, and other
statements of expectations, beliefs, plans, and similar expressions concerning
matters that are not historical facts. These statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
expressed in the statements.
Substantial and Continuing Losses. While the Company's operations have
historically provided a positive cash flow, the Company has recently experienced
severe financial difficulties and has incurred substantial losses, including net
losses of approximately $11,619,000 for each of the years ended December 31,
1994 and 1995. At the present time, the Company is a net user of cash. Losses
are continuing through the date of this Prospectus and there can be no assurance
that the Company will ever return to profitable operations.
Although the restructuring activities taken in 1994 and 1995 have
significantly reduced the expense structure of the Company and the Company is
presently taking actions to minimize its cash outlays by deferring or
eliminating discretionary expenses and capital asset purchases, the Company's
return to profitability will depend on its ability to effectively monitor and
control its costs. The Company must also increase its shipment rate to an
acceptable level. It is not certain that the Company will be able to achieve the
operating efficiencies necessary to return to profitability. Furthermore, future
operating results depend upon many factors, including general economic
conditions, the ability of the Company to continue to book and fulfill orders
successfully, the level of competition and defense spending.
Dependence on U.S. Military. Approximately 78% of the Company's backlog of
orders totalling $47,800,000 at December 31, 1995 represented orders for
military and government sales. During the years ended December 31, 1994 and
1995, sales under contracts with the U.S. Government were approximately 40% and
38% of the Company's sales, respectively. Such orders are subject to termination
at the convenience of the U.S. Government with negotiated settlements in which
the Company seeks to recover its costs and a reasonable profit. There can be no
assurance that the Company will recover its costs or earn any profit on orders
terminated by the U.S. Government.
In recent years the Company has reduced its dependency on the U.S. defense
budget by expanding its non-military business operations. However, the Company
still expects a substantial portion of 1996 sales to be directly to the military
or through prime contractors to the military. With continuing discussions by
Congress on budget cuts, it is difficult to assess what the impact of budget
cuts, if any, will be on the Company. It appears that defense outlays will be
reduced from past levels. The Company is not aware of any programs in which it
participates that are specifically targeted for termination or curtailment other
than the Navy Standard Teleprinter ("NST") program, which had provided
significant revenues to the Company from 1990 to early 1994. The Company's
products are utilized in many different U.S. Government programs which reduces
the adverse impact of canceling a single specific program. However, reductions
in future U.S. defense spending levels could adversely impact the Company's
future sales volume.
Substantial Secured Indebtedness. At June 29, 1996, the Company's long-term
secured indebtedness including current installments totaled $12,675,000,
substantially all of which is due to the Company's primary lending institutions,
The Bank of New York and Chemical Bank (the "Bank Lenders"), pursuant to the
Credit Agreement which provides for quarterly principal payments of $500,000 on
June 30, 1996, September 30, 1996 and December 31, 1996, and $750,000 on the
last day of each quarter thereafter, commencing March 31, 1997 and ending on
December 31, 1998, together with accrued and unpaid interest through the
applicable payment date at
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the prime rate plus 1 3/4% per annum. The remaining outstanding principal amount
of $7,975,000 is due and payable on January 15, 1999. In addition, at June 29,
1996, the Company had $6,342,000 principal amount of Notes outstanding. Interest
on the Notes is payable quarterly in arrears on January 15, April 15, July 15
and October 15 of each year, commencing April 15, 1996 at 12% per annum. The
Notes mature on January 15, 2001.
Estimated cash disbursements pertaining to principal and interest
requirements under the Credit Agreement, the Notes and otherwise over the next
three years can be summarized as follows:
1996 1997 1998
---- ---- ----
Principal on Credit Agreement $2,000,000 $3,000,000 $3,000,000
Principal on Notes -0- -0- -0-
Interest on Credit Agreement 1,318,000 1,168,000 868,000
Interest on Notes 750,000 761,000 761,000
Other interest 5,000 4,000 3,000
---------- ---------- ----------
$4,073,000 $4,933,000 $4,632,000
The Company estimates that its normal working capital requirements are
approximately 20% of its annual sales. Thus the Company estimates that for each
$1,000 in increased sales, the Company would require approximately $200 of
increased working capital. The nature of the Company's business does not require
extensive investment in capital assets. Over the last five years, the Company's
capital expenditures have approximated $1,000,000 per year.
In 1995, the Company's cash flow was inadequate to meet its obligations.
Consequently the Company suspended principal payments under the Credit Agreement
and reduced its payments to key suppliers which resulted in an increase in its
accounts payable. It is essential that the Company return to profitability in
order for it to meet its future commitments.
As of June 29, 1996 approximately $12,675,000 of the Company's interest
bearing debt was subject to variable interest rates. Each 1% change in the prime
rate would result in a change in the interest due of approximately $130,000 per
annum before any future principal reduction.
The Company has substantial debt service obligations and has no
arrangements with respect to, or sources of, additional financing. Substantially
all of the Company's assets have been pledged to secure the indebtedness
outstanding under the Credit Agreement. It is not certain that the Company will
be able to achieve the revenue level necessary to return to profitability and
there can be no assurance that the Company will have sufficient cash flow in the
future to meet its obligations with respect to its indebtedness, including its
obligations with respect to the Notes. The Notes are unsecured and subordinate
in right of payment to all Senior Indebtedness (as defined in the Notes) of the
Company.
The Notes provide that the Senior Indebtedness can be increased by the Bank
Lenders in certain circumstances to protect its interest in the collateral
provided by the Company. The Notes also provide that if any Senior Indebtedness
is outstanding on the maturity date of the Notes, the Company cannot pay the
amounts due thereunder. Although the Credit Agreement provides that the Senior
Indebtedness is to paid in full on January 15, 1999, two years prior to the
maturity date of the Notes, there can be no assurance that the Company will in
fact be able to pay such indebtedness at such time.
Ranking of the Notes. The Notes are subordinated to all Senior Indebtedness
of the Company, including indebtedness under the Credit Agreement. Therefore, in
the event of bankruptcy, liquidation or reorganization of the Company, the
assets of the Company will be available to pay obligations on the Notes only
after all Senior Indebtedness has been paid in full, and there may not be
sufficient assets remaining to pay amounts due on the
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Notes. At March 30, 1996, the amount of outstanding Senior Indebtedness was
$15,175,000. In addition, the indebtedness under the Credit Agreement is secured
by liens on substantially all of the assets of the Company including the capital
stock of certain of its subsidiaries and is guaranteed by certain of the
Company's subsidiaries, which guarantees are secured by a lien on substantially
all of the assets of such subsidiaries. See "DESCRIPTION OF
NOTES--Subordination."
No Assurance of Company's Ability to Service Notes. The Company presently
intends to service the Notes out of its future cash flow from operations or
proceeds of future financings, if any. There can be no assurance that the
Company will generate sufficient cash flow in the future to pay the interest on
the Notes or on its other indebtedness or to pay the principal on the Notes or
that future financings, if necessary, will be available. See "DESCRIPTION OF
SECURITIES--The Notes."
Trade Debt. As of December 31, 1995, the Company had approximately
$5,300,000 in the aggregate past due to vendors primarily for raw materials and
components. The Company's cash constraints strained its relationships with
vendors which adversely impacted the Company's ability to meet its production
targets on a timely and cost-effective basis. Although the Company has used a
portion of the proceeds of the Private Placement to pay vendors and the
Company's relationships with vendors have begun to improve, there can be no
assurance that the Company's relationships with vendors will continue to improve
or that such vendors will continue to provide the Company with raw materials.
Industry Competition. The Company's business is highly competitive. Many
suppliers in the Company's markets are significantly larger than the Company in
total sales and assets, and many devote significantly more resources to the
development of new products than does the Company. There can be no assurance
that the Company will be able to compete successfully or that competitors will
not commercialize services or products that render the Company's services or
products obsolete or less marketable.
Foreign Operations. As of December 31, 1995, the total assets of the
Company were $48,012,000 of which $8,292,000 or approximately 17% were located
outside of the United States primarily in the United Kingdom. The Company's
foreign sales (which are comprised of export sales from the U.S. and foreign
revenues from Lynwood) in 1995 were $12,679,000 which accounted for
approximately 21% of the Company's total sales. Approximately 86% of the
Company's foreign sales are to customers in the United Kingdom and no other
single country accounted for more than 5% of the Company's foreign sales in any
of the past three years. All of the Company's sales to customers in the United
Kingdom are payable in British currency. Therefore, fluctuations in exchange
rates between the U.S. dollar and the British pound will impact on the Company's
operating results. All export sales from the U.S. are payable in U.S. dollars
and, therefore, settlement amounts do not fluctuate with changes in exchange
rates. As a result of the political and economic stability of the United
Kingdom, the Company does not believe that there is substantial risk from
foreign operations. However, there can be no assurance that this will continue
to be the case.
Technological Change. The Company's technological base is characterized by
rapid change that frequently results in sudden product and equipment
obsolescence. The Company has reduced its expenditures on independent research
and development over the past few years and anticipates further reducing its
cost of independent research and development in 1996. While the Company expects
to continue to make expenditures in an effort to improve current and proposed
product designs and configurations of already technologically complex products,
there can be no assurance that its efforts will be successful or that
introduction of new products or technological developments by others will not
cause the Company's technology to become uneconomical or obsolete.
Limited Protection of Intellectual Property. The Company regards portions
of the hardware designs and operating software incorporated into its products as
proprietary and seeks to protect such proprietary information through its
reliance on patent, copyright, trademark and trade secret laws, non-disclosure
agreements with its employees and confidentiality provisions in licensing
arrangements with its customers. There is no assurance that such agreements will
be effective to protect the Company or that the proprietary information deemed
confidential by the Company will be adequately protected by the laws respecting
trade secrets. Consequently, it may be possible
-10-
<PAGE>
<PAGE>
for unauthorized third parties to copy certain portions of the Company's
products or to "reverse engineer" or otherwise obtain the Company's proprietary
rights. Moreover, the laws of some foreign countries do not afford the same
protection provided by U.S. laws to the Company's proprietary rights.
Securities Litigation. On or about June 28, 1994, TDA Trading Corp.
("TDA"), individually and on behalf of a class of persons similarly situated,
commenced a securities fraud class action in the United States District Court
for the Eastern District of New York (the "Court") against Robert A. Carlson,
Richard A. Schneider and the Company. TDA commenced its action, entitled TDA
Trading Corp. v. Carlson, et al., by filing a complaint (the "Complaint") with
the Court.
The Complaint principally alleges that between July 21, 1993 and December
22, 1993 (the "Class Period"), in various press releases issued by the Company
and in the Company's Quarterly Report on Form 10-Q for the fiscal period ended
October 2, 1993, the defendants violated Section 10(b) of the Exchange Act, 15
U.S.C. 78j(b), and Rule 10b-5 promulgated thereunder by knowingly and/or
recklessly misrepresented to the public that they expected the Company's 1993
fourth quarter and fiscal year sales and earnings results to continue to
increase at levels substantially above those of prior years at a time when they
supposedly knew but failed to disclose that the Company's fourth quarter 1993
sales of its NST and other products would decrease precipitously. The Complaint
further alleges that, as a result of defendants' alleged failure to disclose
these developments, TDA and other purchasers of Common Stock were damaged
because, it is alleged, at the time of purchase the price of Common Stock had
been artificially inflated and the drop in the price of the Common Stock by
approximately 35% on December 22, 1993 was a result of the alleged
misrepresentations by the Company. Additionally, the Complaint asserts an
alleged violation of ss.20 of the Exchange Act by certain directors and officers
of the Company. Specifically, the Complaint alleges that at the time these
adverse business developments allegedly became known to defendants and prior to
their dissemination to the public, defendants Carlson, Schneider and other
directors of the Company, at various times throughout the Class Period,
allegedly sold shares of Common Stock owned by them personally at price levels
which TDA claims were higher than the true value of these shares.
As relief, TDA essentially seeks damages in an amount to be proven at
trial, together with costs and expenses, including reasonable attorneys',
accountants' and experts' fees. The Complaint also requests that the Court
declare its action against the Company and the individual defendants to be a
proper class action and certify it as class representative and plaintiff's
counsel as counsel for the class. On March 24, 1995, the Court granted TDA's
motion for class certification. On June 27, 1996, the Court denied the Company's
motion for summary judgement. The Court has set a trial date of September 4,
1996.
The Company has advised its directors' and officers' liability insurance
carrier of the claims asserted against it and defendants Carlson and Schneider.
Should TDA prove its case and should the Company's insurance carrier decline to
cover the award, the Company could be assessed up to or in excess of $7,500,000
in damages, which would have a materially adverse effect on its financial
position. The Company's insurance carrier has previously notified the Company
that it reserves the right to deny coverage under the insurance policy in
connection with the TDA litigation (i) for claims not covered, such as claims
that do not involve negligent acts, errors or omissions, (ii) for damages that
may be uninsurable under the policy or applicable law, and (iii) for various
exclusions contained in the insurance policy, including dishonest, fraudulent,
willful or criminal acts or omissions.
Absence of Public Market. No trading market currently exists for either the
Notes or the Warrants and no assurance can be given that an active market will
develop for such Securities or as to the liquidity of, or the trading market
for, such Notes and Warrants.
Restrictions on Dividends. The Company is prohibited from paying cash
dividends on its Common Stock by certain debt covenants contained in its Credit
Agreement.
Anti-takeover Restrictions. At the 1996 Annual Meeting of Shareholders held
in August 1996, the Company's shareholders approved a proposal to classify the
Board into two classes containing three and four directors each. The
classification of the Company's Board of Directors could have the effect of
discouraging attempts by a person or group to take control of the Company. See
"DESCRIPTION OF SECURITIES -- Common Stock -- Other Provisions."
-11-
<PAGE>
<PAGE>
The Company's Board of Directors may issue Preferred Stock of the Company,
without shareholder approval, in series and with such designations, relative
rights and preferences as the Board of Directors may determine. Any shares of
Preferred Stock issued in the future will rank prior to the Common Stock with
respect to dividend rights and rights upon liquidation and could have rights
which would dilute the voting power of the Common Stock. The Board of Directors,
without shareholder approval, can issue Preferred Stock with voting and
conversion rights which could adversely affect the voting power of the holders
of the Common Stock. Such issuances may also have the effect of discouraging
attempts by a person or group to take control of the Company.
In addition, the Company's Board of Directors has the ability to issue
shares of Common Stock which would dilute the voting power and equity of the
holders of outstanding Common Stock.
Effect of Outstanding Warrants, Options and Notes. The Company has
outstanding at the present time (a) Warrants to purchase up to a maximum of
4,119,700 shares of Common Stock at an exercise price of $2.50 per share, (b)
additional warrants to purchase up to a maximum of 300,000 shares of Common
Stock at an exercise price of $3.00 per share (the "Additional Warrants"), (c)
Notes convertible into a maximum of 3,171,000 shares of Common Stock at a
conversion price of $2.00 per share, and (d) options to purchase 750,055 shares
of Common Stock in the aggregate under the Company's 1991 Stock Option Plan and
1993 Stock Option Plan for Directors at exercise prices ranging from $1.875 to
$8.33 as of March 31, 1996 and 30,000 to Directors at an exercise price of $2.50
as of such date. The terms on which the Company may obtain additional financing
during the respective periods of the outstanding Warrants, Additional Warrants,
options and Notes may be adversely affected by the existence of such Warrants,
Additional Warrants, options and Notes. The holders of the Warrants, Additional
Warrants, options and Notes may exercise or convert them at a time when the
Company might be able to obtain additional capital through a new offering of
securities on terms more favorable than those provided by the Warrants,
Additional Warrants, options and Notes.
Taxable Income in Excess of Cash Received. For federal income tax purposes,
the purchase price of each Note and Warrant was allocated between the Notes and
the Warrants in accordance with their relative fair market values. The amount
allocable to the Notes was less than the principal amount of the Notes. There
can be no assurance that the Internal Revenue Service will agree with the
aforesaid allocation. The excess of the amount payable upon maturity of the
Notes over the amount of the purchase price allocated to the Notes for federal
income tax purposes will be treated as "Original Issue Discount," as such term
is defined by the Internal Revenue Code of 1986, as amended. Generally,
investors must report the Original Issue Discount in their gross incomes over
the period of time their Notes are held. Investors are urged to consult with
their own tax advisors in connection with the foregoing. See "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES."
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Securities
by the Selling Securityholders.
-12-
<PAGE>
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at June 29, 1996. This material should be read in conjunction with the
separate consolidated financial statements of the Company included elsewhere in
this Prospectus.
June 29, 1996
-------------------------------
Actual
(Unaudited) (In thousands)
Short-term debt........ $ 2,620
Long-term debt......... 15,951
Shareholders' equity
Preferred Stock, no par
value, 2,000,000 shares
authorized and unissued ---
Common Stock, $0.10 par
value, 10,000,000 shares
authorized; 8,459,437 shares
issued................ 846
Capital in excess of par value 19,122
Foreign currency translation
adjustment............ 49
Retained deficit....... (6,502)
Total shareholders' equity 13,515
-------
Total capitalization.. $32,086
=======
DIVIDEND POLICY
The Company did not declare or pay any cash dividends on its Common Stock
in any of the past five fiscal years. The Company is restricted from paying cash
dividends on its Common Stock by certain debt covenants contained in the Credit
Agreement, but is permitted to effect stock splits and declare and pay dividends
payable solely in shares of any class of its capital stock.
-13-
<PAGE>
<PAGE>
SELECTED FINANCIAL DATA
The selected data presented below for each of the years in the five-year
period ended December 31, 1995 are derived from the consolidated financial
statements of the Company which financial statements have been audited by KPMG
Peat Marwick LLP, independent certified public accountants. The selected
financial data for the three months ended July 1, 1995 and June 29, 1996 have
been derived from the Company's unaudited consolidated financial statements
included in the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 29, 1996. Such unaudited consolidated financial statements in the
opinion of the Company's management reflect all adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation of interim data.
The consolidated financial statements as of December 31, 1995 and 1994 and for
each of the three years in the period ended December 31, 1995, and the
independent auditors' report thereon, and the unaudited consolidated financial
statements as of June 29, 1996 and July 1, 1995 are included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
Fiscal Year Six Months Ended
----------------------------------------------------- -------------------
1991 1992 1993 1994 1995 July 1, June 29,
---- ---- ---- ---- ---- ------- --------
1995 1996
---- ----
(unaudited)
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 59,412 $ 67,315 $ 81,024 $ 54,520 $ 60,008 $ 26,771 $ 33,857
Operating earnings (loss)(1) 6,308 8,407 8,960 (14,589) (8,875) (5,826) 1,789
Net earnings (loss)(1) 3,900 5,051 5,455 (11,591) (11,619) (6,899) 363
Per share data:
Net earnings (loss)(3) 0.63 0.80 0.80 (1.69) (1.57) (0.94) 0.05
Cash dividends(2) -- -- -- -- -- -- --
Total assets at end of period 33,817 43,704 60,715 53,720 48,012 -- 48,891
Long-term debt
(excluding current portion) 5,017 7,158 10,797 13,990 15,573 -- 15,951
Working capital 14,134 17,094 19,105 16,665 10,044 -- 14,255
Shareholders' equity 18,897 23,911 30,593 20,296 10,086 -- 13,515
Average market price per
common share at end
of period(3) $4 9/16 $8 3/16 $6 1/4 $2 11/16 $1 1/2 $3 1/4 $3 5/8
Weighted average common shares(3) 6,222 6,309 6,843 6,580 7,382 7,459 8,459
</TABLE>
- ------------------------
(1) Includes $7,321 in restructuring costs in 1994.
(2) There have been no cash dividends in the above five fiscal years.
(3) Prior year share data has been restated to reflect 4% stock dividends
declared in February 1992, 1993 and 1994 and a three-for-two stock split
paid in August 1993.
-14-
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
In early 1994, the Company experienced several adverse events: (i) orders
for the Company's NST, which had provided significant revenues to the Company
since 1990, ceased earlier than anticipated and left the Company with excess
staff and facilities; (ii) certain new products within the Company's products
division encountered technical difficulties and cost overruns; (iii) several
anticipated contract awards were delayed; (iv) the TEMPEST business at Systems
declined faster than anticipated; (v) Lynwood sought to reposition itself from a
manufacturer of intelligent terminals to a military systems supplier and
experienced high transition costs; and (vi) Wilcom's customers began a series of
cost cutting moves which resulted in delayed and reduced sales.
Primarily in response to the termination of NST production, the Company
announced in April 1994 that it would close its two New York facilities in
September 1994 and transfer its New York military products operations and
certain key personnel to Codar's Colorado location by the end of September 1994.
This resulted in a $7.3 million restructuring charge. At the same time, the
Company also announced a $2.2 million charge for cost overruns on certain
Company products from the New York operations.
The move to Colorado created additional problems. Codar attempted to
integrate three different lines of business into its Colorado facility, which
had not historically produced the products being introduced in any significant
quantities. Each of the product lines transferred to Colorado was new to the
workforce in Colorado and had been designed by an engineering force and
manufactured under the supervision of managers that did not elect to move to
Colorado as anticipated. Development and production costs of the newer products
that were introduced to Codar proved difficult to estimate accurately. In
addition, Codar did not have adequate inventory controls, material ordering
programs or production schedules for these products.
As the Company began to miss its targets, particularly at Codar, the
Company's credit facility was amended from an unsecured to a secured facility
and waivers and revisions to financial covenants were sought from the Company's
lenders. In the fourth quarter of 1994, Codar experienced operational
improvement, but still was not profitable. The fourth quarter of 1994 was the
Company's fourth consecutive quarter of losses after positive revenue and income
in each of its previous 15 quarters.
As the Company entered 1995, the Company established conservative operating
objectives for each of its divisions and staffed each division accordingly. As
the year progressed, it became clear that both Lynwood and Systems would exceed
their revenue and operating earnings objectives, but that Codar and Wilcom would
not.
First Half 1996 Compared With First Half 1995
The nature of the Company's business is such that year-to-year changes in
sales levels are predominantly due to changes in shipping volume or product mix
rather than changing sales prices. Net sales for the first half of 1996 were
$33.9 million, a 26% increase when compared with $26.8 million for the same
period in 1995.
-15-
<PAGE>
<PAGE>
The following chart provides the sales breakdown by segment and subsidiary
for the first six months:
In thousands of dollars 1996 1995 % Change
- ------------------------------------------------------------------------------
Electronic Systems Segment
Codar Technology, Inc. $16,678 $13,060 28%
NAI Systems Division 6,530 5,213 25%
Lynwood Scientific Dev. Ltd. 6,658 5,432 23%
Intercompany (260) (454) %
------- ------- ---
Total Electronic Systems Segment 29,606 23,251 27%
Telecommunications Segment
Wilcom, Inc. $4,251 $ 3,520 21%
------- ------- ---
Total Telecommunications Segment 4,251 3,520 21%
------- ------- ---
Total $33,857 $26,771 26%
======= ======= ===
Sales in the Electronic Systems segment (net of inter-company eliminations)
increased 27% to $29.6 million from $23.3 million for the same period in 1995.
Each of the NAI subsidiaries recorded sales increases in the first half of 1996
as compared to 1995. The largest increase was recorded by Codar and is
attributable to increased shipping volumes. The 1995 revenues were adversely
impacted by production problems on certain contracts. The increases at the NAI
Systems Division and Lynwood are representative of the increased levels of
business at both companies.
In recent years the Company has reduced its dependency on the United States
defense budget by expanding its non-military business operations. However, the
Company still expects approximately 50% of 1996 sales to be directly to the
military or through prime contractors to the military. The Company is not aware
of any programs in which it participates that are specifically targeted for
termination or curtailment. The Company's products are utilized on many
different U.S. Government programs which reduces the adverse impact of canceling
a single specific program. However, changes in future U.S. defense spending
levels could impact the Company's future sales volume.
Sales in the Telecommunications segment increased 21% to $4.3 million, as
compared to $3.5 million for the same period in 1995. The increase in sales was
attributable to increased line treatment revenues principally attributable to
the Company's new telephone line quality improvement products as they continue
to gain acceptance with the Bell operating companies and independent telephone
companies.
The gross margin percentage for the first half of 1996 was 20.1%, as
compared with 2.6% for the same period in 1995. The following chart provides the
gross margin percentage by subsidiary:
1996 1995
---- ----
Codar Technology, Inc. 10.7% (19.4)%
NAI Systems Division 19.7% 13.5%
Lynwood Scientific Development Ltd. 32.9% 31.8%
Wilcom, Inc. 33.5% 22.6%
-16-
<PAGE>
<PAGE>
The margin improvement at Codar is attributable to increased shipping
volumes and cost reduction efforts initiated in late 1995 and early 1996.
Codar's operating performance was still adversely impacted by several large
contracts for which the gross margins are -0-. These contracts are expected to
be substantially completed during the third quarter of 1996. The Company expects
the Codar gross margin percentage to continue to improve during the year.
The Systems Division's first half 1995 gross margin was adversely impacted
by the recording of a $900,000 provision for inventory obsolescence.
The Lynwood and Wilcom gross margins were favorably impacted by increased
shipping volumes and cost reduction efforts completed in the fourth quarter of
1995.
Selling expense for the first half of 1996 was $2.1 million, as compared
with $2.5 million for the same period in 1995. The 16% decrease despite an
increase in sales of 26% is attributable to the Company's desire to reduce its
operating expenses.
General and administrative expenses for the first half of 1996 were $2.5
million, as compared with $2.8 million for the same period in 1995. A decline in
the corporate office expense, as well as cost cutting moves taken in the fourth
quarter of 1995, account for the decline.
Company-sponsored research and development expenditures for the first half
of 1996 were $0.9 million, as compared with $1.0 million for the same period in
1995. The Company expects that the level of the first-half 1996 IR&D
expenditures will be relatively constant for the remainder of 1996.
For the first half of 1996, the Company had operating income of $1.8
million, as compared with an operating loss of $5.8 million for the same period
in 1995. The first half results were favorably impacted by the recognition of a
gain of approximately $750,000 on the previously announced sale of the Systems
Integration Division to Tracor Aerospace Inc. in June 1996.
Interest expense, net of interest income, was $1.1 million for the first
half of 1996, as compared with $0.7 million for the same period in 1995.
The Company accrued an income tax expense of $0.1 million. The entire tax
expense pertains to the Company's Lynwood subsidiary located in the U.K.
Lynwood's earnings are taxed in the U.K. and, while the Company has a U.S. net
operating loss carry-forward, Lynwood is required to pay taxes in the U.K. The
Company is unable to recognize the tax benefit associated with its U.S. net
operating loss carry-forward due to uncertainties as to whether or not a future
benefit will be realized. Once the Company returns to sustained profitability,
the benefits of such a tax loss carry-forward will be recognized.
For the first half of 1996, the Company had a net profit of $0.4 million,
as compared with a net loss of $6.9 million in the first half of 1995. Earnings
per share were $0.05, as compared with a loss of $0.94 for the same period in
1995, based on a weighted average of 8.0 million and 7.3 million shares
outstanding, respectively.
1995 Compared with 1994
Net sales in 1995 were $60.0 million, a 10% increase when compared with
$54.5 million for the same period in 1994. The increase occurred in the
Electronic Systems segment. Year to year changes in the Company's sales levels
are predominantly due to changes in shipping volume or product mix rather than
changing sales prices.
-17-
<PAGE>
<PAGE>
The following chart provides the sales breakdown by product line:
In thousands of dollars 1995 1994 % change
- ----------------------------------------------------------------------
Electronic Systems Segment
Systems $30,862 $16,587 86%
Components 14,334 19,006 (25%)
Service 6,617 10,737 (38%)
-------------------------------
Total Electronic Systems Segment $51,813 $46,330 12%
Telecommunications Segment
Line Treatment $ 5,652 $ 5,391 5%
Test Equipment 2,472 2,799 (12%)
Data Communications 71 -- 100%
-------------------------------
Total Telecommunications Segment $ 8,195 $ 8,190 0%
-------------------------------
Total $60,008 $54,520 10%
===============================
Sales in the Electronic Systems segment (net of intercompany eliminations)
increased 12% to $51.8 million from $46.3 million in 1994. The sales increase
was primarily attributable to higher systems integration revenue, partially
offset by lower component and service revenues. The increase in systems revenue
was principally attributable to Systems. The decrease in service and components
revenue is primarily attributable to Codar and the closing of the military
products division, which was consolidated into Codar in September 1994.
A significant portion of the Company's net sales have historically been
directly to the military or through prime contractors to the military. The
Company has not initiated any change in its marketing focus and, as of December
31, 1995, approximately 78% of the Company's backlog of orders represents orders
for military and government sales.
The Company expects a significant amount of 1996 sales to be directly to
the military or through prime contractors to the military. The Company is not
aware of any programs in which it participates that are specifically targeted
for termination or curtailment. The Company's products are utilized on many
different U.S. Government programs, which reduces the adverse impact of
canceling a single specific program. However, changes in future U.S. defense
spending levels could impact the Company's future sales volume.
Sales in the Telecommunications segment remained flat at $8.2 million in
1995 and 1994. A small increase in line treatment products due to deliveries of
Wilcom's new Enhanced Line Powered Amplifier products was offset by a decline in
test equipment as a result of lower orders from the regional Bell operating
companies and foreign telecommunications companies.
The consolidated gross margin for 1995 was 8.2%, as compared to 18.8% in
1994. The 1995 gross margin was adversely affected by a $6.6 million charge to
operations and an unfavorable mix of high and low margin product deliveries. The
$6.6 million charge to operations was attributable to a charge of $4.4 million
for cost growth on certain long term contracts due to engineering design
changes, greater than anticipated labor and material and overhead costs and a
$2.2 million charge for increased provisions relating to slow moving, excess and
obsolete inventory. Lower than normal margins are expected to continue at least
into the second quarter of 1996, principally at Codar, due to a disproportionate
level of low margin revenue as a result of past cost overruns on certain long
term contracts for which the Company continues to provide products. The Company
believes that it has
-18-
<PAGE>
<PAGE>
recognized the entire adverse impact of cost overruns on those contracts for
which the expected final costs exceed the contract value.
Selling expense for 1995 was $5.0 million, as compared with $7.5 million in
1994. This decrease is attributable to the savings associated with the
consolidation of the military products division in the third quarter of 1994 and
cost cutting measures implemented at all of the Company's divisions in 1995.
General and administrative expenses for 1995 were $6.5 million, as compared
to $6.3 million in 1994. This increase is primarily attributable to the Company
moving its corporate headquarters from Woodbury, New York to Longmont, Colorado
in December 1995 and additional administrative expense at Codar as a result of
increased management resources. These cost increases were partially offset by
cost cutting measures implemented at the Company's other divisions and the
savings associated with the consolidation of the military products division in
the third quarter of 1994.
Company-sponsored research and development expenditures for 1995 were $1.8
million, as compared to $3.2 million in 1994. This decrease is attributable to
savings associated with the previously mentioned consolidation and the change in
mix between Company-sponsored research and development and customer-funded
research and development. The Electronic Systems segment is focusing on its
system integration business. Although systems integration work by its nature
will require significant engineering content, such costs must be classified as
contract costs and charged to cost of sales as opposed to Company-sponsored
research and development (IR&D).
The Company recorded an operating loss of $8.9 million in 1995, as compared
with an operating loss of $14.6 million in 1994. The operating loss in 1995 was
primarily due to the $6.6 million charge previously noted. The 1994 operating
loss included a $7.3 million restructuring expense.
Interest expense, net of interest income, was $2.4 million in 1995, as
compared to $1.4 million in 1994. The 1995 figures also included a $0.9 million
charge for debt restructuring expense related to the April 7, 1995 agreement
reached with the Company's two lending institutions.
The effective income tax expense rate was below the combined statutory
federal and state rates for the first nine months of 1995. The Company was
unable to recognize a tax benefit for its loss in 1995 due to uncertainties as
to whether or not a future benefit would be realized. Any earnings in 1996 will
not be taxed at the statutory rate. The small tax provision is associated with
the operations of Lynwood, the Company's United Kingdom subsidiary.
The Company recorded a net loss of $11.6 million in 1995, substantially the
same as the net loss recorded in 1994. Loss per share was ($1.57), as compared
with a ($1.69) in 1994, based on a weighted average of 7.4 million and 6.9
million shares outstanding, respectively.
1994 Compared with 1993
Net sales in 1994 were $54.5 million, a 33% decrease when compared with
$81.0 million for the same period in 1993. The decrease occurred in both
segments, with the largest decrease in the components business which was
attributable to the decline in NST business.
-19-
<PAGE>
<PAGE>
The following chart provides the sales breakdown by product line:
In thousands of dollars 1994 1993 % Change
- ------------------------------------------------------------------------
Electronic Systems Segment
Systems $16,587 $15,870 5%
Component 19,006 50,662 (62%)
Service 10,737 4,670 130%
--------------------------------
Total Electronic Systems Segment $46,330 $71,202 (35%)
Telecommunications Segment
Line treatment $ 5,391 $ 5,895 (9%)
Test equipment 2,799 3,927 (29%)
--------------------------------
Total Telecommunications Segment $ 8,190 $ 9,822 (17%)
--------------------------------
Total $54,520 $81,024 (33%)
================================
Sales in the Electronic Systems segment (net of intercompany eliminations)
decreased 35% to $46.3 million from $71.2 million in 1993. The sales decrease
was primarily attributable to lower component revenue, partially offset by
higher service revenue. The decrease in component revenue was principally due to
the substantial completion in 1993 of the NST contract and a decrease in TEMPEST
printer product shipments. The increase in systems and service revenue was
primarily attributable to the inclusion of revenue from Codar which was acquired
in October 1993.
Sales in the Telecommunications segment decreased 17% to $8.2 million, as
compared to $9.8 million for the same period in 1993. The decrease in sales was
attributable to lower test equipment and line treatment revenues which were
adversely affected by lower orders due to cost cutting initiatives from the
regional Bell operating companies and foreign telecommunications companies.
The gross margin percentage for 1994 was 18.8%, as compared with 33.9% in
1993. The gross margin percentage was adversely affected by an unfavorable mix
of high and low margin product deliveries, reduced shipping volume, continuing
inefficiencies as the Company transitions its military products manufacturing
operations from Hauppauge, New York to Longmont, Colorado and a $2.2 million
first quarter charge associated with cost overruns on two new printer products.
Selling expense for 1994 was $7.5 million, as compared with $7.4 million in
1993. This slight increase is attributable to the inclusion of the selling
expenses associated with Codar which was acquired in October 1993 partially
offset by savings associated with the previously mentioned restructuring and
lower selling expenses due to lower sales volume.
General and administrative expenses for 1994 were $6.3 million, as compared
with $5.8 million in 1993. This increase is primarily attributable to increased
one-time charges associated with the Company's previously mentioned
restructuring and the cost of running the Hauppauge facility for the first ten
months of 1994 substantially below capacity.
Company-sponsored research and development expenditures in 1994 were $3.2
million, as compared with $5.0 million in 1993. This decrease is attributable to
savings associated with the previously mentioned restructuring and the change in
mix between Company-sponsored research and development and customer-funded
research and development. A key component to the Electronic Systems' segment
strategy is to focus on system integration business. Although systems
integration work
-20-
<PAGE>
<PAGE>
by its nature will require significant engineering content, such costs must be
classified as contract costs and charged to cost of sales as opposed to
Company-sponsored research and development (IR&D).
The Company recorded an operating loss of $14.6 million in 1994, as
compared with operating earnings of $9.0 million in 1993. The operating loss was
primarily attributable to lower sales volume and margins, the previously
mentioned restructuring and continuing inefficiencies as the Company transitions
its military products manufacturing operations from Hauppauge, New York to
Longmont, Colorado.
Interest expense, net of interest income, increased by $0.7 million to $1.4
million in 1994. This increase was attributable to increased long-term debt,
short-term bank borrowings and an increase in the prime rate. In October 1993,
the Company increased its long-term debt by $7.5 million in conjunction with the
acquisition of Codar.
The effective income tax recovery rate was below the combined statutory
federal and state rates for 1994. The Company was unable to recognize a tax
benefit to its losses greater than the amount it could carry back due to
uncertainties as to whether or not a future benefit will be realized.
The Company had a recorded loss of $11.6 million in 1994, as compared with
net earnings of $5.5 million in 1993. Earnings (loss) per share were ($1.69), as
compared with $0.80 in 1993, based on a weighted average of 6.9 million and 6.8
million shares outstanding, respectively. The 1993 earnings per share and shares
outstanding figures have been adjusted to reflect the distribution of a 4% stock
dividend on March 14, 1994 to shareholders of record on February 25, 1994.
Liquidity and Capital Resources
Although the Company reported a net loss of $11.6 million in 1995, it still
generated a small positive cash flow from operations due to the receipt of a
Federal tax refund of $4.0 million in January attributable to the 1994 tax loss
carryback. Company operations have historically provided a positive cash flow;
however, the Company is currently experiencing financial difficulties due to
lower shipping volumes and cost overruns on certain long term contracts.
Although the fourth quarter revenue level was up approximately 9% over the
third quarter revenue level, the lower than normal gross margins resulted in
continuing losses and the Company must continue to increase its shipment rate
while reducing costs in order to improve its operating margin.
The restructuring actions taken in 1994 and 1995 have significantly reduced
the expense structure of the Company; however, it is not certain that the
Company will be able to achieve the revenue level necessary to return to
profitability. The Company is taking action to minimize its cash outlays by
deferring or eliminating discretionary expenses and capital asset purchases.
Among the steps taken during the last quarter of 1995 to reduce expenses and
improve profitability during 1996 are the following: (1) the availability of
cash from the sale of the Notes and Warrants described below is expected to
result in improved procurement practices as the confidence of vendors in the
Company's payment ability is improved, which will reduce costs and improve
product delivery; (2) the closing of the Woodbury, New York corporate office,
the elimination of several corporate support personnel and the relocation of the
Company's corporate headquarters to Colorado in December 1995 is expected to
result in cost savings; (3) the Company has reduced Wilcom's workforce from 76
to 41 and commenced an outsourcing effort of up to 70% of Wilcom's present
production; (4) the Company has reduced Codar's workforce by 28 and is
continuing to review and rationalize its operations; and (5) the Company has
reduced its budget for independent research in pursuit of new products and
improvements to existing products by approximately 33%. However, management is
committed to returning the Company to profitability and believes that it has
taken the necessary action to restructure the Company so that it will be
profitable in 1996. There can
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be no assurance, however, that expenses will be reduced or profitability will
improve in 1996 or any other period as a result of these or any other steps.
On February 15, 1996, the Company entered into an amendment to its credit
agreement with its bank lenders which amended and extended the payment
provisions contained therein and reset certain financial covenants on more
favorable terms for the Company. The revised credit agreement provides for
quarterly principal payments of $500,000, beginning on March 31, 1996 and
payments of $750,000 beginning on March 31, 1997 and paid through December 31,
1998. The remaining principal balance is due on January 15, 1999. Interest is
payable monthly at the rate of 1 3/4% above prime. The loan covenants require
that the Company maintain certain minimum levels of net worth, current ratio and
quick ratio. There are also limits on capital expenditures and the payment of
cash dividends. The Company believes that it can comply with such loan covenants
during the term of the credit agreement.
On February 15, 1996, February 23, 1996, February 29, 1996, and May 2,
1996, the Company issued an aggregate of $8,342,000 of 12% Convertible
Subordinated Promissory Notes due January 15, 2001 (the "Notes") and warrants to
purchase an aggregate of 2,085,500 shares of the Company's Common Stock (the
"Warrants"). The Notes are convertible by the holders into shares of Common
Stock at a price equal to $2.00 per share, subject to adjustment if the Company
fails to meet certain earnings thresholds and in certain other events. Interest
on the Notes is payable quarterly in arrears on January 15, April 15, July 15
and October 15 of each year, commencing April 15, 1996. The Notes mature on
January 15, 2001. The Notes may be prepaid by the Company without premium or
penalty at any time after January 15, 1999. The Notes are unsecured obligations
of the Company and contain certain restrictions on the Company, including a
negative pledge of the Company's assets not otherwise encumbered by the holders
of the senior indebtedness.
In addition to the Warrants issued with the Notes, the Company issued an
aggregate of 2,034,200 Warrants to the lead investor and the placement agent.
All Warrants entitle the holders thereof to purchase shares of Common Stock at
any time and from time to time on or before February 15, 2002 at an exercise
price equal to $2.50 per share of Common Stock, subject to adjustment in certain
events.
The Company received total proceeds (net of placement agency fees and
expenses) of $7,534,081 ($2,500,000 was received prior to December 31, 1995)
from the sale of the Notes and the Warrants upon completion of the offering.
Approximately $4.1 million was used to reduce the Company's accounts
payable to its vendors. The remainder of the funds received will be used to meet
operating and working capital needs. As a result of the sale of the Notes and
the debt restructuring, the Company will expend approximately $4,073,000 in
principal and interest payments in 1996, $4,933,000 in 1997 and $4,632,000 in
1998. On January 15, 1999, the Company is required to make a balloon payment of
$7,175,000.
The Company intends to further reduce its operating expenses and sell all
non-essential assets. The Company intends to pay interest on the Notes, interest
and principal under the credit agreement and operating expenses for the next
three years with cash flow from operations, together with the excess cash
received from the sale of the Notes after the payment of vendors and proceeds
from asset sales, if any. The Company believes that it will be necessary to
refinance its existing bank debt prior to maturity on January 15, 1999, when the
balloon payment of $7,175,000 is due. At that time, the Company intends to
explore all available options, including the issuance of debt or equity
securities of the Company and the sale of one or more of the Company's
subsidiaries.
On May 9, 1996, the Company entered into an agreement with Charles S.
Holmes, a member of the Company's Board of Directors, that in consideration of
his converting the 12% Convertible
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Subordinated Promissory Note due 2001 of the Company in the aggregate unpaid
principal amount of $2,000,000 held by him into 1,000,000 shares of Common Stock
as provided in Section 6 of the Note, the Company would immediately grant him
warrants to purchase 300,000 shares of Common Stock at any time and from time to
time on or before February 15, 2002 at an exercise price of $3.00 per share,
subject to adjustment in certain events.
Cash and cash equivalents totaled $1.1 million at June 29, 1996, as
compared to $2.6 million at December 31, 1995. Cash used by operating activities
amounted to $7.4 million in the first six months of 1996, as compared to cash
provided by operating activities of $0.8 million in the comparable period of
1995.
Inflation
The Company's financial statements are prepared in accordance with
historical accounting systems, and therefore do not reflect the effect of
inflation. The impact of changing prices on the financial statements is not
considered to be significant.
New Accounting Standards
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
(SFAS 121), was issued in March 1995 by the Financial Accounting Standards
Board. It requires that long-lived assets and certain identifiable intangibles
held and used by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. SFAS 121 is required to be adopted for fiscal years beginning after
December 15, 1995 and will be adopted by the Company for fiscal 1996. Adopting
this statement is not expected to have a significant effect on the consolidated
financial statements of the Company.
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123), was issued by the Financial Accounting
Standards Board in October 1995. SFAS 123 establishes financial accounting and
reporting standards for stock-based employee compensation plans as well as
transactions in which an entity issues its equity instruments to acquire goods
or services from non-employees. This statement defines a fair value based method
of accounting for employee stock options or similar equity instruments, and
encourages all entities to adopt this method of accounting for all employee
stock compensation plans. However, it also allows an entity to continue to
measure compensation cost for those plans using the intrinsic value based method
of accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to
Employees. Entities electing to remain with the accounting method prescribed in
Opinion 25 must make pro forma disclosures of net income and, if presented,
earnings per share, as if the fair value based method of accounting defined by
SFAS 123 had been applied. SFAS 123 is applicable to fiscal years beginning
after December 15, 1995. The Company currently accounts for its equity
instruments using the accounting method prescribed by Opinion 25. The Company
does not currently expect to adopt the accounting method prescribed by SFAS 123;
however, the Company will include the pro forma disclosures required by SFAS 123
when required.
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THE COMPANY
General
The Company through its wholly owned subsidiaries, designs, manufactures
and markets rugged computer systems, advanced peripheral products, intelligent
terminals, high performance work stations, TEMPEST computer systems (which
suppress certain radiation to prevent external detectors from reading the data
being transcribed) and telecommunications test equipment and transmission
products. The Company operates in two distinct operating segments: an Electronic
Systems segment and a Telecommunications segment. The Electronic Systems segment
is comprised of all of the Company's defense, military and government-related
businesses and the Telecommunications segment is focused on commercial
communications opportunities, as illustrated below.
[NAI TECHNOLOGIES GRAPHIC OMITTED]
The Electronic Systems segment provides rugged computer products
specifically designed for deployment in harsh environments that require special
attention to system configurations. This segment's customer base includes the
U.S. and foreign armed services and intelligence agencies.
The Telecommunications segment provides transmission enhancement products
and rugged, hand-held test equipment for analog, digital and fiber-optic
communications and data-interchange networks. This segment's customer base
includes the regional Bell operating companies and independent telephone
companies.
The Company's strategy is to be a leading supplier of high quality,
innovative products, systems and services to satisfy specialized customer
requirements in niche information technology and telecommunications markets,
especially in environments with harsh operating requirements.
Electronic Systems Segment
The Electronic Systems segment is comprised of three operating
subsidiaries, as follows:
o Codar Technology, Inc., located in Longmont, Colorado ("Codar");
o NAI Technologies-Systems Division Corporation, based in Columbia,
Maryland ("Systems"); and
o Lynwood Scientific Developments Limited, based in Farnham, United
Kingdom ("Lynwood").
Codar. Codar designs, manufactures, integrates and supports rugged computer
systems and subsystems for the U.S. Department of Defense ("DoD") and its prime
contractors and allies. These systems and subsystems are used in tactical,
planning, communications and intelligence applications.
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Codar currently competes primarily in the computer and peripheral product
segment of the military market, with both militarized and ruggedized products.
Additional business is targeted at engineering support service and system
integration opportunities.
Codar's product line includes a range of commercial off-the-shelf
("COTS")-based rugged minicomputers, workstations, personal computers,
industry-compatible, removable mass storage subsystems, high-resolution monitors
and keyboards. These products incorporate technology from other companies. Codar
also provides engineering services and system integration capabilities.
Codar's equipment is designed to allow flexibility in configuration of all
essential components. In addition to complying with system functional
specifications, Codar's products are engineered to be deployed in environments
that require special attention to system configurations with limitations on size
and power consumption, and restraint on electromagnetic emissions. Products are
custom built to withstand shock, vibration, cold, heat, dust, sand, rain and
altitude conditions.
Codar has developed and produced products for a large number of government
programs and departments and more than 100 additional customers aggregating more
than 200 different end-users. The products have met military requirements for
use in a variety of applications in vehicles, shelters and fixed-site
installations. Codar has designed, built, tested and sold equipment for
airborne, ground/mobile and shipboard military environmental specifications and
military requirements. Codar is the prime contractor for several DoD systems
projects including the Fire Direction Data Manager ("FDDM"), which provides
tactical and technical fire control capabilities for field artillery rockets and
missiles and is capable of receiving, processing, displaying, generating,
transmitting messages and performing relay functions for digital messages in the
same network and between communications networks; the Tower Restoration Vehicle
("TRV") Program, which provides rapid restoration of limited air traffic control
services at forward and bare-base operating areas, after loss of assets at fixed
air base locations, with a mobile air traffic control tower and is capable of
mobility over all types of terrain, can be airlifted by a single transport
aircraft and can be rapidly deployed for full operations in 90 minutes; and the
Rapid Anti-Ship Missile Integrated Defense System ("RAIDS"), which is a tactical
decision aid system based on an open-architecture network of processors that
enhances the missile defense effectiveness of ships and performs all system
executive functions, including internal and external data
sharing/communications, anti-ship missile defense system performance and
operational status monitoring, designated target identification, track data
association, limited threat evaluation and maintenance of the status of the
anti-ship missile defense threat environment.
Codar provides a variety of ruggedized and electromagnetic interference
("EMI") compliant workstations, based on processors from other companies, as
well as related peripherals, such as ruggedized/EMI color monitors, keyboards
and mass storage units ("MSEU"). These products are used by the U.S. Army and
Navy. The Codar Model 325M-S Rugged Lightweight SPARC(R)station has been
selected by GTE Government Systems Corp. ("GTE") for use on the U.S. Army's
Common Hardware/Software Program known as CHS-2. Codar will supply computers
with ruggedized color monitors and MSEUs over a five-year period as part of the
basic CHS-2 program as well as engineering services in support of GTE and the
U.S. Army.
Codar also offers ruggedized rackmount and portable personal computers
utilizing the Intel 80486 or Pentium processors. These computers offer rugged
portability in either a compact, modular "lunch box" design or a rackmount
design. Completely sealed from the environment in their non-operating
configuration, these computers are easily transported. In addition to shock and
vibration, these units can operate over a wide range of temperature variations.
Options include a detachable keyboard, color touch screen display and various
memory options.
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In addition, Codar's standard product line currently offers two customized
printers that can operate in shipboard, mobile and airborne environments and can
withstand severe environmental conditions while providing letter quality text
and graphic output.
The focus of Codar's new products is the design, manufacture and
integration of rugged computer systems and subsystems to support the upgrade of
large platforms and programs, mobile or transportable systems and subsystems for
command and control applications and the support of the "digitization" of the
battlefield as exemplified by the U.S. Army's "Force 21" programs.
In an effort to maintain its technological capabilities, and be in a
position to provide the latest technology to its customers, Codar works with its
suppliers to permit it to accelerate new product introductions and help its
customers have access to the latest COTS product technology. Codar also makes
significant use of special teaming relationships with various large prime
contractors such as GTE in the CHS-2 program. These relationships allow Codar to
participate in larger programs than it could on its own.
Systems. Systems provides custom packaged, integrated computer systems for
deployment in shelters, ships, land vehicles and other demanding environments.
Systems' integration expertise encompasses most major industry standard
architectures and most widely used operating systems. Systems produces PC and
workstation products that are based around COTS technology and are configured in
such a manner as to satisfy specific customers' needs. Systems' products are
sold domestically through its own sales force and internationally through the
sales force of Lynwood. For more than 20 years, Systems has been a supplier to
the National Security Agency ("NSA"), the U.S. Navy and other government defense
customers. Systems has engineered solutions that meet a wide variety of unique
specifications including: TEMPEST size and weight constraints, low power
consumption, rack mounting and unattended operation with remote diagnostics.
Systems' strategy is to be able to supply the latest COTS-based products
and technologies to its customers, including primarily the NSA. The NSA is
normally centered around information and intelligence and is not generally
involved with large military platform upgrade programs. The NSA is concerned
with supplying hardware and software to government agencies and departments that
will support the intelligence needs of the country. Systems' activity for the
NSA is therefore associated with electronic systems and subsystems for use in
intelligence and information warfare applications. Systems makes significant use
of technology relationships with third parties. In order to supply products in a
timely fashion, Systems concentrates its efforts in the design and the final
assembly and test of its products rather than providing a fully integrated
vertical manufacturing capability.
Lynwood. Lynwood supplies rugged, environmentally and electrically screened
personal computers and workstations based upon standard COTS technology, aimed
at the military and government markets principally in Europe. Lynwood develops,
manufactures, installs and supports complete computer systems for the Government
and Defense markets in Australia, Europe and the United Kingdom. Lynwood adapts
COTS systems for use in harsh and extreme environments. Lynwood also develops
TEMPEST products. In addition to creating its own products, Lynwood also
provides an international marketing and manufacturing capability for the
Company. In some cases, Lynwood provides systems that are made up of its own
products coupled with those of Codar or Systems.
Lynwood produces several personal computer and workstation products
designed to be operated in harsh environments. For example, Lynwood has a
completely compatible PC based upon a standard PC motherboard which operates in
driving rain and at extremes of temperature, and which is completely sealed from
dust and dirt. These products have been sold to armed services in Australia,
Israel and the
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UK. Lynwood also develops secure TEMPEST screened workstation products which are
designed to operate in areas of high security.
Lynwood principally works on discrete projects and delivers solutions to
meet specific customer and project requirements. Lynwood's products include the
RP6200, a rugged, portable PC based on standard COTS technologies and designed
for desktop use or rackmounting. The unit is ruggedized and its specification
allows flexibility in configuration to meet specific project requirements. The
RP6200 is also designed to meet the intermediate TEMPEST standard. The unit can
be configured with the latest Intel Pentium processor, removable disk drives and
a highly readable LCD color display. The unit is in active use with armed forces
in Australia, Europe and the United Kingdom. The RP6120 is a fully sealed,
non-air breathing variant of the RP6200, designed to operate in the harshest of
environments. It has all the features of the RP6200, in addition to which it
will operate in driving rain, excessive humidity, salt fog and heavy dust
environments. The unit is designed for use in desert, tropical and jungle
environments.
Lynwood has the capability to supply integrated systems and subsystems that
meet specific rugged and environmental specifications. Lynwood's design and
manufacturing capabilities are concentrated around the system integration and
final assembly and test of these products. Lynwood strives to respond quickly
with a cost effective product using the latest COTS technologies and employs the
same technology relations and teaming programs as Codar and Systems to meet this
end.
Telecommunications Segment
The Telecommunications segment currently consists of one operating company:
Wilcom, Inc. ("Wilcom"), located in Laconia, New Hampshire. Wilcom designs and
manufactures products for use in the telephone industry. The majority of
Wilcom's sales are to the Regional Bell Operating Companies ("RBOCs").
The business of Wilcom is made up of two product lines: analog and digital
telephone test equipment, for use with either fiber or copper cable; and
telephone transmission enhancement products, which are used to enhance or
improve the characteristics of voice, digital data and video over copper wire.
The largest part of Wilcom's business is in telephone transmission enhancement
products.
The test equipment product line is comprised of digital, fiber and analog
test instrumentation used by domestic and international telephone companies.
Current products include line testers, fiber identifiers, power meters and other
such instruments. Wilcom is currently finishing the design of a low cost optical
time domain reflectometer which is used to locate faults or breaks in fiber
cables. This product is expected to be introduced in early 1996.
Telephone transmission enhancement products, which represent the greater
growth opportunity for the division, include two product lines that are
differentiated by their use rather than their technologies. One of the product
lines is referred to as line treatment equipment ("LTE") and is normally
installed on telephone company property, while the other product line, the
enhanced line power amplifier ("ELPA"), is normally installed at the customer's
premises (but can be installed on telephone company property).
Both the LTE and the ELPA are electronic modules, installed for the express
purpose of improving voice quality, increasing data transmission speeds when
using modems and increasing the ability of copper wire to be used for video
transmission in special instances. The LTE has been designed for use with two
and four wire telephone circuits and the ELPA has been designed for use with two
wire circuits. Network upgrading has become important due to the many new
competitive technological alternatives to copper wire such as radio, cellular
telephone, satellite transmission, fiber cables and
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microwave which can send information and data from location to location. The
proliferation of higher speed analog modems has made the need for better quality
phone lines an important issue. Wilcom's products allow the telephone companies
to provide additional services in voice, data and video transmission over their
existing copper networks.
The ELPA product line has been extended by the introduction of a smaller,
lighter, less expensive product called the MB21-Kl. The MB21-Kl has been
designed to be self-powered from the telephone line and permit the improvement
of line transmission quality by automatically adjusting the various electrical
parameters that control signal transmission. The MB21-Kl also requires less
skilled technicians for installation and can be configured and installed from a
remote site, which can result in substantially reduced service calls and cost to
the RBOCs. The Company has received patents on the MB21-Kl and has applications
in process to cover the new remote configuration features.
The development work on the MB21-Kl was completed in early 1995 in
conjunction with Southwestern Bell and resulted in a 10,000 piece order that is
currently being put in service by Southwestern Bell in selected areas. The
product has also been ordered by another RBOC and is under field trials at other
RBOCs and one major independent telephone company.
Marketing and Service
The Company sells its products directly to customers and serves as a
subcontractor to larger prime contractors serving the same customer base. The
Company's products are marketed to customers through sales personnel,
manufacturers' representatives and distributors. The Company maintains sales
offices and sales support in Columbia, Maryland; Westlake Village, California;
Longmont, Colorado; Laconia, New Hampshire; Australia; England; and Israel.
The Company provides maintenance and field service for its products through
its customer service departments located at each of its manufacturing facilities
and at certain customer sites. Field service for printers is also performed by
some distributors. Most overseas service is performed by the Company's
representatives in Australia, Denmark, England, France, Germany and Israel.
Customers
During 1995 and 1994, sales under contracts with the U.S. Government were
approximately 38% and 40%, respectively, of the Company's net sales. Other than
the U.S. Government, no single customer accounted for more than 10% of the
Company's sales in 1995 or 1994. The Company's sales are affected by the U.S.
defense budget. With continuing discussions on budget cuts, it is difficult to
assess what the impact of budget cuts, if any, will be on the Company. It
appears that defense outlays will be reduced from past levels. The Company is
unaware of any targeted cuts specifically affecting its products. The Company's
products are utilized on many different programs. However, changed U.S.
Government spending levels could impact the Company's future sales levels. No
single U.S. Government contract accounted for greater than 10% of the Company's
sales in 1995 or 1994.
The U.S. Government accounted for 44% of the Electronic Systems segment's
1995 sales. Three separate customers accounted for 26%, 23% and 13%,
respectively, of the Telecommunications segment's 1995 sales.
Foreign Sales
Foreign sales in 1995 and 1994 accounted for approximately 21% and 25%,
respectively, of total sales. Such sales, which exclude products sold to the
United States Government and resold by the U.S.
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Government for foreign military use, are made primarily to customers in
Australia, Canada, Hong Kong, India, Indonesia, Israel, Japan, the United
Kingdom and Western Europe.
The Company's foreign sales are comprised of export sales from the U.S. and
foreign revenues from Lynwood. All export sales from the U.S. are payable in
U.S. dollars and, therefore, settlement amounts do not fluctuate with changes in
exchange rates. All of Lynwood's sales are payable in British currency.
Fluctuations in exchange rates between the U.S. dollar and the British pound
will impact on the Company's operating results. No single country, with the
exception of the United Kingdom which accounted for 86% of the Company's foreign
sales, accounted for more than 5% of the Company's foreign sales in any of the
past three years. See "RISK FACTORS -- Foreign Operations."
Foreign sales for the past three years have been as follows:
Approximate
Total Percent of
Foreign Sales Company Sales
------------- -------------
1995....................$12,679,000 21%
1994.................... 13,828,000 25%
1993.................... 17,363,000 21%
Backlog
The Company's backlog of orders was $47.8 million at December 31, 1995. Of
this amount, 71% represents orders for U.S. military sales. Such orders are
subject to termination at the convenience of the U.S. Government with negotiated
settlements in which the Company seeks to recover its costs and a reasonable
profit. Certain other orders, when subject to cancellation or return, are
handled with a restocking charge or by negotiated settlement.
While the Company's backlog is not subject to seasonal factors, it does
fluctuate due to timing of orders from the U.S. Government. The Company expects
to produce and ship approximately 77% of its current backlog of orders before
the end of 1996.
Competition
The Company's business is highly competitive. Many suppliers in the
Company's markets are significantly larger than the Company in terms of total
sales and assets, and many devote significantly more resources to the
development of new products than does the Company. The Company searches for
certain market niches where it has expertise and can compete successfully.
Competition for the Company's products is based principally on reliability,
performance, price and diversity of the products offered.
Contracts for which the Company competes are primarily awarded on the basis
of either price or "best value" which is a weighted calculation performed on the
basis of technical solution and price. Quality, on-time performance and
financial stability of the contract recipient are also key factors in
determining how contracts are awarded.
A substantial number of the Company's products become obsolete within a
number of years from their initial shipment to customers due to the rapid
technological advances characterized by the Company's business. The alternatives
to the Company's products are products which are
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manufactured by other competitors, are created from design solutions calling for
alternative equipment or procedures, or are ultimately produced as a result of
technological advances which occur in the business over time.
The Company believes it has a reputation with its customers for the timely
delivery of well designed, quality products at a reasonable price. Should any of
these Company attributes be compromised, it could impact on the Company's
long-standing relationship with its customers. Certain customers require Company
personnel to maintain various levels of security clearances in order to receive
access to "sensitive data." Should the Company lose its security clearances, it
would jeopardize the Company's relationship with such customers.
Research and Development
The Company's technological base is characterized by rapid change. As a
result, maintenance and expansion of the Company's business are partially
dependent upon the success of the Company's programs to develop new products and
upgrade existing products. The Company's engineering resources have been devoted
to the development of new products in every major category of its business.
During the years 1995, 1994 and 1993, the Company's total engineering
expenditures were $7,264,000, $9,335,000 and $7,444,000, respectively. Due to
the extensive use of COTS-based equipment in the Company's products, the
Company's cost of independent research in pursuit of new products and
improvements to existing products was approximately $1,807,000, $3,214,000 and
$5,020,000, respectively. Customer-funded engineering included in cost of sales
or inventory as a contract cost was $5,457,000 in 1995, $6,121,000 in 1994 and
$2,424,000 in 1993.
Patents and Trademarks
The Company owns patents and trademarks and seeks patent protection for its
products in cases where the Company believes the technology involved is
sufficiently innovative to warrant such protection. The Company seeks trademark
protection for its products in cases where the Company believes for marketing
reasons such protection is warranted. The Company seeks to protect its
proprietary information through its reliance on patent, copyright, trademark and
trade secret laws, non-disclosure agreements with its employees and
confidentiality provisions in licensing arrangements with its customers. There
is no assurance that such agreements will be effective to protect the Company or
that the proprietary information deemed confidential by the Company will be
adequately protected by the law respecting trade secrets. Consequently, it may
be possible for unauthorized third parties to copy certain portions of the
Company's products or to "reverse engineer" or otherwise obtain the Company's
proprietary rights. Moreover, the laws of some foreign countries do not afford
the same protection provided by U.S. laws to the Company's proprietary rights.
Government Regulation
The Company is subject to the Federal acquisition regulations governing the
issuance of government contracts, Federal Trade Commission regulations governing
its advertising and trade practices, Department of Commerce regulations as well
as Department of State Defense Trade Control regulations with respect to goods
it imports and exports, and the Truth in Negotiations Act, which provides for
the examination by the U.S. Government of cost records to determine whether
accurate pricing information was disclosed in connection with government
contracts. To date, such government
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regulations have not had a material adverse effect on the Company's business.
The Company in the normal course of business is subject to Department of Defense
audits with respect to its government contracts, some of which may result in
pricing adjustments.
The Company's manufacturing operations are subject to various federal,
state and local laws that regulate the discharge of materials into the
environment, or otherwise relating to the protection of the environment. To
date, compliance with such government regulations has not had a material adverse
effect on the Company's business.
Manufacturing and Supplies
Production of the Company's products requires assembly and testing of
components, printed circuit boards and other purchased parts. Quality control,
testing and inspection are performed at various steps throughout the
manufacturing process.
The Company purchases certain materials and components used in its systems
and equipment from independent suppliers. These materials and components are not
normally purchased under long-term contracts. The Company purchases
minicomputers, workstations, personal computers, mass storage subsystems, high
resolution monitors and keyboards under OEM agreements. The Company believes
that most of the items its purchases may be obtained from a variety of suppliers
and it normally obtains alternative sources for major items, although the
Company is sometimes dependent on a single supplier or a few suppliers for some
items.
During 1995 and 1994, the Company's cash constraints strained its
relationships with vendors, which adversely impacted the Company's ability to
meet its production targets on a timely and cost-effective basis.
Employees
At December 31, 1995, the Company had approximately 390 employees. The
Company has never experienced a work stoppage and none of its employees is
represented by a union. The Company believes its relationship with its employees
is good.
Properties
The Company's facilities, which are believed to be adequate to meet the
Company's foreseeable needs, are shown in the table that follows:
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<PAGE>
<PAGE>
Facilities
----------
Approximate
Floor Area Expiration
Division or Subsidiary Location (in Sq. Ft.) Date
- ---------------------- -------- ------------ ----
Corporate headquarters Longmont, Colorado 2,500 (leased) November 1, 1997
Electronic Systems Segment
Codar Longmont, Colorado 77,500 (leased) November 1, 1997
Systems Columbia, Maryland 25,000 (leased) November 30, 1996
Lynwood Farnham, England 26,000 (leased) December 25, 2014
Telecommunications Segment
Wilcom Laconia,
New Hampshire 52,000 (owned) --
The Company also leases several small sales offices. The Company pays
approximately $1,316,000 per annum for the rental of all its facilities.
On November 30, 1995, the Company relocated its executive and
administrative offices from Woodbury, New York, to Longmont, Colorado.
Legal Proceedings
TDA Trading Corp. v. Carlson, et al. On or about June 28, 1994, TDA Trading
Corp. ("TDA"), individually and on behalf of a class of persons similarly
situated, commenced a securities fraud class action in the United States
District Court for the Eastern District of New York against Robert A. Carlson,
Richard A. Schneider and the Company. TDA commenced its action, entitled TDA
Trading Corp. v. Carlson, et al., by filing a complaint (the "Complaint") with
the Court.
The Complaint principally alleges that between July 21, 1993 and December
22, 1993 (the "Class Period"), in various press releases issued by the Company
and in the Company's Quarterly Report on Form 10-Q for the fiscal period ended
October 2, 1993, the defendants violated Section 10(b) of the Exchange Act, 15
U.S.C. 78j(b), and Rule 10b-5 promulgated thereunder by knowingly and/or
recklessly misrepresented to the public that they expected the Company's 1993
fourth quarter and fiscal year sales and earnings results to continue to
increase at levels substantially above those of prior years at a time when they
supposedly knew but failed to disclose that the Company's fourth quarter 1993
sales of its Navy Standard Teleprinter and other products would decrease
precipitously. The Complaint further alleges that, as a result of defendants'
alleged failure to disclose these developments, TDA and other purchasers of
Common Stock were damaged because, it is alleged, at the time of purchase, the
price of Common Stock had been artificially inflated and the drop in the price
of the Common Stock by approximately 35% on December 22, 1993 was a result of
the alleged misrepresentations by the Company. Additionally, the Complaint
asserts an alleged violation of ss.20 of the Exchange Act by certain directors
and officers of the Company. Specifically, the Complaint alleges that at the
time that these adverse business developments allegedly became known to
defendants and prior to their dissemination to the public, defendants Carlson,
Schneider and other
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<PAGE>
<PAGE>
directors of the Company, at various times throughout the Class Period,
allegedly sold shares of Common Stock owned by them personally at price levels
which TDA claims were higher than the true value of these shares.
As relief, TDA essentially seeks damages in an amount to be proven at
trial, together with costs and expenses, including reasonable attorneys',
accountants' and experts' fees. TDA's Complaint also requests that the Court
declare its action against the Company and the individual defendants to be a
proper class action and certify it as class representative and plaintiff's
counsel as counsel for the class. On March 24, 1995, the Court granted TDA's
motion for class certification. On June 27, 1996, the Court denied the Company's
motion for summary judgment. The Court has set a trial date of September 4,
1996.
The Company believes that it has meritorious defenses to the allegations
and claims set forth in the Complaint and that a finding of ultimate liability
against it, if any, would not have a materially adverse effect on its financial
position. The Company has advised its directors' and officers' liability
insurance carrier of the claims asserted against it and defendants Carlson and
Schneider. The Company's insurance carrier has previously notified the Company
that it reserves the right to deny coverage under the insurance policy in
connection with the TDA litigation (i) for claims not covered, such as claims
that do not involve negligent acts, errors or omissions, (ii) for damages that
may be uninsurable under the policy or applicable law, and (iii) for various
exclusions contained in the insurance policy, including dishonest, fraudulent,
willful or criminal acts or omissions.
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<PAGE>
<PAGE>
MANAGEMENT
Directors and Executive Officers
The names and ages of the directors and executive officers of the Company,
and their positions with the Company, are as follows:
Name Age Position
- ---- --- --------
Robert A. Carlson 62 Class I Director, Chairman and Chief Executive
Officer
Richard A. Schneider 43 Class II Director, Executive Vice President,
Treasurer, Chief Financial Officer and
Secretary
Stephen A. Barre 56 Class II Director
Edward L. Hennessy, Jr. 68 Class II Director
Charles S. Holmes 51 Class I Director
C. Shelton James 55 Class I Director
Dennis McCarthy 49 Class II Director
The principal occupations for the past five years (and, in some instances,
for prior years) of each of the directors, executive officers and key employees
of the Company are as follows:
Robert A. Carlson is a Director and the Chairman and Chief Executive
Officer of the Company. Mr. Carlson has been an officer of the Company since
1987. Until October 1995, he served as President and Chief Executive Officer
while, until December 1989, he served as President and Chief Operating Officer
of the Company. Prior to joining the Company, Mr. Carlson served as President
and Chief Executive Officer of Millicom Inc., a cellular telephone company, from
1984 through 1985 as well as a director of Racal/Millicom, a United Kingdom
company. From 1977 through 1983, Mr. Carlson served as a Division President of
Simmonds Precision Products, Inc., a military electronic company.
Richard A. Schneider is a Director and the Executive Vice President,
Treasurer, Chief Financial Officer and Secretary of the Company. He was elected
a Director of the Company on February 11, 1993. From October 1988 until December
1992, he served as Vice President - Finance and Treasurer of the Company. He was
elected Secretary of the Company in January 1990. Prior to joining the Company,
from November 1981 to 1988, Mr. Schneider was employed by EDO Corporation, an
electronics company which designs and manufactures advanced electronic and
specialized equipment for military, marine and aviation markets, in a number of
positions, the most recent of which was Controller. Mr. Schneider is a certified
public accountant.
Stephen A. Barre, a Director of the Company since 1989, has been for more
than the past five years the Chairman and Chief Executive Officer of Servo
Corporation of America, a communications and defect detection company.
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<PAGE>
<PAGE>
Edward L. Hennessy, Jr., a Director of the Company since March 6, 1996, Mr.
Hennessy is the retired Chairman and Chief Executive Officer of Allied Signal,
Inc. He is also a director of The Bank of New York, Lockheed Martin Corp.,
National Association of Manufacturers, and Fundamental Management Corporation.
Charles S. Holmes, a Director of the Company since October 3, 1995, is the
President and sole stockholder of Asset Management Associates of New York, Inc.
("Asset Management"), a New York-based firm specializing in acquisitions of
manufacturing businesses. Mr. Holmes founded and was a partner in Asset
Management Associates, a predecessor partnership of Asset Management, from 1978
to 1991. He has served since its formation in 1992 as the Chairman of the Board
of Directors of Chart Industries Inc. which specializes in the design,
manufacture and sale of industrial process equipment used in the hydrocarbon and
industrial gas industries for low-temperature and cryogenic applications, and
manufactures other industrial equipment such as stainless steel tubing,
structural pipe supports and high vacuum systems.
C. Shelton James, a Director of the Company since 1989, has been for more
than the past five years the Chairman of the Board and Chief Executive Officer
of Elcotel Inc., a public communications company. He also is President and a
director of Fundamental Management Corporation, an investment management
company, and is on the Board of Directors of Harris Computer Systems Inc., a
company engaged in the manufacture of electronic computers, SK Technologies, a
company engaged in development and marketing of point of sale and data
communication software and market computer hardware, and CPSI Inc., a company
engaged in high performance computing.
Dennis McCarthy was elected a Director of the Company on March 6, 1996. He
has been employed by Asset Management Associates of New York, Inc., a New
York-based firm specializing in acquisitions of manufacturing businesses, since
1988.
Directors are elected by the shareholders at annual meetings for two year
terms and serve until the next annual meeting of shareholders for the year in
which their term expires or until their successors are duly elected and
qualified. Officers are elected to serve, subject to the discretion of the
Board of Directors, until their successors are elected.
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<PAGE>
<PAGE>
Executive Compensation
The following table sets forth all plan and non-plan compensation awarded
to, earned by or paid to the Company's Chief Executive Officer and each of the
executive officers of the Company other than the Chief Executive Officer whose
total annual salary and bonus exceeded $100,000 for each of the Company's last
three fiscal years (collectively, the "Named Executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
----------------------------------
Annual Compensation Awards Payouts
--------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other
Annual Restricted Securities
Compen- Stock Underlying LTIP All Other
Name and Principal Fiscal sation Award(s) Options/ Payouts Compensation
Position Year Salary(5) Bonus ($) ($)(1) ($) SARs (#) ($) ($)
- ------------------- ------ ---------- --------- ------- ----- ---------- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert A. Carlson - 1995 $263,000 -- -- -- 250,000(5) -- $59,071(2)
President and Chief 1994 275,000 -- -- -- 138,983(4) -- 66,324(2)
Executive Officer 1993 260,000 $ 68,790 -- -- 64,347 -- 69,652(2)
Richard A. Schneider 1995 152,000 8,500 -- -- 125,000(5) -- 7,630(3)
Executive Vice 1994 149,000 -- -- -- 94,389(4) -- 12,426(3)
President, Treasurer 1993 138,000 27,380 -- -- 23,442 -- 13,993(3)
and Secretary
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) The aggregate amount of all perquisites and other personal benefits paid to
any Named Executive is not greater than either $50,000 or 10% of the total
of the annual salary and bonus reported for such Named Executive.
(2) Includes $59,122, $59,022 and $59,071 of life insurance premiums paid on
term life and split dollar policies by the Company on behalf of Mr. Carlson
in each of the years 1993, 1994 and 1995, respectively, as well as $7,909,
$7,302 and $0 of matching contributions made by the Company under the
401(k) deferred compensation plan and $2,621, $0 and $0 of matching
contributions made by the Company under the profit sharing portion of such
plan for the benefit of Mr. Carlson for each of the years 1993, 1994 and
1995, respectively.
(3) Includes $7,637, $7,603 and $7,630 of life insurance premiums paid on term
life and split dollar policies by the Company on behalf of Mr. Schneider in
each of the years 1993, 1994 and 1995, respectively, as well as $4,166,
$4,823 and $0 of matching contributions made by the Company under the
401(k) deferred compensation plan and $2,190, $0 and $0 of matching
contributions made by the Company under the profit sharing portion of such
plan for the benefit of Mr. Schneider for each of the years 1993, 1994 and
1995, respectively.
(4) Options to acquire shares of the Company's Common Stock that were granted
in fiscal year 1994. At the same time, options for Mr. Carlson (102,951
shares) and Mr. Schneider (54,996 shares) were canceled.
(5) Options to acquire shares of the Company's Common Stock that were granted
in fiscal year 1995. At the same time, options for Mr. Carlson (214,485
shares) and Mr. Schneider (95,327 shares) were canceled.
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<PAGE>
<PAGE>
Stock Options
The table below summarizes the options granted to the Named Executives in
1995 and their potential realizable values.
Option/SAR Grants in 1995
-------------------------
<TABLE>
<CAPTION>
Potential Realizable Value of
Assumed Annual
Rates of Stock Price
Appreciation
Individual Grants for Option Term (1)
- -----------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Base
Name Granted (#) Fiscal Year Price ($/Sh) Expiration Date 5% ($) 10% ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert A. Carlson 250,000(2) 49% $2.50 5 years $ - $176,631
President and
Chief Executive Officer
Richard A. Schneider 125,000(3) 24% $2.50 5 years $ - $ 88,316
Executive Vice President,
Treasurer and Secretary
</TABLE>
- ------------------------
(1) Option price at date of grant compounded annually at 5% and 10% over the
ten year term minus the exercise price times the number of shares subject
to the option.
(2) Such options were granted on October 16, 1995 in connection with an
employment agreement entered into between Mr. Carlson and the Company to
replace 214,485 previously issued options which were canceled. The closing
price for a share of Common Stock on the grant date was $1.81.
(3) Such options were granted on October 16, 1995 in connection with an
employment agreement entered into between Mr. Schneider and the Company to
replace 95,327 previously issued options which were canceled. The closing
price for a share of Common Stock on the grant date was $1.81.
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<PAGE>
<PAGE>
The table below summarizes the exercise of stock options during 1995 for
the Named Executives.
Aggregated Option/SAR Exercises in 1995 and FY-End Option/SAR Values
--------------------------------------------------------------------
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End (#) at FY-End ($)
Shares
Acquired on Value Exercisable/ Exercisable/
Name Exercise Realized ($) Unexercisable Unexercisable (1)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert A. Carlson -0- $ 0 0/250,000 $0/0
President and Chief
Executive Officer
Richard A. Schneider -0- $ 0 0/125,000 $ 0/0
Executive Vice President,
Treasurer and Secretary
</TABLE>
- ------------------------
(1) Market price at December 31, 1995 minus exercise price times the number of
shares underlying the unexercised options.
Supplemental Retirement Plan
The Corporation has a non-qualified Supplemental Retirement Plan pursuant
to which the Corporation may pay from general revenues to two currently eligible
employees the difference between (i) 2.5% (5.0% for the President/CEO) of the
average of the employees' highest consecutive five year earnings per year of
service to a maximum of 50% and (ii) those benefits payable under the Company's
terminated Pension Plan, Social Security and from any other prior employers'
defined benefit pension plan. It is estimated that Messrs. Carlson and
Schneider, who have 11 and 7 years of credited service, respectively, will
receive each year at normal retirement age the following annual amounts under
the non-qualified Supplemental Retirement Plan: $131,296 and $65,103,
respectively.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 1995, the members of the
Compensation Committee were John M. May (Chairman), Walter Lipkin and Robert D.
Rosenthal. During fiscal year 1995 and formerly, none of such persons was an
officer of the Company or any of its subsidiaries or had any relationship with
the Company other than serving as a director of the Company, except that Mr.
Lipkin served as a Vice President or Senior Vice President and Treasurer of the
Company from 1954 through 1989. In addition, during the fiscal year ended
December 31, 1995, no executive officer of the Company served as a director or
member of the compensation committee of another entity, one of whose executive
officers served as a director or on the Compensation Committee of the Company.
Mr. Lipkin resigned as a director of the Company on October 3, 1995 and
Messrs. May and Rosenthal resigned as directors on February 15, 1996. On March
6, 1996, Messrs. Barre, Hennessy and Holmes were appointed as members of the
Compensation Committee.
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<PAGE>
<PAGE>
Employment and Change in Control Agreements
The Company entered into an Employment Agreement (the "Carlson Employment
Agreement") with Robert A. Carlson on October 16, 1995. Pursuant to the Carlson
Employment Agreement, the term of Mr. Carlson's employment commenced on October
16, 1995 and will continue until November 30, 1997. Mr. Carlson will be paid
salary at a rate of $214,500 per annum which represents a 25% reduction in
salary from the prior year's level. In addition to such salary and assuming the
Company attains certain annual targets, the Company will pay to Mr. Carlson an
annual bonus equal to 100% of his salary. In addition, Mr. Carlson will be
eligible to participate in all employee benefit programs, will be entitled to
four weeks vacation, will continue to participate in the Company's retirement
program, will be provided with use of a Company car, and has been granted
options to purchase 250,000 shares of Common Stock at a per share exercise price
of $2.50 (such options to replace 225,000 previously issued options which were
canceled). In addition, if the Company decides to terminate Mr. Carlson's
employment without cause, the Company will provide Mr. Carlson with 20 days
written notice, and provide him with a severance payment of a pro rata share of
unused vacation for the full year plus a pro rata share of unused vacation for
the full year plus a pro rata share of his bonus under the Company Bonus Plan,
if the Board in its sole discretion so determines. In addition, the Company will
pay Mr. Carlson either his salary for the remainder of the term under the
agreement or one year's salary, whichever is greater. If the Company decides to
terminate Mr. Carlson's employment for cause, the Company will provide 20 days
written notice, and reason for the termination. Mr. Carlson will have those 20
days to effect a cure to the Company's satisfaction, and, if so cured, such
reason will no longer constitute cause for removal.
The Company entered into an Employment Agreement (the "Schneider Employment
Agreement") with Richard A. Schneider on October 16, 1995. Pursuant to the
Schneider Employment Agreement, the term of Mr. Schneider's employment commenced
on October 16, 1995 and will continue until October 16, 1997. Mr. Schneider will
be paid salary at a rate of $135,000 per annum which represents a 25% reduction
in salary from the prior year's level. In addition to such salary and assuming
the Company attains certain annual targets, the Company will pay to Mr.
Schneider an annual bonus equal to 87% of his salary. In addition, Mr. Schneider
will be eligible to participate in all employee benefit programs, will be
entitled to three weeks vacation, will be provided with use of a Company car,
and has been granted options to purchase 125,000 shares of Common Stock at a per
share exercise price of $2.50 (such options to replace 100,000 previously issued
options which were canceled). In addition, if the Company decides to terminate
Mr. Schneider's employment without cause, the Company will provide Mr. Schneider
with 20 days written notice, and provide him with a severance payment of a pro
rata share of unused vacation for the full year plus a pro rata share of his
bonus under the Company Bonus Plan, if the Board in its sole discretion so
determines. In addition, the Company will pay Mr. Schneider either his salary
for the remainder of the term under the agreement or one year's salary,
whichever is greater. If the Company decides to terminate Mr. Schneider's
employment for cause, the Company has agreed to provide 20 days written notice,
and reason for the termination. Mr. Schneider will have those 20 days to effect
a cure to the Company's satisfaction, and, if so cured, such reason will no
longer constitute cause for removal. In addition and pursuant to the Schneider
Employment Agreement, the Company will loan to Mr. Schneider the equivalent of
the difference between his net salary and the net salary he was receiving
immediately prior to the execution of the Schneider Employment Agreement
($550.00 per week). This loan will be repayable out of any bonus paid to Mr.
Schneider on account of work performed during the prior year; provided, however,
that upon a resignation for Good Reason (as defined) or termination without
cause, the full amount outstanding under such loans will be discharged in full.
The Company entered into an amendment of the Schneider Employment Agreement
("Amendment No. 1") with Mr. Schneider on August 8, 1996. Pursuant to Amendment
No. 1, Mr.
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<PAGE>
<PAGE>
Schneider will no longer be eligible to participate in or receive any benefits
under the Company's Supplemental Retirement Plan (the "SERP"). Mr. Schneider's
interest in the SERP was redeemed by the Company for $150,000 which represents
approximately 60% of the actuarial value of his accrued benefit under the SERP
as of February 29, 1996.
Director Compensation
During 1995, each director who was not also an officer of the Company was
paid an annual retainer of $9,000 plus a uniform fee of $1,000 for each Board
and committee meeting attended in person. During 1995, directors who were also
officers of the Company received no remuneration for attendance at Board and
committee meetings.
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<PAGE>
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information concerning persons or groups who
are known by the Company to be the beneficial owners of more than 5% of the
Common Stock as of June 29, 1996. The information in the table below is based
upon information furnished to the Company by such persons and statements filed
with the Commission.
Number of Shares of
Common Stock Percent of
Name and Address of Beneficial Owner Beneficially Owned (1) Common Stock
- ------------------------------------ ------------------- ------------
Charles S. Holmes
P.O. Box 2850
Southampton, NY 11969 (2) 3,000,000 28.68%
Pioneering Management Corporation
60 State Street
Boston, MA 02114 (3) 696,500 7.61%
Fundamental Management Corporation
4000 Hollywood Boulevard
Suite 610N
Hollywood, FL 33021 (4) 1,075,636 11.28%
- ------------------------
(1) To the knowledge of the Company, beneficial owners named in the above table
have sole voting power with respect to the shares listed opposite their
names.
(2) Mr. Holmes is a director of the Company. These shares are comprised of
1,700,000 shares underlying certain Warrants exercisable at $2.50 per share
and 300,000 shares underlying the Additional Warrants exercisable at $3.00
per share. The ownership percentage is calculated as if such Warrants and
Additional Warrants had been converted as of June 29, 1996.
(3) These shares are reportedly owned by a passive investor. Pioneering
Management Corporation is the investment company advisor of such investor
and is registered under Section 203 of the Investment Advisers Act of 1940.
(4) These shares are reportedly owned by various limited partnerships, of which
Fundamental Management Corporation is the general partner. C. Shelton
James, a director of the Company, is the President and a director of
Fundamental Management Corporation. Includes 225,000 shares underlying
certain Warrants exercisable at $2.50 per share and 450,000 shares
underlying $900,000 of Notes convertible into shares at $2.00 per share.
Excludes 14,793 shares of Common Stock owned by Mr. James as to which
shares Fundamental Management Corporation disclaims beneficial ownership.
The ownership percentage is calculated as if such Warrants and Notes had
been converted as of June 29, 1996.
Shares of Common Stock beneficially owned as of June 29, 1996 by each
director and executive officer of the Company and by all directors and executive
officers of the Company as a group are set forth in the following table. This
table is based upon information furnished to the Company by such persons and
statements filed with the Commission.
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<PAGE>
<PAGE>
Beneficial Ownership of Shares (1)
Number of Shares of
Common Stock Percent of
Name Beneficially Owned (2) Common Stock (3)
- ---- ------------------- ------------
Robert A. Carlson 100,467 1.19%
Stephen A. Barre 17,654 --
Edward L. Hennessy, Jr. -0- --
Charles S. Holmes (4) 1,000,000 11.82
C. Shelton James (5) 14,793 --
Dennis McCarthy -0- --
Richard A. Schneider 16,812 --
All directors and officers as a group
(7 persons) 149,721 13.59%
- ------------------------
- -- = Less than 1%
(1) Directors and executive officers have sole voting power and sole investment
power with respect to the shares listed opposite their names.
(2) Excludes options exercisable within 60 days of March 31, 1996 for such
persons as follows: Mr. Carlson, -0-; Mr. Barre, 3,120; Mr. Hennessy, -0-;
Mr. Holmes, -0-; Mr. James, 7,401; Mr. McCarthy, -0-; Mr. Schneider, -0-;
and all directors and officers as a group, 16,751.
(3) The percentages of Common Stock outstanding are based on 8,459,437 shares
outstanding on June 29, 1996.
(4) Excludes Warrants to purchase 1,700,000 shares of Common Stock and
Additional Warrants to purchase 300,000 shares of Common Stock owned by Mr.
Holmes.
(5) Excludes 385,636 shares of Common Stock, Warrants to purchase 225,000
shares of Common Stock and Notes convertible into 450,000 shares of Common
Stock owned by various limited partnerships of which Fundamental Management
Corporation, an investment company of which Mr. James is President and a
director, as to which shares Mr. James shares voting and dispositive power.
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<PAGE>
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On October 13, 1995, Charles S. Holmes loaned the Company $1,000,000 at 12%
interest, and received a fee of 3% of such principal amount (the "Holmes
Transaction"), and in December 1995, Mr. Holmes loaned the Company an additional
$1,000,000 on the same terms, both of which loans were integrated with the
Company's private placement (the "Holmes Transaction") of 12% Convertible
Subordinated Notes due January 15, 2001 (the "Notes") and Warrants to purchase
Common Stock (the "Warrants") and Mr. Holmes received 2,000 Units consisting of
$2,000,000 aggregate principal amount of Notes and Warrants to purchase 500,000
shares of Common Stock in exchange therefor. In connection with the Holmes
Transaction, Mr. Holmes became a director of the Company in October 1995. In
connection with the Holmes Transaction, the Company issued Warrants to purchase
an aggregate of 1,200,000 additional shares of Common Stock at $2.50 per share
to Mr. Holmes for advisory services in connection with the private placement and
the engagement of Commonwealth Associates as the Company's placement agent.
In December 1995 and January 1996, Active Investors II, Ltd. loaned the
Company $500,000 and $400,000, respectively, at 12% interest (the "James
Transaction"), both of which loans were integrated with the James Transaction
and Active Investors received 900 Units consisting of $900,000 aggregate
principal amount of Notes and Warrants to purchase 225,000 shares of Common
Stock in exchange therefor. On May 2, 1996, Active Investors purchased an
additional 100 Units from the Company consisting of $100,000 aggregate principal
amount of Notes and Warrants to purchase 25,000 shares of Common Stock. C.
Shelton James, a director of the Company, is the President and a director of
Active Investors. Active Investors and certain affiliated limited partnerships
currently own shares of Common Stock of the Company.
In connection with the Private Placement, the Company agreed to use its
best efforts to cause the resignation of two then-current members of the Board
of Directors and cause to be elected as directors two individuals acceptable to
the Company and who are designated by the investors (including one designated
solely by Mr. Holmes) and one designated solely by Active Investors. Dennis
McCarthy was designated to serve in such capacity by Mr. Holmes, while Edward L.
Hennessy, Jr. was designated to serve in such capacity by Active Investors, and
each became a director of the Company on March 6, 1996.
On May 9, 1996, the Company entered into an agreement with Charles S.
Holmes, a member of the Company's Board of Directors, that in consideration of
his converting the 12% Convertible Subordinated Promissory Note due 2001 of the
Company in the aggregate unpaid principal amount of $2,000,000 held by him into
1,000,000 shares of Common Stock as provided in Section 6 of the Note, the
Company would immediately grant him warrants to purchase 300,000 shares of
Common Stock at any time and from time to time on or before February 15, 2002 at
an exercise price of $3.00 per share, subject to adjustment in certain events.
Such warrants are referred to herein as the Additional Warrants and such shares
are referred to as the Holmes Shares and are being registered herewith.
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<PAGE>
<PAGE>
DESCRIPTION OF SECURITIES
The Notes
The Notes mature on January 15, 2001 and bear interest from the date of
issuance at the rate per annum of 12%. Interest on the Notes is payable
quarterly in arrears on January 15, April 15, July 15 and October 15 of each
year commencing April 15, 1996. In the event of a Chapter 11 or Chapter 7
bankruptcy case in which the Company is the debtor, the Notes will bear interest
from the date of commencement of the case at a default rate per annum equal to
the lesser of 18% or the highest such rate allowable by law. The Notes are
subject to prepayment, in whole and not in part, at the option of the Company,
at any time after the third anniversary of the date of issuance, without premium
or penalty. Upon the occurrence of a "change in control" of the Company, each
holder of the Notes will have the right to require that the Company repurchase
such holder's Notes in whole and not in part, without premium or penalty, at a
purchase price in cash in an amount equal to 100% of the principal amount
thereof, together with accrued and unpaid interest, if any, to the date of
purchase, pursuant to an offer made in accordance with the procedures described
in the Notes. The Notes may not be amended in any material respect without the
consent of the holders of at least 50% in aggregate principal amount of
outstanding Notes. The Notes are governed by an Indenture dated as of July 15,
1996 between the Company and First Trust National Association, as trustee.
Subordination. The indebtedness evidenced by the Notes, including any
interest thereon, is subordinate and subject in right of payment to the prior
payment when due in full of all Senior Indebtedness. Senior Indebtedness is
defined in the Note to include, unless the terms respecting the particular
indebtedness or obligation otherwise provide, the principal of, premium, if any,
and any interest on, all liabilities of the Company, direct or contingent,
joint, several or independent, now or hereafter existing, due or to become due,
whether created directly or acquired by assignment or otherwise, under or in
respect of the Credit Agreement and all extensions, renewals and refunding of
any of the foregoing up to the original amount. At March 30, 1996, the amount of
Senior Indebtedness outstanding was $15,175,000 which was outstanding pursuant
to the Credit Agreement which provides for quarterly principal payments of
$500,000 on March 31, 1996, June 30, 1996, September 30, 1996 and December 31,
1996, and $750,000 on the last day of each quarter thereafter, commencing March
31, 1997 and ending on December 31, 1998, together with accrued and unpaid
interest through the applicable payment date at the prime rate plus 1 3/4% per
annum. The remaining outstanding principal amount of $7,975,000 is due and
payable on January 15, 1999. Upon the acceleration of any Senior Indebtedness or
upon the maturity of the entire principal amount of any Senior Indebtedness by
lapse of time, acceleration or otherwise, all such Senior Indebtedness which has
been so accelerated or matured shall first indefeasibly be paid in full before
any payment is made by the Company or any person acting on behalf of the Company
on account of any obligations evidenced by the Notes. There is no sinking fund
for the Notes.
The Notes will be senior to any indebtedness of the Company's subsidiaries.
At March 30, 1996, there was no such indebtedness.
Conversion Rights. The Notes may be converted by the holders as to their
principal amount into Common Stock of the Company at any time at a conversion
price equal to $2.00 per share, subject to adjustment. The conversion price of
the Notes will be adjusted to $1.50 or $1.00, respectively, if the Company's
EBITDA falls below $6,000,000 or $4,750,000 in 1996. Should the Company sell the
stock or assets of a subsidiary in 1996, such amounts will be reduced by
$838,000 if the stock or assets of Wilcom are sold, $2,805,000 if the stock or
assets of Codar are sold, $607,000 if the stock or assets of Systems are sold,
and $1,833,000 if the stock or assets of Lynwood are sold,
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depending on the time of sale. The conversion price and the number of shares of
Common Stock to be received upon conversion are subject to adjustment upon the
occurrence of any of the following events: (i) the recapitalization of the
Company or reclassification of the securities to be received upon conversion or
any merger or consolidation of the Company into or with a corporation or other
business entity, or the sale or transfer of all or substantially all of the
Company's assets or any successor corporation's assets to any other corporation
or business entity, (ii) the subdivision or combination of the shares of Common
Stock to be received upon conversion, (iii) the payment of dividends or other
distributions in the form of the securities to be received upon conversion, and
(iv) the issuance of shares of Common Stock at less than the conversion price.
No adjustment of the conversion price is required to be made until cumulative
adjustments otherwise required to be made amount to 1% or more of the conversion
price last adjusted. The Company may force conversion of the Notes if, at any
time prior to maturity, the closing bid price for the Common Stock exceeds $6.00
per share for thirty (30) consecutive trading days prior to the giving of notice
of conversion. Fractional shares will not be issued upon conversion, but cash
adjustment will be paid in lieu thereof. Interest will accrue on the Notes
through the date of conversion. No payment or adjustment will be made for
dividends on securities issued upon conversion.
Restrictive Covenants. The Notes contain certain negative covenants
prohibiting, among other things, the negative pledge of the Company's assets not
otherwise encumbered by its senior lenders.
Events of Default. "Events of Default" under the Notes include failure to
pay principal when due or the failure to pay interest for a period of 10 days
after such payment becomes due, the failure to pay other indebtedness for
borrowed money in excess of $500,000 when due, or the acceleration of such
indebtedness, the failure to pay any judgment in excess of $500,000 when due or
stayed, and voluntary or involuntary bankruptcy of the Company. In the event
that the Company defaults in making any payment of principal required to be made
by the Notes, the Company shall pay interest on such defaulted amount at a rate
of 18%.
If an Event of Default occurs and is continuing, then and in every such
case the holders of the Notes may declare the Notes then outstanding to be
immediately due and payable by a notice in writing to the Company, whereupon the
same will be immediately due and payable. A payment default will result in an
increased issuance to Noteholders of warrants to purchase an amount of shares of
Common Stock and until the Notes are fully repaid, the right of the Noteholders
to elect a majority of the Company's Board of Directors. In the event of a
Chapter 11 or Chapter 7 bankruptcy case in which the Company is the debtor, the
Notes will bear interest from the date of commencement of the case at a default
rate per annum equal to the lesser of 18% or the highest such rate allowable by
law.
The Warrants
Each Warrant entitles the holder thereof to purchase specified numbers of
shares of Common Stock at an exercise price equal to $2.50 per share, subject to
adjustment. The Exercise Price of the Warrants will be adjusted to $2.00 or
$1.50, respectively, if the Company's EBITDA falls below $6,000,000 or
$4,750,000 in 1996. Should the Company sell the stock or assets of a subsidiary
in 1996, such amounts will be reduced by $838,000 if the stock or assets of
Wilcom are sold, $2,805,000 if the stock or assets of Codar are sold, $607,000
if the stock or assets of Systems are sold, and $1,833,000 if the stock or
assets of Lynwood are sold, depending on the time of sale. The Exercise Price
and the number of shares of Common Stock to be received upon exercise are
subject to adjustment upon the occurrence of any of the following events: (i)
the recapitalization of the Company or reclassification of the securities to be
received upon conversion or any merger or consolidation of
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the Company into or with a corporation or other business entity, or the sale or
transfer of all or substantially all of the Company's assets or any successor
corporation's assets to any other corporation or business entity, (ii) the
subdivision or combination of shares of Common Stock to be received upon
exercise, (iii) the payment of dividends or other distributions in the form of
the securities to be received upon exercise, and (iv) the issuance of shares of
Common Stock at less than the Exercise Price. No adjustment of the Exercise
Price is required to be made until cumulative adjustments otherwise required to
be made amount to 1% or more of the Exercise Price last adjusted. Warrants will
be exercisable, at any time and from time to time, on or before 5:30 p.m., local
time, on or before February 15, 2002 (the "Expiration Date") by delivery of an
Exercise Notice duly completed and tendering of the aggregate Exercise Price.
Each Warrant may be exercised in whole or in part so long as any exercise in
part would not involve the issuance of fractional shares of Common Stock.
Discussion of the Notes and Warrants in this Prospectus is qualified
entirely by reference to the forms of the Note and Warrant filed by the Company
with the Commission.
Common Stock
The Company is authorized to issue 25,000,000 shares of Common Stock, par
value $.10 per share. As of June 29, 1996, 8,459,437 shares of Common Stock were
outstanding.
Voting Rights. Holders of shares of Common Stock are entitled to one vote
for each share of Common Stock held. Under New York law, the affirmative vote of
the holders of a majority of the outstanding shares of Common Stock is required
to approve, among other matters, an amendment of the certificate of
incorporation if the rights or preferences of such holders would be subordinated
or otherwise adversely affected thereby.
Dividends. If all cumulative dividends shall have been paid as declared or
set apart for payment upon shares of Preferred Stock then outstanding, if any,
holders of shares of Common Stock are entitled to receive such dividends as may
be declared by the Company's Board of Directors out of funds legally available
for such purpose. The Credit Agreement prohibits the payment of cash dividends,
but permits stock splits and dividends payable solely in shares of any class of
its capital stock. See "Trading Information" below.
Liquidation Rights. Upon liquidation, dissolution or winding up of the
Company, the holders of the Common Stock are entitled to share ratably in all
assets available for distribution after payment in full of creditors and after
the preferential rights of holders of shares of Preferred Stock then
outstanding, if any, have been satisfied.
Other Provisions. The holders of Common Stock are not entitled to
preemptive or subscription rights. The affirmative vote of the holders of 80% of
all Common Stock of the Company shall be required for the adoption or
authorization of (i) a business combination (as defined in the Certificate of
Incorporation) with any other entity (as defined in the Certificate of
Incorporation) if, as of the record date for the determination of shareholders
entitled to notice thereof and to vote thereon, such other entity is the
beneficial owner, directly or indirectly, of more than 10% of the outstanding
shares of Common Stock, or (ii) a proposed dissolution of the Company or a
proposed amendment of the Certificate of Incorporation of the Company which
would either change the entitlement of the holders of shares of Common Stock of
the Corporation to vote in the election of directors or would authorize the
Company to issue either shares of capital stock (other than shares of its Common
Stock) or bonds, debentures or other obligations, which, if issued, would or
could be entitled to vote in the
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election of directors if, as of the record date for the determination of
shareholders entitled to notice of and to vote on such proposed dissolution or
such proposed amendment, any other entity (as defined in the Certificate of
Incorporation) is the beneficial owner, directly or indirectly, of more than 10%
of the outstanding shares of Common Stock; provided that such 80% voting
requirement shall not be applicable to the adoption or authorization of a
business combination if certain circumstances, detailed in the Certificate of
Incorporation, exist. This provision may have the effect of discouraging
attempts by a person or group to take control of the Company. See "RISK FACTORS
- -- Anti-takeover Restrictions."
All issued and outstanding shares of Common Stock are, and the Common Stock
reserved for issuance upon conversion of the Notes and exercise of the Warrants
will be, when issued, fully-paid and non-assessable.
Preferred Stock
The Company is authorized to issue 2,000,000 shares of preferred stock, no
par value (the "Preferred Stock"), none of which are currently outstanding. The
Board of Directors of the Corporation is authorized to establish and designate
series of Preferred Stock and to fix from time to time before issuance the
number, designation, relative rights, preferences and limitations (including,
without limitation, participating, voting, optional or other special rights), of
the shares of any series of Preferred Stock. Except to the extent, if any, that
holders of issued and outstanding shares of preferred Stock are entitled to
vote, the entire voting power for the election of directors and for all other
purposes shall be vested exclusively in the holders of the Common Stock.
Registration Rights
The Company has agreed to include the Notes, the Warrants and the shares of
Common Stock reserved for issuance upon conversion of the Notes and Exercise of
the Warrants (collectively, the "Registrable Securities") in any registration
statement filed with the Commission, at any time prior to December 31, 2005,
with respect to any future public offerings initiated by the Company or any
selling shareholders (the "Piggy-Back Rights") and holders of a majority in
interest of the Registerable Securities will have the right, which right may be
exercised no more than twice, to demand, at any time prior to January 15, 2006,
that the Company file a registration statement with the Commission with respect
to the Registrable Securities (the "Demand Rights"). The Company will bear all
fees and expenses incurred in the preparation and filing of any registration
statement relating to the exercise of Piggy-Back Rights and the first exercise
of Demand Rights.
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Trading Information
The Common Stock trades on The Nasdaq Stock Market under the symbol NATL.
The table below sets forth for the periods indicated the high and low sale
prices for the Common Stock as adjusted for stock dividends and stock splits as
compiled from published sources.
Period High Low
------ ---- ---
1996
First Quarter $ 2 3/8 $ 1 7/16
Second Quarter $ 3 7/8 $ 2
1995
First Quarter $ 3 $ 1 7/8
Second Quarter 3 1/2 2 1/8
Third Quarter 3 1/4 1 1/4
Fourth Quarter 2 3/8 1 1/8
1994
First Quarter 7 5 3/16
Second Quarter 5 7/8 3 5/8
Third Quarter 4 7/8 2 7/8
As of June 27, 1996, the approximate number of record holders of the Common
Stock as determined from the records of the transfer agent, American Stock
Transfer & Trust Company, was 665. Street names are included collectively as a
single holder of record. Management estimates that the Company has approximately
2,000 additional shareholders holding stock in street names.
The Notes will not be listed for trading following the filing of this
Prospectus.
There have been no cash dividends declared or paid on the Common Stock
during the past five years. The Credit Agreement prohibits the payment of cash
dividends. A 4% stock dividend on the Common Stock was paid to shareholders of
record on February 25, 1994.
Transfer Agent
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York. The Company acts
as its own transfer agent with respect to the Notes and Warrants.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary describes the material United States federal income
tax considerations applicable to the purchase, ownership and disposition of the
Notes and the Warrants, and of the Common Stock received upon conversion of the
Notes or exercise of the Warrants. This summary is limited solely to investors
who acquire securities pursuant to this Prospectus and who own the Notes and the
Warrants, and any Common Stock received on conversion of the Notes or exercise
of the Warrants, as capital assets within the meaning of Section 1221 of the
Internal Revenue Code of 1986, as amended (the "Code"). This summary is based
upon the provisions of the Code and the regulations, administrative rulings and
judicial decisions now in effect, all of which are subject to change (possibly
with retroactive effect) or different interpretations. There can be no assurance
that the Internal Revenue Service (the "Service") will take a similar view as to
any of the tax consequences described below. No ruling has been or will be
requested from the Service on any tax matters relating to the purchase or the
ownership or disposition of the Securities.
This summary does not purport to deal with all aspects of United States
federal income taxation that may be relevant to a particular holder or to
certain types of holders subject to special treatment under the federal income
tax laws (for example, S corporations, banks, dealers in securities, life
insurance companies, tax exempt organizations and foreign taxpayers) or to
investors who acquired their interest in the securities covered by this
Prospectus pursuant to the exercise of employee stock options or otherwise as
compensation. In addition, the following summary does not consider the potential
effect of any applicable foreign, state, local or other tax laws, or estate or
gift tax considerations. This discussion is not intended as tax advice to the
purchasers of the Securities.
The Service announced in 1994 that it is studying the federal income tax
treatment of debt instruments which can be repaid in stock of an issuer and
that, in appropriate circumstances, such debt instruments may be recharacterized
as equity for federal income tax purposes. The Company believes that the Notes
should be characterized as debt for federal income tax purposes, and the
following discussion assumes such treatment. However, because the Company can
require conversion of the Notes in certain circumstances, there can be no
assurance that the Service will not challenge this position.
Investors are advised to consult their own tax advisors with respect to the
consequences to them of the purchase, ownership and disposition of the
securities offered hereby.
Allocation of Issue Price of Units Among the Notes and the Warrants; Initial
Adjusted Basis
As stated above, the Notes and the Warrants were issued together as
"investment units" in the Private Placement. Under applicable Treasury
Regulations, the original issue price for such an investment unit must be
allocated between the Notes and the Warrants based upon their relative fair
market values. Thus, the original issue price of each Note is equal the issue
price of an overall Unit less the amount allocable to the Warrant.
The Company has allocated $875 of the issue price of each Unit to each
$1,000 principal amount of the Notes and $125 of such amount to each Warrant to
purchase 250 shares of Common Stock (at $.50 each). The Company's allocation
reflects its judgment as to the relative fair market values of those instruments
at the time of issuance, but is not binding on the Service.
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The Company's allocation of the issue price of the Units is binding on
holders of the instruments, unless a holder discloses the use of a different
allocation on its federal income tax return for the year that includes the
acquisition date of the Note and/or Warrant. Holders considering the use of an
issue price allocation different from that used by the Company should consult
their tax advisors as to the consequences thereof.
Each Note is legended to indicate the issue date of such Note and the
portion of the issue price of the Unit which, in the Company's opinion, is
properly allocable to the Note.
An investor who acquires a Note or a Warrant from a Selling Securityholder
will receive an initial tax basis in such security equal to his cost therefor.
Taxation of Interest
Each holder of a Note will be required to report, as ordinary income,
stated interest on the Note in accordance with such holder's tax accounting
method. For example, accrual method holders will report the interest on the
Notes as it accrues, and cash method holders will report such interest when it
is received or unconditionally made available for receipt.
Original Issue Discount on the Notes
For federal income tax purposes, when a debt instrument is issued at a
discount, the amount of such discount ("original issue discount" or "OID") is
treated as interest income, and the holder of such instrument must include such
OID in his income for the period during which the OID accrues even though no
cash attributable to such OID income will be received until maturity, redemption
or other disposition of the debt instrument.
The amount of OID, if any, on a debt instrument is the difference between
its "issue price" and its "stated redemption price at maturity" (subject,
generally, to a statutory de minimis exception). The portion of any such OID
that is to be accrued (and included in income) with respect to a debt instrument
with a maturity of more than one year generally will be determined for each
accrual period during the term of such debt instrument under the constant yield
method, applied by multiplying the adjusted issue price of the debt instrument
at the beginning of the accrual period by its yield to maturity, and subtracting
from that product the amount of any interest payments made during that accrual
period that are based on a single fixed rate and are payable unconditionally in
cash or in property (other than debt instruments of the issuer) at intervals of
one year or less during the entire term of the debt instrument ("Qualified
Stated Interest"). The resulting amount is allocated ratably to each day in the
accrual period, and the amount includible in a holder's income (whether on the
cash or accrual method of accounting) with respect to the debt instrument is the
sum of the resulting daily portions of OID for each day of the taxable year on
which the holder held the debt instrument.
The adjusted issue price of a debt instrument at the beginning of any
accrual period is equal to its original issue price increased by all previously
accrued OID and reduced by the amount of all previous payments made on such debt
instrument other than payments of Qualified Stated Interest. Generally, the tax
basis of a debt instrument in the hands of the holder will be increased and
decreased, respectively, by the same amounts.
Because of the required allocation of a portion of the issue price for the
Units to the Warrants (see discussion above), the stated redemption price at
maturity for the Notes exceeded their issue price
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(after giving effect to such allocation). Accordingly, the Notes were issued
with OID equal to this excess. The Company believes the amount of OID per each
$1,000 principal amount of the Notes is $125.
A purchaser of Notes from a Selling Securityholder will generally be
required to include in his gross income in advance of the receipt of cash
representing that income the sum of the daily portions of OID on his Notes for
each day during each taxable year or portion thereof on which he holds such
Notes in the same manner as the Selling Securityholder. (These amounts are in
addition to the actual interest payments on the Notes.) An investor that
acquires Notes from a Selling Securityholder for an amount that exceeds their
adjusted issue price at the time of such acquisition will, however, be
considered to have purchased such Notes at an acquisition premium. The amount of
OID which any such investor is required to include in income with respect to
such Notes for any taxable year will be reduced by the portion of such
acquisition premium properly allocable to such year.
The Company will furnish annually to record holders of the Notes and to the
Service information with respect to the OID, if any, accruing during the
calendar year (as well as interest paid during that year). Because this
information will be based upon the adjusted issue price of the Notes, investors
who purchase the Notes from the Selling Securityholders for an amount in excess
of the adjusted issue price at the time of such acquisition will be required to
determine for themselves (based upon the rules described above) the amount of
OID, if any, they are required to report. Moreover, as stated above, the Service
may not agree with the original issue price allocated by the Company to the
Notes.
On December 15, 1994 the Service issued proposed regulations governing the
inclusion in income of OID for certain contingent payment debt instruments (the
"Proposed Regulations"). The Proposed Regulations are effective only for debt
instruments issued after such regulations become final, and accordingly do not
apply to the Notes. The Service could, however, assert that the inclusion of a
default rate of interest applicable upon the occurrence of a bankruptcy of the
Company, and the right of the Company to prepay the Notes prior to their
scheduled maturity, give rise to contingent payments within the meaning of the
Proposed Regulations. If the Service were successful in such an assertion, the
resulting OID analysis could differ from that set forth herein.
Market Discount
The income which an investor who acquires a Note from a Selling
Securityholder must recognize may also be affected by the market discount
provisions of the Code. Debt instruments such as the Notes which bear OID are
considered to have been purchased at a market discount if, subsequent to their
original issuance, they are purchased at a price below their adjusted issue
price.
Under the market discount rules, if such an investor purchases a Note at a
market discount in excess of a statutorily-defined de minimis amount and
thereafter recognizes gain upon a disposition or retirement of the Note, then
the lesser of the gain so recognized or the portion of the market discount that
accrued while the Note was held by such investor generally will be treated as
ordinary income at the time of the disposition. Moreover, any such market
discount on a Note may be taxable to such an investor at the time of certain
otherwise non-taxable transactions (e.g., gifts). In addition, a holder of a
market discount Note may be required to defer a portion of any interest expense
that otherwise may be deductible on any indebtedness incurred or maintained to
purchase or carry such Note until the holder disposes of the Note in a taxable
transaction.
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Neither the rule treating accrued market discount as ordinary income on
disposition nor the rule deferring interest deductions applies if the holder of
the market- discount Note elects to include the accrued market discount in
income currently. This election to include market discount in income currently,
once made, applies to all market discount obligations acquired during or after
the first taxable year to which the election applies and may not be revoked
without the consent of the Service.
Conversion of Notes into Common Stock
In general, no gain or loss will be recognized for federal income tax
purposes upon a conversion of the Notes into shares of Common Stock. However,
cash paid in lieu of a fractional share of Common Stock will result in taxable
gain (or loss), which will be capital gain (or loss), to the extent that the
amount of such cash exceeds (or is exceeded by) the portion of the adjusted
basis of the Note allocable to such fractional share. The adjusted basis of
shares of Common Stock received on conversion will equal the adjusted basis of
the Note converted, reduced by the portion of adjusted basis allocated to any
fractional share of Common Stock exchanged for cash. The holding period of an
investor in the Common Stock received on conversion will include the period
during which the converted Notes were held.
Exercise of Warrants
No gain or loss will be recognized upon the exercise of a Warrant (except
to the extent, if any, of cash received in lieu of fractional shares). The
holder's tax basis in the Common Stock acquired on such exercise will be the sum
of his tax basis in the Warrants exercised and the cash paid upon exercise. The
holding period for the Common Stock acquired on such exercise will begin on the
date of exercise of the Warrant and will not include the period during which the
Warrant was held.
Upon expiration of an unexercised Warrant, a holder will generally
recognize a loss equal to such holder's adjusted tax basis in the Warrant. If
the Common Stock issuable upon exercise of the Warrant would have been a capital
asset of the holder if acquired by the holder, such loss will be a capital loss.
Adjustment of Conversion Price
The conversion ratio of the Notes and the Warrants is subject to adjustment
under certain circumstances. Section 305 of the Code and the Treasury
Regulations issued thereunder may treat the holders of the Notes and of the
Warrants as having received a constructive distribution, resulting in ordinary
income (subject to a possible dividend-received deduction in the case of
corporate holders) to the extent of the Company's current and/or accumulated
earnings and profits, if, and to the extent that, certain adjustments in the
conversion ratio increase the proportionate interest of a holder of Notes or
Warrants in the fully diluted Common Stock, whether or not such holder ever
exercises its conversion privilege. Such a constructive distribution could
result from the adjustment of the conversion price for the Notes or the Warrants
attributable to the failure of the Company to meet certain specified adjusted
earnings levels for 1996. Adjustments to the conversion ratio of the Notes and
the Warrants also may occur in other limited circumstances. Moreover, if there
is not a full adjustment to the conversion ratio of the Notes or the Warrants to
reflect a stock dividend or other event increasing the proportionate interest of
the holders of outstanding Common Stock in the assets or earnings and profits of
the Company, then such increase in the proportionate interest of the holders of
the Common Stock could be treated as a distribution to such holders of Common
Stock, taxable as ordinary income (subject to a possible dividends-received
deduction in the case of corporate holders) to the extent of
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the Company's current and/or accumulated earnings and profits. The Company
intends that there be a full adjustment to the conversion ratio of the Notes and
the Warrants in any such event. Accordingly, the holders of Common Stock should
not be deemed to receive any such taxable dividend distribution under Section
305 of the Code.
Dividends on Common Stock
Distributions on the shares of Common Stock into which Notes have been
converted or which were received on the exercise of the Warrants will be taxable
as dividends (i.e., as ordinary income) to the extent of the Company's current
and/or accumulated earnings and profits. To the extent that the amount of any
such distribution exceeds the Company's current and accumulated earnings and
profits for a taxable year, the distribution will first be treated as a tax-free
return of capital, causing a reduction in the adjusted basis of the Common Stock
(thereby increasing the amount of gain, or decreasing the amount of loss, to be
recognized by the investor on a subsequent disposition of the Common Stock), and
the balance in excess of adjusted basis will be taxed as if it were capital gain
recognized on a sale or exchange of such stock.
Subject to certain holding period and taxable income requirements imposed
by the Code, a distribution to a corporate shareholder that is treated as a
dividend may qualify for the 70% (or, in certain cases, 80%) dividends-received
deduction available under the Code. However, to the extent that the corporate
shareholder incurs indebtedness that is directly attributable to an investment
in the stock on which the dividend is paid, all or a portion of the
dividends-received deduction may be disallowed. In addition, dividend income
that is not subject to the regular federal income tax as a consequence of the
dividends-received deduction may be subject to the federal alternative minimum
tax. Finally, the tax basis of stock held by a corporate shareholder may be
reduced (but not below zero) by the non-taxed portion of any "extraordinary
dividend" (as defined in Section 1059 of the Code) that is received with respect
to such stock. To the extent a corporate holder's tax basis would have been
reduced below zero but for the foregoing limitation, such holder must increase
the amount of gain recognized on the ultimate sale or exchange of such stock for
the taxable year in which such sale or exchange occurs.
Disposition of Notes and Common Stock
Subject to the discussion above under "Conversion of Notes into Common
Stock," each holder of Notes generally will recognize gain or loss upon the
sale, exchange, redemption, retirement or other disposition of the Notes
measured by the difference (if any) between (i) the amount of cash and the fair
market value of any property received (except to the extent that such cash or
other property is attributable to the payment of accrued interest not previously
included in income, which amount will be taxable as ordinary income) and (ii)
the holder's adjusted tax basis in the Notes. Subject to certain special rules
under Section 302 of the Code in the case of redemptions (whereunder the total
proceeds received by a seller of Common Stock may be treated as a dividend) and
to the discussion of Section 1059 of the Code under "Dividends on Common Stock,"
above, in cases of significant "extraordinary dividends," each holder of Common
Stock received upon a conversion of the Notes or an exercise of the Warrants, in
general, will recognize gain or loss upon the sale, exchange, redemption or
other disposition of the Common Stock in an amount determined similarly to the
calculation described in the preceding sentence for the Notes. Any gain or loss
recognized on the sale, exchange, redemption, retirement or other disposition of
a Note or Common Stock held as a capital asset will be capital gain or loss
(except as discussed under "Market Discount" above). Such capital gain or loss
will be long-
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term capital gain or loss if the Note or the Common Stock has been held for more
than one year at the time of the sale or exchange, and otherwise will be a
short-term capital gain or loss.
Effect on Holders of Sale of Warrants
The sale of a Warrant other than to the Company will result in the
recognition of capital gain or loss to the holder if the Warrant is held as a
capital asset and the Common Stock issuable upon exercise would have been a
capital asset if acquired. The gain or loss will be measured by the difference
between the amount realized and the holder's basis in the Warrant, and will be
long-term or short-term capital gain or loss depending on whether the Warrant
has been held for more than one year. If the Warrants are sold to the Company,
the Service may contend that the repurchase of Warrants by the Company is a
relinquishment of the holder's contractual rights and not a sale or exchange of
property. If the Service were to prevail on this argument, gain or loss on the
repurchase of Warrants would be ordinary income or loss even if the Warrants
were held as capital assets.
Back-Up Withholding
A holder of Common Stock or Notes may be subject to "back-up withholding"
at a rate of 31% with respect to certain "reportable payments," which generally
include interest and dividend payments. These back-up withholding rules apply if
such holder, among other things, (i) fails to furnish a social security number
or other taxpayer identification number ("TIN") certified under penalties of
perjury within a reasonable time after the request therefor, (ii) furnishes an
incorrect TIN, (iii) fails to report properly interest or dividends, or (iv)
under certain circumstances, fails to provide a certified statement, signed
under penalties of perjury, that the TIN furnished is the correct number and
that such holder is not subject to back-up withholding. Any amount withheld from
a payment to an investor under the back-up withholding rules is creditable
against such investor's federal income tax liability, provided the required
information is furnished to the Service. Back-up withholding will not apply,
however, with respect to payments made to certain holders of Common Stock and
Notes, including corporations, tax-exempt organizations and certain foreign
persons, provided their exemption from back-up withholding is properly
established.
The Company will report to the holders of Common Stock and Notes and to the
Service the amount of any "reportable payments" for each calendar year and the
amount of tax withheld, if any, with respect to payments on such securities.
Consequences to the Company
The Company is generally required to deduct the OID, if any, on the Notes
as it is included in income by the holder, except that the deductions taken by
the Company will be determined without regard to any reduction in the amount of
OID included in the income of any investor who acquires Notes at an acquisition
premium (discussed above). The Company should not recognize income if it redeems
or acquires the Notes from holders for a price equal to the principal amount of
the Notes less unamortized OID or upon conversion of the Notes. If the Company
acquires, or is considered to have acquired, Notes for a lesser price, the
Company may be required to recognize income or may be entitled to elect to
postpone recognizing such income by reducing its tax basis in other assets.
Alternatively, if the Company acquires the Notes for a greater price, the
Company may be entitled to a deduction equal to such excess.
-54-
<PAGE>
<PAGE>
The Company should not recognize any gain or loss on the conversion by
Charles S. Holmes of his Notes as described above under "Certain Relationships
and Related Transactions" or on the issuance by the Company of the Additional
Warrants in connection with such conversion.
Section 382
As of December 31, 1995, the Company had net operating losses ("NOLs")
available for carryforward for federal income tax purposes equal to
approximately $10 million.
Under Section 382 of the Code, a corporation's ability to utilize NOLs (as
well as certain unrealized "built-in losses") to offset its income following an
"ownership change" (as described below) is generally limited on an annual basis
to an amount of income equal to the product of the fair market value of such
corporation's outstanding stock immediately before the ownership change and the
"long-term tax-exempt rate."
An ownership change occurs under Section 382 if the percentage of stock of
the loss corporation owned actually or constructively by one or more 5-percent
shareholders increases by more than 50 percentage points relative to the lowest
percentage of stock of the loss corporation owned by those 5-percent
shareholders at any time during a statutory "testing period" (generally the
three-year period ending on the testing date). A "5-percent shareholder" is one
who owns at least 5 percent of the stock of the loss corporation (not including
certain nonvoting, nonparticipating preferred stock), and all stock owned by
shareholders who are not 5-percent shareholders (hereinafter referred to as
public shareholders) is generally treated as being owned by one 5-percent
shareholder. In addition, under Section 382 and the regulations promulgated
thereunder, public shareholders of a loss corporation may be segregated into two
or more separate groups, each of which is treated as a separate 5-percent
shareholder. Public shareholders who receive stock from a loss corporation as a
result of certain types of transactions will be segregated and treated
separately from the public shareholders who owned stock of the loss corporation
prior to the transaction.
Certain provisions under the Treasury Regulations treat options to acquire
stock of a loss corporation such as the Company as currently exercised for
purposes of determining whether an ownership change subject to Section 382 has
occurred. Among other requirements, such provisions require generally that a
principal purpose of the issuance, transfer or structuring of the option is to
avoid or ameliorate the impact of an ownership change of the loss corporation.
The Company believes that such principal purpose does not exist, and therefor it
would not appear that the issuance of the Notes and the Warrants would result in
a deemed exercise of all related conversion and purchase rights under these
provisions. It is not possible to predict with accuracy the timing and potential
effect under Section 382 of any future actual exercise of conversion rights
under the Notes or purchase rights under the Warrants. It is possible that the
actual exercise of such rights could result in an ownership change under Section
382. If such an ownership change were to result, the Company's prospective
ability to utilize its NOLs would be limited as described above. At the date of
this Prospectus, except for the conversion by Charles S. Holmes of $2,000,000 of
aggregate unpaid principal amount of the Notes effective on May 9, 1996 (see
"Certain Relationships and Related Transactions" above), no Notes have been
converted into, and no Warrants have been exercised to purchase, Common Stock,
and the Company does not expect that any additional significant amount of the
Notes would be converted into Common Stock, or that any significant number of
the Warrants would be exercised, prior to 1997.
-55-
<PAGE>
<PAGE>
Pending Legislation
During the latter part of 1995, there were presented before Congress
certain legislative proposals which, if enacted into law, may affect portions of
the above tax discussion, including a reduction in tax on capital gains and
provisions modifying certain of the extraordinary dividend rules of Section 1059
of the Code. Investors should consider the potential effect of the possible
enactment into law of these provisions in making their investment decision.
On March 19, 1996, President Clinton released a set of legislative
proposals as a part of his plan to balance the federal budget. These proposals
include, among other things, proposals to (i) deny a deduction for interest and
OID for certain long-term debt as well as for certain debt which is mandatorily
convertible into the issuer's stock or is so convertible at the issuer's option,
(ii) defer the deduction for OID on convertible debt until actual payment (which
would exclude conversion) of the debt, and (iii) reduce the 70-percent
dividends-received deduction to 50 percent. The Company cannot predict with any
degree of certainty which, if any, of the president's proposals will ultimately
become law or, if enacted into law, what the effective dates of such provisions
would be. Investors should consider the potential effect of the President's
proposals in making their investment decision.
THE FOREGOING SUMMARY IS NOT INTENDED AS TAX ADVICE TO THE PURCHASERS OF
THE SECURITIES. EACH PURCHASER IS URGED TO CONSULT WITH SUCH PURCHASER'S OWN TAX
ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES OF THE INVESTMENT IN THE SECURITIES
TO SUCH PURCHASER'S OWN PARTICULAR TAX SITUATION, INCLUDING THE APPLICATION AND
EFFECT OF STATE AND LOCAL INCOME AND OTHER TAX LAWS.
-56-
<PAGE>
<PAGE>
SELLING SECURITYHOLDERS
All of the Securities being offered hereby are being offered on behalf of
the Selling Securityholders.
The Noteholders and the Warrantholders acquired the Notes and the Warrants
in conjunction with the Private Placement which was consummated on February 15,
1996, February 23, 1996 and February 29, 1996. The lead investor in the Private
Placement, Charles S. Holmes, serves as a director of the Company. See
"MANAGEMENT -- Directors and Executive Officers of the Company," "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" and "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS." Commonwealth Associates served as the
Company's Placement Agent in connection with the private placement and received
its Warrants as partial compensation for such service.
The Bank Lenders acquired the shares of Common Stock owned by them on or
about April 12, 1996 pursuant to the Credit Agreement. The Bank Lenders
currently serve as the Company's primary bank lenders pursuant to the Credit
Agreement.
Active Investors acquired 363,636 shares of Common Stock on November 3,
1994 pursuant to the Stock Purchase Agreement. C. Shelton James, a director of
the Company, is the President and a director of Active Investors. Active
Investors and certain affiliated limited partnerships currently own shares of
Common Stock of the Company as well as Notes and Warrants. See "MANAGEMENT
- --Directors and Executive Officers of the Company," "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" and "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
Mr. Holmes acquired the Holmes Shares upon conversion of the Notes of the
Company in the aggregate unpaid principal amount of $2,000,000 held by him into
1,000,000 shares of Common Stock of the Company. See "MANAGEMENT -- Directors
and Executive Officers of the Company," "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT" and "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
Arthur Freilich beneficially owns five shares of Common Stock.
Except as otherwise noted, the Selling Securityholders have advised the
Company that they do not own any shares of Common Stock in addition to the
Shares.
The Selling Securityholders have indicated that they intend to sell all of
the Securities set forth opposite their names below. The number of Securities
which may actually be sold by the Selling Securityholders will be determined
from time to time by such Selling Securityholders and will depend on a number of
factors including the price of the Securities from time to time. The table below
sets forth information as of August 13, 1996 concerning the beneficial ownership
of the Securities by the Selling Securityholders. All information as to the
beneficial ownership has been furnished to the Company by the Selling
Securityholders.
-57-
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Name Amount of Warrants Shares Presently Percent of
and Address Notes Presently Owned Owned Class
- ----------- ----- --------------- ----- -----
<S> <C> <C> <C>
Active Investors II, Ltd. $ 1,000,000 250,000 363,636
4000 Hollywood Boulevard
Suite 610 North
Miami, FL 33021
The Bank of New York 125,000
One Wall Street
New York, NY 10286
Chemical Bank 125,000
7600 Jericho Turnpike
Woodbury, New York 11797
Christopher P. Baker $ 50,000 12,500
4 Rollins Place
Boston, MA 02114
Hans C. Bodmer $ 75,000 18,750
Muehlestrasse 15
8803 Rueschlikon
Switzerland
Churchill Associates L.P. $ 125,000 31,250
by Churchill International, Inc.
G.P.
by James Pinto, President
1149 Windsong Trail
Richardson, TX 75081
William Forman $ 200,000 50,000
70 Timber Ridge Drive
Holbrook, NY 11741
Arthur Freilich $ 100,000 25,000
11 Radnor Road
Plainview, NY 11803
Sydney J. Goldstein $ 57,000 14,250
IRA Account
P.O. Box 24181
2741 Kersdale Road
Cleveland, OH 44124
</TABLE>
-58-
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Name Amount of Warrants Shares Presently Percent of
and Address Notes Presently Owned Owned Class
- ----------- ----- --------------- ----- -----
<S> <C> <C> <C>
The Hart Family Trust $ 50,000 12,500
Andrew B. Hart and
Loni A. Hart, Trustees
12570 Skyline Blvd.
Oakland, CA 94619
Charles S. Holmes 1,700,000* 1,000,000
117 Whites Lane
Southampton, NY 11968
Information Age Partners, LP. $ 50,000 12,500
by Newmark Research, G.P.
by Amy Newmark, President
18 Sidney Lanier Lane
Greenwich, CT 06831
Michael T. Jackson Trust $ 200,000 50,000
Michael T. Jackson, Trustee
71 Bellevue Avenue
Belvedere, CA 94920
David S. Lawi $ 25,000 6,250
3 Ramapo Trail
Harrison, NY 10528
MK'S OMO Contracting Inc. $ 25,000 6,250
Employees' Profit Sharing Trust
Sanford Kirschenbaum, Trustee
P.O. Box 847
East Brunswick, NJ 08816
Timothy Moran $ 100,000 25,000
33 Woodland Drive
Bayport, NY 11705
Orbis Pension Trustees Ltd. $1,000,000 250,000
David J. Lewis,
Investment Manager
1 Connaught Place
London W2 2DY
England
Claudia C. Rouhana $ 25,000 6,250
5 Prospect Lane
Sands Point, NY 11050
</TABLE>
-59-
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Name Amount of Warrants Shares Presently Percent of
and Address Notes Presently Owned Owned Class
- ----------- ----- --------------- ----- -----
<S> <C> <C> <C>
William J. Rouhana, Jr. $ 25,000 6,250
5 Prospect Lane
Sands Point, NY 11050
S & A Enterprises, Inc. $ 55,000 13,750
Profit Sharing Fund
Sydney J. Goldstein, Trustee
P.O. Box 24181
2741 Kersdale Road
Cleveland, OH 44124
Leonard M. Schiller $ 50,000 12,500
1110 N. Lake Shore Drive
Apt. 9S
Chicago, IL 60611
Philip J. Schiller $ 50,000 12,500
1419 Waverly Road
Highland Park, IL 60035
William R. Schoen $ 25,000 6,250
5 Kenilworth Court
Novato, CA 94945
SJG Management, Inc. $ 100,000 25,000
Profit Sharing Fund
Sydney J. Goldstein, Trustee
P.O. Box 24181
2741 Kersdale Road
Cleveland, OH 44124
S.J. Warner Charitable $ 100,000 25,000
Remainder Unitrust
Stephen J. Warner, Trustee
1617 N. Flagler Dr.
Apt. 4A
West Palm Beach, FL 33407
Tel Com Partners L.P. $ 100,000 25,000
by James Pinto, G.P.
10369 Blue Arrow Ct.
Columbia, MD 21044-4123
</TABLE>
-60-
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Name Amount of Warrants Shares Presently Percent of
and Address Notes Presently Owned Owned Class
- ----------- ----- --------------- ----- -----
<S> <C> <C> <C>
Winfield Capital Corp. $ 400,000 100,000
c/o Paul A. Perlin, CEO
237 Mamaroneck Avenue
White Plains, NY 10605
Michael S. Falk, IRA $ 25,000 6,250
One Beekman Place, Apt. 15A
New York, NY 10022
Robert O'Sullivan $ 10,000 21,230
215 East 95th Street, Apt. 33B
New York, NY 10128
E&M RP Trust $ 400,000 100,000
Edward H. Shea, Jr., Trustee
655 Brea Canyon Road
Walnut, CA 91789
Tahoe Partnership I $ 100,000 25,000
Peter O. Shea, Managing Partner
655 Brea Canyon Road
Walnut, CA 91789
Siam Partners II $ 100,000 25,000
Edmund H. Shea, Jr.,
Managing Partner
655 Brea Canyon Road
Walnut, CA 91789
Patrick H. Miller Jr. and $ 200,000 50,000
Lee M. Miller, JTWROS
1266 W. Pacesferry Rd, N.W.
Suite 457
Atlanta, GA 30327
Gerald B. Cramer $ 600,000 150,000
1330 Journeys End Road
Croton-on-Hudson, NY 10520
Weiss Peck & Greer, Trustee $ 200,000 50,000
IRA Account of
S. Marcus Finkle
1 New York Plaza, 31st Floor
New York, NY 10004
</TABLE>
-61-
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Name Amount of Warrants Shares Presently Percent of
and Address Notes Presently Owned Owned Class
- ----------- ----- --------------- ----- -----
<S> <C> <C> <C>
Paul D. Goldenheim $ 10,000 2,500
4 Bald Hill Place
Wilton, CT 06897
David Morley $ 20,000 5,000
2 Longbeach
Corey Groville, Jersey
Channel Islands
Edward J. Rosenthal ISERP $ 100,000 25,000
707 Westchester Avenue
White Plains, NY 10604
Cameron Capital Ltd. $ 200,000 50,000
10 Cavendish Road
Hamilton HM 19
Bermuda
Keith Rosenbloom $ 15,000 76,350
Commonwealth Associates
733 Third Avenue
New York, NY 10017
Jo-Bar Enterprises, LLC $ 100,000 25,000
By Joel A. Stone, Managing
Member
8700 Bryn Mawr, 9th Floor
Chicago, IL 60062
Lawrence Field $ 100,000 25,000
2540 East 28th
Tulsa, OK 74114
J. Michael Wolfe $ 100,000 25,000
403 Greenwood Avenue
Clarksville, TN 37040
Kent A. Rodriguez $ 25,000 6,250
7020 Lanham Lane
Edina, MN 55439
</TABLE>
-62-
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Name Amount of Warrants Shares Presently Percent of
and Address Notes Presently Owned Owned Class
- ----------- ----- --------------- ----- -----
<S> <C> <C> <C>
Benjamin Rosenbloom $ 50,000 12,500
44 Coconut Road
Palm Beach Towers,
Apt. A321
Palm Beach, FL 33480
Commonwealth Associates 218,870
733 Third Avenue
New York, NY 10017
Ed Downe 50,000
c/o Commonwealth Associates
733 Third Avenue
New York, NY 10017
James Pinto 200,000
1149 Windsong Trail
Richardson, TX 75081
Michael S. Falk 210,000
c/o Commonwealth Associates
733 Third Avenue
New York, NY 10017
Beth Lipman 5,000
c/o Commonwealth Associates
733 Third Avenue
New York, NY 10017
Vincent Labarbara 9,000
c/o Commonwealth Associates
733 Third Avenue
New York, NY 10017
Lisa Jagerman 10,000
c/o Commonwealth Associates
733 Third Avenue
New York, NY 10017
Eric Rand 12,000
c/o Commonwealth Associates
733 Third Avenue
New York, NY 10017
</TABLE>
-63-
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Name Amount of Warrants Shares Presently Percent of
and Address Notes Presently Owned Owned Class
- ----------- ----- --------------- ----- -----
<S> <C> <C> <C>
Paul Sterios 8,000
c/o Commonwealth Associates
733 Third Avenue
New York, NY 10017
James L. Lynch 20,000
c/o Commonwealth Associates
733 Third Avenue
New York, NY 10017
</TABLE>
-64-
<PAGE>
<PAGE>
PLAN OF DISTRIBUTION
The Securities are being sold by the Selling Securityholders for their own
account; the Company will not receive any proceeds from the sales of the
Securities by the Selling Securityholders. The Selling Securityholders are not
restricted as to the price or prices at which they may sell the Securities. The
proceeds to the Selling Securityholders from the sale of the Securities will be
the purchase price of such Securities sold less the agents' or brokers'
discounts or commissions and other expenses of issuance and distribution not
borne by the Company. Further, the Selling Securityholders are not restricted as
to the number of Securities which may be sold at any one time.
The Selling Securityholders, or their pledgees, donees, transferees or
other successors, may sell the Securities in any of three ways: (i) through
broker-dealers; (ii) through agents or (iii) directly to one or more purchasers.
The distribution of the Securities may be effected from time to time in one or
more transactions (which may involve crosses or block transactions) (A) in the
over-the-counter market, (B) in transactions otherwise than in the
over-the-counter market or (C) through the writing of options on the Securities
(whether such options are listed on an options exchange or otherwise). Any of
such transactions may be effected at market prices prevailing at the time of
sale, at prices related to such prevailing market prices, at negotiated prices
or at fixed prices. The Selling Securityholders may effect such transactions by
selling Securities to or through broker-dealers, and such broker-dealers may
receive compensation in the form of discounts, concessions or commissions from
the Selling Securityholders and/or commissions from purchasers of Securities for
whom they may act as agent (which discounts, concessions or commissions as to a
particular broker-dealer might be in excess of those customary in the types of
transactions involved). There is no plan to offer such Securities through
underwriters or any existing arrangement between the Selling Securityholders and
any broker or dealer.
In connection with any sales, the Selling Securityholders and any
broker-dealer participating in such sales may be deemed to be underwriters
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act"). Any commissions paid or any discounts or concessions allowed to any such
broker-dealers, and, if any such broker-dealers purchase shares as principal,
any profits received on the resale of such shares, may be deemed to be
underwriting discounts and commissions under the Securities Act. The Selling
Securityholders may indemnify any broker-dealer that participates in
transactions involving the sale of the Securities against certain liabilities,
including liabilities arising under the Securities Act.
The Selling Securityholders must comply with the requirements of the
Securities Act and the Exchange Act and the rules and regulations thereunder in
offers and sales of their Securities. In particular, the Selling Securityholders
may not: (i) pay commissions or finder's fees to anyone other than normal
brokers' commissions paid to their brokers who execute orders for sales; (ii)
bid for or purchase for their own account or the account of any affiliate or
induce others to bid for or purchase any of the Company's shares, including the
Securities, until the Securities have been sold; or (iii) make any bids for or
purchases of such shares, directly or indirectly, for the purpose of stabilizing
the price of the Common Stock. Additionally, the Selling Securityholders,
including brokers through whom their sales are made as well as dealers who
purchase the Securities being offered hereby for resale, must comply with the
Prospectus delivery requirements of the Securities Act during the term of this
offering.
-65-
<PAGE>
<PAGE>
LEGAL MATTERS
The legality of the Securities offered hereby will be passed upon for the
Company by Whitman Breed Abbott & Morgan, New York, New York.
EXPERTS
The consolidated financial statements and schedule of NAI Technologies,
Inc. and subsidiaries as of December 31, 1995 and 1994 and for each of the years
in the three year period ended December 31, 1995 have been included herein and
in the Registration Statement in reliance on the report of KPMG Peat Marwick
LLP, independent certified public accountants, appearing elsewhere herein upon
the authority of such firm as experts on accounting and auditing.
-66-
<PAGE>
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Page
----
Independent Auditors' Report 68
Consolidated Balance Sheets at December 31, 1995 and 1994 69
Consolidated Statements of Operations - Years ended 70
December 31, 1995, 1994 and 1993
Consolidated Statements of Shareholders' Equity - 71
Years ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows - Years ended 72
December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements 73
Consolidated Balance Sheets at
June 29, 1996 (unaudited) Consolidated and December 31, 1995 96
Consolidated Statements of Operations - (unaudited)
Three months ended June 29, 1996 and 97
July 1, 1995 Consolidated
Consolidated Statements of Operations - (unaudited)
Six months ended June 29, 1996 and 98
July 1, 1995 Consolidated
Consolidated Statements of Cash Flows - (unaudited)
Six months ended June 29, 1996 and 99
July 1, 1995 Consolidated
Other Financial Information 100
Independent Auditors' Report 101
Consolidated Financial Statement Schedules:
II - Valuation and Qualifying Accounts 102
-67-
<PAGE>
<PAGE>
Independent Auditors' Report
The Board of Directors
and Stockholders
NAI Technologies, Inc.
We have audited the accompanying consolidated balance sheets of NAI
Technologies, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NAI Technologies,
Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
March 1, 1996
Boulder, Colorado
-68-
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
(in thousands, except share amounts) 1995 1994
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 2,605 $ 1,658
Accounts receivable, net 13,735 12,508
Income taxes receivable -- 4,732
Inventories, net 11,995 14,052
Deferred tax asset 384 378
Other current assets 813 871
------- -------
Total current assets 29,532 34,199
------- -------
Property, plant and equipment, net 5,351 7,657
Excess of cost over fair value of net
assets acquired, net 10,339 10,865
Notes receivable 1,190 --
Other assets 1,600 999
------- -------
Total assets $48,012 $53,720
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 9,797 $ 7,484
Notes payable -- 127
Current installments of long-term debt 2,177 2,179
Accrued payroll and commissions 768 535
Other accrued expenses 6,376 6,435
Income taxes payable 370 774
------- -------
Total current liabilities 19,488 17,534
------- -------
Notes payable -- 6,000
Long-term debt 15,573 7,990
Other accrued expenses 2,481 1,522
Deferred income taxes 384 378
------- -------
Total liabilities $37,926 $33,424
------- -------
Commitments and contingent liabilities
Shareholders' Equity:
Capital Stock:
Preferred stock, no par value, 2,000,000
shares authorized and unissued -- --
Common stock, $.10 par value, 25,000,000
shares authorized; shares issued:
7,459,437 in 1995 and 7,174,592 in 1994 746 717
Capital in excess of par value 16,162 14,718
Foreign currency translation adjustment 43 107
Retained earnings (deficit) (6,865) 4,754
------- -------
Total shareholders' equity 10,086 20,296
Total liabilities and shareholders' equity $48,012 $53,720
======= =======
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-69-
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31,
(in thousands except per share amounts) 1995 1994 1993
---- ---- ----
Net sales $60,008 $54,520 $81,024
------- ------- -------
Cost of sales 55,100 44,254 53,526
------- ------- -------
Gross margin 4,908 10,266 27,498
------- ------- -------
Selling expenses 4,971 7,490 7,351
General and administrative expenses 6,517 6,313 5,794
Research and development costs 1,807 3,214 5,020
Restructuring expenses -- 7,321 --
Other expenses 488 517 373
------- ------- -------
Total expenses 13,783 24,855 18,538
------- ------- -------
Operating earnings (loss) (8,875) (14,589) 8,960
------- ------- -------
Non-operating income (expense)
Interest income 195 83 21
Interest expense (2,562) (1,477) (786)
------- ------- -------
(2,367) (1,394) (665)
------- ------- -------
Earnings (loss) before income taxes (11,242) (15,983) 8,295
Income tax expense (benefit) 377 (4,392) 2,840
Net earnings (loss) ($11,619) ($11,591) $ 5,455
======= ======= =======
Earnings (loss) per common share ($1.57 ) ($1.69 ) $ 0.80
======= ======= =======
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-70-
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the three years ended December 31, 1995
<TABLE>
<CAPTION>
Capital Total
Common in excess Note Translation Retained shareholders'
(in thousands) stock of par receivable adjustment earnings equity
- -------------- ----- ------ ---------- ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1993 $ 384 $ 8,828 ($ 26) -- $14,725 $23,911
Net earnings -- -- -- -- 5,455 5,455
Common stock acquired and retired (2) (336) -- -- -- (338)
4% common stock dividend 16 2,252 -- -- (2,268) --
Three for two common stock split 214 (214) -- -- -- --
Exercise of common stock warrants 8 (8) -- -- -- --
Foreign currency translation adjustment -- -- -- (54) -- (54)
Common stock issued in connection
with the acquisition of Lynwood 20 1,100 -- -- -- 1,120
Tax benefit from exercise of employee
stock options -- 220 -- -- -- 220
Exercise of employee stock options and
stock purchase plan, net of shares 11 254 14 -- -- 279
tendered ------- ------- ------- ------- ------- -------
Balance December 31, 1993 651 12,096 (12) (54) 17,912 30,593
Net (loss) -- -- -- -- (11,591) (11,591)
4% common stock dividend 26 1,541 -- -- (1,567) --
Foreign currency translation adjustment -- -- -- 161 -- 161
Sale of common stock 36 964 -- -- -- 1,000
Tax benefit from exercise of employee
stock options -- 23 -- -- -- 23
Exercise of employee stock options and
purchases under stock purchase plan 4 106 -- -- -- 110
------- ------- ------- ------- ------- -------
Balance December 31, 1994 717 14,730 (12) 107 4,754 20,296
Net (loss) -- -- -- -- (11,619) (11,619)
Foreign currency translation adjustment -- -- -- (64) -- (64)
Common stock issued in debt restructuring 25 475 -- -- -- 500
Issuance of stock warrants in connection
with debt offering -- 913 -- -- -- 913
Exercise of employee stock options and
purchases under stock purchase plan 4 56 -- -- -- 60
------- ------- ------- ------- ------- -------
Balance December 31, 1995 $ 746 $16,174 ($ 12) $ 43 ($6,865) $10,086
======= ======= ======= ======= ======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands) 1995 1994 1993
- -------------- ---- ---- ----
Cash Flows from Operating Activities:
Net earnings (loss) ($11,619) ($11,591) $5,455
Adjustments to reconcile net earnings
(loss) to cash (used in)
provided by operating activities:
Depreciation and amortization 2,979 2,435 2,508
Loss on disposal of property, plant and
equipment 1 2,298 --
Provision for inventory obsolescence 2,248 2,031 387
Tax benefit from exercise of employee
stock options -- 23 220
Changes in assets and liabilities,
excluding effects from acquisitions
and foreign currency adjustments:
Accounts receivable (1,227) 2,534 (1,374)
Inventories ( 191) 879 (2,512)
Accounts payable and other accrued
expenses 3,545 4,215 (4,885)
Income taxes 4,328 (2,775) (1,199)
Other, net 57 (82) 336
------ ------ ------
Net cash (used in) provided by operating
activities 121 (33) (1,064)
------ ------ ------
Cash Flows from Investing Activities:
Contingent payment on purchase of KMS
Advanced Products (103) (189) (227)
Payment for purchase of Lynwood,
net of cash acquired -- -- (3,986)
Payment for purchase of Codar,
net of cash acquired -- -- (4,592)
Purchase of property, plant and equipment (886) (935) (1,484)
Proceeds from sale of property, plant
and equipment 443 1,053 70
------ ------ ------
Net cash used in investing activities (546) (71) (10,219)
------ ------ ------
Cash Flows from Financing Activities:
Issuances of notes payable 6 8,636 250
Issuances of 12% convertible
subordinated notes 2,500 -- --
Payments of notes payable (133) (5,283) --
Payments for debt restructuring (345) -- --
Proceeds from long-term borrowings -- -- 7,500
Payments of long-term debt (656) (4,777) (2,748)
Receipts on notes receivable -- 223 433
Proceeds from exercise of stock options
and stock purchase plan 60 110 265
Proceeds from sale of common stock -- 1,000 --
Purchase and retirement of common stock -- -- (338)
------ ------ ------
Net cash (used in) provided by financing
activities 1,432 (91) 5,362
------ ------ ------
Effect of foreign currency exchange rates
on cash (60) 136 (35)
------ ------ ------
Net (decrease) increase in cash and
cash equivalents 947 (59) (5,956)
Cash and cash equivalents at beginning of year 1,658 1,717 7,673
------ ------ ------
Cash and cash equivalents at end of year $2,605 $1,658 $1,717
====== ====== ======
Supplemental disclosure of cash flow information:
Cash paid for (received):
Interest $1,506 $1,462 $ 771
Income taxes (4,697) (773) 3,859
Non-cash investing and financing activities:
Common stock issued in Lynwood acquisition -- -- 1,120
Notes payable issued in Codar acquisition -- -- 2,524
Common stock issued in debt restructuring 500 -- --
Notes receivable from sale of property,
plant and equipment 1,190 -- --
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
1. SUMMARY OF ACCOUNTING POLICIES
Description of Business: NAI Technologies designs, manufactures and markets
rugged computer systems, advanced peripheral products, high performance
workstations, TEMPEST computer systems and telecommunications test
equipment and transmission products, and integrated systems for defense,
military, government-related and commercial businesses. The Company's
customer base includes commercial markets requiring rugged, mobile computer
and communications systems, U.S. and foreign armed services and
intelligence agencies, and the regional Bell operating companies and
independent telephone companies. Net sales to the U.S. Government for the
years ended December 31, 1995, 1994 and 1993 were $22,665,000, $21,819,000,
and $41,559,000, respectively. With the exception of the U.S. Government,
no single customer accounted for more than 10% of annual sales in any of
the years presented.
Basis of Presentation: The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany transactions and balances have been eliminated in
consolidation.
Management Estimates: The preparation of financial statements in conformity
with generally accepted accounting principals 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.
Foreign Currency Translation: The financial statements and transactions of
the Company's foreign subsidiary are maintained in its functional currency.
For consolidation purposes, assets and liabilities of the Company's U.K.
subsidiary have been translated at rates of exchange at the end of the
period. Revenues and expenses have been translated at the weighted average
rates of exchange in effect during each period. Translation gains and
losses are accumulated as a separate component of shareholders' equity.
Gains and losses resulting from transactions denominated in a currency
other than the entity's functional currency are included in other operating
expense in the consolidated statements of operations. There were no
significant gains or losses from foreign currency transactions in the years
presented.
Financial Statement Reclassification: Certain reclassifications have been
made to prior years' financial statements to conform to the 1995
presentation.
Cash equivalents: The Company classifies investments that are readily
convertible into cash, and have original maturities of three months or
less, as cash equivalents.
Inventories: Inventories are valued at the lower of cost or market on a
first-in, first-out (FIFO) basis. Work in process is stated at total cost
incurred, reduced by estimated costs of units delivered, not in excess of
net realizable value. The Company's business is characterized by rapid
change that frequently results in product obsolescence. The Company
continually reviews its on-hand quantities
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<PAGE>
and compares such to current business levels and future expectations.
Adjustments to the carrying values of inventory are made when considered
necessary.
Property, Plant and Equipment: Property, plant and equipment are recorded
at historical cost. Depreciation and amortization have been computed using
the straight-line method over the following estimated useful lives of the
assets: equipment and furniture and fixtures, generally -- 2 to 10 years,
and buildings -- 33 years. Leasehold improvements are amortized over the
shorter of the estimated useful life of the improvements or the lease term.
Excess of Cost over Fair Value of Net Assets Acquired: The excess of cost
over fair value of net assets acquired (goodwill) is being amortized on a
straight line basis over a period of twenty years. The Company reviews the
significant assumptions which underlie the twenty year amortization period
on a quarterly basis and will shorten the amortization period if considered
necessary. The Company assesses the recoverability of this intangible asset
on a disaggregated basis by acquired economic entity by determining whether
the amortization of the goodwill balance over its remaining life can be
recovered through projected un-discounted future results. Accumulated
amortization was approximately $1,730,000 and $1,100,000 at December 31,
1995 and 1994, respectively. The amortization expense associated with these
amounts is included in other operating expense in the consolidated
statements of operations and amounted to $630,000, $620,000 and $359,000 in
1995, 1994 and 1993, respectively.
Revenue Recognition: Sales are recorded when title passes (either at
shipment or customer acceptance). In some limited cases, a sale may be
recorded upon the completion of a specific contractual task such as the
issuance of a test report. Cost of goods sold is based upon average
estimated cost per unit. Sales and profits on cost reimbursable contracts
are recognized as costs are incurred. Sales and estimated profits under
long-term contracts are recorded under the percentage of completion method
of accounting using the cost to cost method. Costs include direct
engineering and manufacturing costs, applicable overhead costs and special
tooling and test equipment. All selling, general and administrative
expenses are charged to operations as incurred. Warranty expense is accrued
based upon the historical relationship between sales and warranty claims.
Estimated losses are provided for in full when identified.
Income Taxes: Effective January 1, 1993 the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes". This statement requires the use of the asset and liability approach
for financial accounting and reporting of income taxes. Under this method,
deferred tax assets and liabilities are recognized based on the temporary
differences between the carrying amounts of assets and liabilities for
financial statement purposes and income tax purposes using enacted rates
expected to be in effect when such amounts are realized or settled.
Stock Dividends: On March 14, 1994 the Company issued 261,139 shares of
common stock in connection with a 4% stock dividend to shareholders of
record on February 25, 1994. On March 26, 1993 the Company issued 252,784
shares (as adjusted for stock dividend and stock split) of common stock in
connection with a 4% stock dividend to shareholders of record on February
26, 1993. All references to earnings per share, stock option plan data and
common shares have been adjusted to give effect to the stock dividends. The
stock dividends were accounted for by transferring approximately $1,567,000
and $2,268,000 from retained earnings to common stock and capital in excess
of par value in 1994 and 1993, respectively.
Stock Split: On September 17, 1993 the Company issued 2,219,621 shares (as
adjusted for stock dividend) of common stock in connection with a three for
two stock split payable in the form of a 50% stock dividend to shareholders
of record on August 16, 1993. The stock split was accounted
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<PAGE>
<PAGE>
for by transferring approximately $214,000 from additional paid in capital
to common stock. All references to earnings per share, stock option plan
data and common shares have been adjusted to give effect to the stock
split.
Earnings (Loss) Per Share: Earnings (loss) per share is computed based upon
the weighted average number of common shares and common share equivalents
outstanding. Common share equivalents consist of dilutive common stock
options, common stock subscribed to under the Employee Stock Purchase Plan
and common stock warrants, net of assumed buy-back. The computation of
fully diluted earnings (loss) per share does not materially differ from
that presented in the consolidated statements of operations. Earnings
(loss) per share amounts are based on 7,382,000, 6,850,000 and 6,843,000
average shares outstanding (including common stock equivalents) for 1995,
1994 and 1993, respectively.
2. ACQUISITIONS
On October 14, 1993, the Company acquired Codar Technology, Inc. (Codar)
via a merger of a wholly-owned subsidiary with and into Codar for
approximately $6.5 million consisting of cash and notes payable. Additional
costs incurred pursuant to the transaction resulted in a final total
acquisition cost of approximately $7.6 million. The Company increased its
term loan borrowings by $7.5 million in conjunction with the acquisition.
The excess of the total acquisition cost over the fair value of net assets
acquired, amounting to approximately $5.4 million, is being amortized using
the straight line method over 20 years.
On January 13, 1993, the Company acquired all of the outstanding common
stock of Lynwood Scientific Developments Limited (Lynwood), a U.K. company,
for approximately $4 million in cash, 330,497 shares (adjusted for stock
dividends and stock split) of common stock and warrants to purchase 39,000
shares of common stock at a price of $8.89 per share. The common stock was
valued at approximately $1.1 million based on an appraisal by an investment
company. The cash portion of the purchase price was paid from existing cash
balances. The excess of the total acquisition cost over the fair value of
net assets acquired, amounting to approximately $3.7 million, is being
amortized using the straight line method over 20 years.
Each of the acquisitions was accounted for as a purchase and the operating
results of each are included in the consolidated statements of operations
from the date of acquisition.
The following unaudited pro-forma consolidated results of operations assume
that these acquisitions occurred on January 1, 1993 and reflect the
historical operations of the purchased businesses adjusted for increased
interest expense as a result of borrowings, reduced interest income as a
result of cash utilization and increased depreciation and amortization net
of applicable income taxes resulting from the acquisitions.
(in thousands, except per share data) 1993
----
Net sales $ 92,870
Net earnings $ 3,894
Earnings per share $ 0.57
========
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<PAGE>
<PAGE>
The pro-forma results of operations are not necessarily indicative of the
actual results of operations that would have occurred had the purchases
been made at the beginning of the period, or of results which may occur in
the future.
3. ACCOUNTS RECEIVABLE
Accounts receivable at December 31 consisted of the following:
(in thousands) 1995 1994
-------------- ---- ----
Amounts receivable from United States Government
Amounts billed $ 3,764 $ 4,008
Unbilled contract receivables 2,004 1,629
------- -------
5,768 5,637
Amounts receivable from others
Amounts billed 7,729 6,728
Unbilled contract receivables 380 276
8,109 7,004
13,877 12,641
Allowance for doubtful accounts (142) (133)
------- -------
$13,735 $12,508
======= =======
Unbilled contract receivables represent revenue earned but not yet billed
to customers at year end. The Company expects that substantially all such
amounts will be billed and collected within one year. The Company has one
contract which, under its terms, will result in a maximum unbilled
receivable of approximately $1,400,000 in late 1996 or early 1997. This
amount is expected to be fully collected in 1997 as the Company begins to
make deliveries under this contract.
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<PAGE>
<PAGE>
4. INVENTORIES
Inventories at December 31, summarized by major classification, were as
follows:
(in thousands) 1995 1994
-------------- ---- ----
Raw materials and components $ 11,695 $ 11,948
Work-in-process 4,121 3,849
Finished goods 477 662
Allowance for obsolescence (3,536) (2,250)
Unliquidated progress payments (762) (157)
-------- --------
$ 11,995 $ 14,052
======== ========
5. OTHER CURRENT ASSETS
Other current assets at December 31 consisted of the following:
(in thousands) 1995 1994
-------------- ---- ----
Prepaid insurance $ 219 $ 482
Other prepaid expenses 594 389
-------- --------
$ 813 $ 871
======== ========
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 consisted of the following:
(in thousands) 1995 1994
-------------- ---- ----
Land $ 1,306 $ 1,612
Buildings 1,900 3,302
Machinery and equipment 8,829 8,185
Furniture and fixtures 679 635
Leasehold improvements 317 279
-------- --------
13,031 14,013
Less accumulated depreciation
and amortization (7,680) (6,356)
-------- --------
$ 5,351 $ 7,657
======== ========
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<PAGE>
7. RESTRUCTURING
On April 8, 1994 the Company announced that as part of its transition from
the design and manufacture of computer peripherals toward both producing
and integrating computer systems, it would close its Hauppauge, New York
based Military Products Division and transfer the division's operations to
its Codar facility in Longmont, Colorado. As a direct result of the above,
during the first quarter of 1994 the Company recorded a $9,500,000 charge,
of which $7,300,000 was classified as a restructuring charge and $2,200,000
was charged to cost of sales. The major components of the $7.3 million
restructuring charge relate to employee expense ($2,731,000), disposition
of assets ($2,000,000), inventory write downs on discontinued products
($1,120,000), idle facility costs ($590,000) and lease termination costs
($370,000). The major components of the $2.2 million charge to cost of
sales pertain to inventory write-offs related primarily to excess start-up
costs associated with the NST-II production. The transfer of operations to
Colorado was substantially completed by the fourth quarter of 1994.
At December 31, 1995 the restructuring liability totaled $153,000,
comprised principally of lease termination costs.
8. OTHER ACCRUED EXPENSES - CURRENT
Other accrued expenses - current at December 31, 1995, consisted of the
following:
(in thousands) 1995 1994
-------------- ---- ----
Customer advances $1,143 $ --
Employee benefits 756 1,599
Restructuring 153 981
Insurance payable 168 305
Purchase liabilities 453 682
Warranty 658 348
Deferred revenue 589 763
Contract losses 583 --
Taxes, other than income 365 --
Interest 162 --
Moving expense 513 --
Other 833 1,757
------ ------
$6,376 $6,435
====== ======
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<PAGE>
<PAGE>
9. DEBT
Long term debt at December 31 consisted of the following:
(in thousands) 1995 1994
-------------- ---- ----
Secured revolving credit with quarterly
step-downs of $500 in 1996 with interest
at prime plus 1 3/4% $15,175 $9,175
Midland Bank PLC, secured 5 year business
term loan, monthly principal installments
of (pound)7,257 (approximately $11,000) through
July 1995 with interest at 2% above the
U.K. base rate (6.25% at December 31, 1994) - 80
Notes payable, generally secured by specified
machinery and equipment, with interest at
rates ranging from 8.875% to 12.43% 388 680
Industrial Development Bond, payable in
monthly principal installments of
$4,775 through February 1999 with interest
at 70% of prime, repaid in 1995
(8.5% at December 31, 1994) - 234
12% Convertible Subordinated Promissory
Notes due January 15, 2001 2,500 -
------ ------
18,063 10,169
Original issue discount on 12% Notes (313) -
Less current installments (2,177) (2,179)
------ ------
$15,573 $7,990
======= ======
Aggregate principal payments for the five years subsequent to December 31,
1995 are as follows:
1996 $ 2,177,000
1997 3,144,000
1998 3,067,000
1999 7,175,000
2000 -
thereafter 2,500,000
$18,063,000
In April 1995, the Company restructured its existing indebtedness with its
bank lenders. In consideration for the April 1995 restructuring, the
Company issued an aggregate of 250,000 shares of its Common Stock to the
bank lenders. The shares were valued at an aggregate of $500,000 based upon
the then-current market price of the Common Stock of $2.00 per share.
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<PAGE>
Effective February 15, 1996 the Company entered into an amendment to its
credit agreement with its bank lenders which amended and extended the
payment provisions contained therein which combined the Company's existing
note payable obligation of $600,000 with the previously existing term
obligation and reset certain financial covenants on more favorable terms
for the Company. The revised credit agreement provides for quarterly
principal payments of $500,000, beginning on March 31, 1996, and payments
of $750,000 beginning on March 31, 1997 and paid through December 31, 1998.
The remaining principal balance is due on January 15, 1999. Interest is
payable monthly at the rate of 1 3/4% above prime. The loan covenants
require that the Company maintain certain minimum levels of net worth,
current ratio and quick ratio. They also limit capital expenditures and the
payment of cash dividends. For financial statement purposes, the Company
has presented the secured revolving credit as if the amendment had been
agreed to as of December 31, 1995.
In November and December 1995, the Company borrowed an aggregate of
$2,500,000 and agreed that the loans would be converted into convertible
debt in conjunction with the anticipated sale of 12% Convertible
Subordinated Promissory Notes. Such loans are recorded as Convertible
Subordinated Promissory Notes as of December 31, 1995 in the Company's
financial statements.
On February 15, 1996, February 23, 1996 and February 29, 1996, the Company
issued an aggregate of $8,242,000 of 12% Convertible Subordinated
Promissory Notes due January 15, 2001 and warrants to purchase an aggregate
of 2,060,500 shares of the Company's Common Stock. The Notes are
convertible by the holders into shares of Common Stock at a conversion
price equal to $2.00 per share, subject to adjustment if the Company fails
to meet certain earnings thresholds and in certain other events. Interest
on the Notes is payable quarterly in arrears on January 15, April 15, July
15 and October 15 of each year, commencing April 15, 1996. The Notes mature
on January 15, 2001. The Notes may be prepaid by the Company without
premium or penalty at any time after January 15, 1999. The Notes are
unsecured obligations of the Company and contain certain restrictions on
the Company including relating to a negative pledge of the Company's assets
not otherwise encumbered by the holders of the senior indebtedness.
In addition to the Warrants noted above, the Company issued 2,024,200
Warrants to the lead investor and placement agent in exchange for advisory
services related to the issuance of the Notes. The lead investor, Mr.
Charles S. Holmes (1,200,000), and the placement agent, Commonwealth
Associates (824,200 warrants), are two separate parties that have no
affiliation. Mr. Holmes, a director of the Company, received Warrants to
purchase an aggregate of 1,700,000 shares of Common Stock in two separate
blocks. Through the purchase of $2,000,000 aggregate principal amount of
Notes, Mr. Holmes received Warrants to purchase 500,000 shares of Common
Stock in accordance with the terms of the issuance to each purchaser of the
Notes which provided for the issuance of 1/4 warrant for each $1.00 of
Notes purchased. The value of these Warrants is classified as original
issue discount. The Warrants issued in exchange for advisory services in
connection with the issuance of the Notes is recorded as deferred debt
expense on the Company's balance sheet. As of December 31, 1995, a total of
1,825,000 Warrants has been recorded. 625,000 Warrants were recorded in
connection with the $2,500,000 of Notes sold as of that date and 1,200,000
Warrants have been recorded in connection with the advisory services
performed by Mr. Holmes. All Warrants entitle the holders thereof to
purchase shares of Common Stock at any time and from time to time on or
before February 15, 2002, at an exercise price equal to $2.50 per share of
Common Stock, subject to adjustment in certain events. The Warrants are
detachable and separately transferable. The Warrants are valued at $0.50
per share. Such value was derived based upon an evaluation by an
independent third party. Such evaluation included a review of both current
and historical stock price data, the lack of liquidity afforded to the
Warrants, the results of various quantitative methodologies, the Company's
financial position and historical and projected cash flows. The Warrants
issued in conjunction with the Notes are recorded as original issued
discount on the Company's balance sheet.
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<PAGE>
<PAGE>
The Company's U.K. subsidiary has a credit facility (sterling overdraft)
with a U.K. bank. The credit facility amounts to (pound)600,000
(approximately $938,000) and bears interest at 2 1/4% above the U.K. base
rate (6 3/4% at December 31, 1995). This facility is renewable in March
1996. The maximum month end borrowings under the credit facility during the
years ended December 31, 1995 and 1994 were (pound)84,000 and
(pound)355,000 (approximately $130,000 and $555,000, respectively). The
average short term borrowings for the years ended December 31, 1994 and
1993 were (pound)19,000 and (pound)89,000 (approximately $30,000 and
$139,000, respectively). The weighted average interest rate during the
years ended December 31, 1995 and 1994 was 8.88% and 7.23%, respectively.
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<PAGE>
10. OTHER ACCRUED EXPENSES - NON-CURRENT
Other Accrued Expenses - non-current at December 31 consisted of the
following:
(in thousands) 1995 1994
-------------- ---- ----
Supplemental retirement plan $ 1,235 $ 899
Other taxes 748 0
Deferred compensation 498 623
------- ------
$ 2,481 $1,522
======= ======
The supplemental retirement plan is described in Note 13.
In 1981, the Company entered into agreements with two former officers which
provide for the payments to each of $25,000 per year, adjusted for the
cumulative effects of inflation from inception of the agreement, over a
period of 15 years. Such deferred compensation payments commenced on
January 1, 1990. The 1996 payment to each of the former officers will be
approximately $40,800.
11. INCOME TAXES
The Company and its domestic subsidiaries file a consolidated Federal
income tax return. The provision for income taxes consisted of the
following items:
(in thousands) 1995 1994 1993
-------------- ---- ---- ----
Current:
Federal $ - ($4,286) $2,407
State - - 362
Foreign 377 (446) 181
------ ------ -----
377 (4,732) 2,950
------ ------ -----
Deferred:
Federal - 360 (110)
State - - -
Foreign - (20) -
------ ------ -----
- 340 (110)
------ ------ -----
Total income tax expense (benefit) $ 377 ($4,392) $2,840
====== ======= ======
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<PAGE>
The tax effects of temporary differences that gave rise to significant
portions of the net deferred tax asset and (liability) at December 31,
1995, and 1994 are as follows:
(in thousands) 1995 1994
-------------- ---- ----
Deferred tax assets:
Net operating loss carry forward $3,335 $ -
AMT credit carry forward 319 545
Restructure 52 333
Inventories 1,422 356
Supplemental retirement 317 268
Accrued vacation 146 127
Deferred compensation 195 236
Other 224 114
Valuation allowance (5,626) (1,601)
------ ------
$ 384 $ 378
====== ======
Deferred tax liabilities:
Plant and equipment ($384) ($372)
Other - (6)
------ ------
(384) (378)
$ - $ -
====== ======
The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets which, more likely than not, will not be
realized.
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<PAGE>
The sources of the deferred tax provision and the related tax effect for
the years ended December 31, 1995, 1994 and 1993 are as follows:
(in thousands) 1995 1994 1993
-------------- ---- ---- ----
Net operating loss carry forward ($3,335) $ - $ -
AMT credit carry forward 227 (545) -
Accelerated depreciation for
tax purposes 12 (142) (77)
Decrease (increase) in inventory
reserves (1,066) 235 (8)
Deferred compensation 41 (4) 2
Supplemental retirement (50) (96) (79)
Accrued restructure costs 282 (333) -
Accrued vacation (19) 148 (11)
Other (117) (524) 63
Valuation allowance 4,025 1,601 -
------ ------ -----
$ - $ 340 ($110)
====== ====== ======
A reconciliation of the provision for income taxes computed at the Federal
statutory rate to the actual provision for income taxes is as follows:
(in thousands) 1995 1994 1993
-------------- ---- ---- ----
Expected tax expense (benefit) ($3,822) ($5,434) $2,820
Increases (decreases) resulting from:
Adjustment of prior years'
income taxes (350) (665) (264)
State income taxes, net of
Federal benefit - - 239
Non-deductible expenses 278 167 143
Other 246 (61) (98)
Valuation allowance 4,025 1,601 -
------ ------ -----
Actual income tax expense (benefit) $ 377 ($4,392) $2,840
====== ======= ======
At December 31, 1995 the retained earnings of the Company's foreign
subsidiary were negative. No United States income tax impact pertaining to
the foreign subsidiary has been reflected in the Company's financial
statements.
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<PAGE>
12. SHAREHOLDERS' EQUITY
The Company has two stock option plans - the 1991 Stock Option Plan and the
1993 Stock Option Plan for Directors - which together cover 773,448 shares
of common stock which may be issued pursuant to the plans to key employees
and directors.
The 1991 Stock Option Plan covers 617,448 shares. Options under the 1991
Stock Option Plan are non-qualified stock options and are granted at the
option price fixed by the Compensation Committee of the Board of Directors
but in no event may the option price be less than the fair market value of
a share of common stock on the date of grant. Options under the 1991 Stock
Option Plan have such term as is fixed by the Compensation Committee but no
option may be exercised during the first year after its date of grant or
after the expiration of ten years from its date of grant.
The 1993 Stock Option Plan for Directors covers 156,000 shares. Options
under the Directors' Plan are non-qualified stock options and are granted
in increments of 1,560 shares upon each non-employee director's election or
re-election to the Board of Directors. The option price is equal to the
fair market value of a share of common stock on the date of grant. Options
are granted for a term of ten years and become exercisable eleven months
after their date of grant. In no event may an option be exercised after the
expiration of the term of such option.
Full payment of the exercise price under all stock option plans may be made
in cash or in shares of common stock valued at the fair market value
thereof on the date of exercise. The Company's policy is that such shares
must have been acquired by the optionee at least six months prior to the
exercise date. In 1995 and 1994, all payments were made in cash. In 1993,
38,345 shares were received as payment for the exercise price of options.
In 1993, 36,288 shares were withheld from employee stock option exercises
to cover required income tax withholdings. Such shares, with a fair market
value of $338,000, were retired by the Company.
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<PAGE>
<PAGE>
Employee Stock Option Plans
The following is a summary of activity related to all stock option plans:
Number Weighted average
of option price
shares per share
Outstanding at January 1, 1993 583,341 4.01
Granted 237,130 8.63
Exercised (168,227) 3.02
Expired/canceled (34,293) 4.63
------- ----
Outstanding at December 31, 1993 617,951 6.20
Granted 498,998 5.28
Exercised (30,472) 2.62
Expired/canceled (424,126) 7.60
-------- ----
Outstanding at December 31, 1994 662,351 4.77
Granted 515,000 2.43
Exercised (37,962) 1.93
Expired/canceled (486,656) 4.81
-------- ----
Outstanding at December 31, 1995 652,733 3.06
======= ====
At December 31, 1995, 80,289 options were exercisable and 803,731 shares
were reserved for issuance under all stock option plans.
Warrants
At December 31, 1995, there were 40,560 warrants outstanding which are
exercisable at $8.55 per share. The warrants expire January 13, 1996.
There were also 1,825,000 warrants outstanding which are exercisable at
$2.50 per share. The warrants expire February 15, 2002.
In 1993, warrants to purchase 148,481 (as adjusted) shares of common stock
at an exercise price of $4.14 per share were exercised. The Company and
the warrant holder agreed to issue 83,165 shares which represented 95% of
the appreciation on the warrants as measured by the fair market value of
the common stock at the date of exercise ($10.12 per share).
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<PAGE>
<PAGE>
Employee Stock Purchase Plan
Under the 1992 Employee Stock Purchase Plan, which commenced July 1, 1992,
employees may subscribe to purchase shares of common stock at the lesser of
85% of the market price on the first day of the purchase period or the date
purchased one year later. Payment for the shares is made through payroll
deductions of up to 5% of annual base pay over a one year period. A total
of 113,177 shares has been reserved for issuance under the Employee Stock
Purchase Plan and as of December 31, 1995, 49,063 shares have been issued
pursuant to the plan. The following is a summary of employee stock purchase
plan activity:
Number of Price
Shares Range
------ -----
Outstanding at January 1, 1993 30,623 $ 4.45
Subscriptions 27,253 7.02
Purchases (25,365) 4.45
Cancellations (8,971) 4.45-7.02
------ -----------
Outstanding at December 31, 1993 23,540 $ 7.02
Subscriptions 31,410 3.13
Purchases (9,828) 3.13
Cancellations (22,202) 3.13-7.02
------- -----------
Outstanding at December 31, 1994 22,920 $ 3.13
Subscriptions - -
Purchases (13,870) 3.13
Cancellations (9,050) 3.13
------ -----------
Outstanding at December 31, 1995 - -
====== ===========
At December 31, 1995 there was an outstanding loan which an employee
received from the Company in the amount of approximately $12,000 for the
exercise of previously granted stock options. The note bears interest at
approximately 7% and is collateralized by the stock issued and is due in
1997. The note is presented as a reduction to shareholders' equity in the
Company's Financial Statements.
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<PAGE>
<PAGE>
13. EMPLOYEE BENEFIT PLANS
Pension Plan
Until December 1995, when the plan was terminated and all assets were
distributed, the Company had a noncontributory defined benefit pension plan
covering all eligible employees. The plan provided for normal retirement at
age 65, or at least age 62 with 30 years of service, and optional early
retirement.
In December 1993, the Board of Directors approved an amendment to the
pension plan which resulted in the freezing of all future benefits under
the plan as of January 3, 1994. As a result, in 1993, the Company
recognized a gain of $362,000 which substantially offset the pension
expense for 1993.
The Company's funding policy was to make annual contributions to the extent
such contributions were actuarially determined and tax deductible. Pension
expense (income) for 1995, 1994 and 1993 was $3,000, $(5,000) and $367,000,
respectively.
The following table sets forth the funded status of the Company's defined
benefit pension plan at December 31, 1995, 1994 and 1993:
(in thousands) 1995 1994 1993
-------------- ---- ---- ----
Accumulated benefit obligation,
including vested benefits of
$2,473 and $3,493 in 1994 and 1993 $ - ($2,473) ($3,715)
===== ====== ======
Projected benefit obligation - (2,473) (3,715)
Plan assets at fair value - 2,515 3,727
----- ------ ------
Plan assets greater (less) than
projected benefit obligation - 42 12
Unrecognized transition asset - - -
Unrecognized net (gain) loss - (24) -
----- ------ ------
Prepaid pension asset $ - $ 18 $ 12
===== ====== ======
Net pension expense is comprised of the following:
Service cost $ - $ 9 $ 373
Interest cost 171 208 270
Return on assets (94) 35 (175)
Net amortization and deferral (74) (257) (101)
----- ------ ------
Net pension expense $ 3 ($ 5) $ 367
===== ====== ======
Prepaid pension costs are included in other non-current assets. The
actuarial computations assume a discount rate on benefit obligations of
7.25% in 1994 and 6% in 1993. The expected long-term rate of return on plan
assets was 6% in 1994 and 9% in 1993. Pension Plan assets were primarily
invested in short and intermediate term cash investments, corporate bonds
and common and preferred stock. No compensation increases were assumed in
1994 and 1993.
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<PAGE>
<PAGE>
Supplemental Retirement Plan
In 1991 the Company adopted the NAI Technologies Supplemental Retirement
Plan which is a non-qualified, unfunded pension plan under which the
Company will pay supplemental pension benefits to certain officers. The
expense related to this plan amounted to $146,000, $281,000 and $232,000 in
1995, 1994 and 1993, respectively. The pension cost for this plan is based
on substantially the same actuarial methods and economic assumptions as
those used for the defined benefit pension plan for 1994 and 1993. In 1995,
the actuarial computations assume a discount rate of 6.75% on benefit
obligations and an assumed compensation increase of 5%. Such benefits will
be paid from the Company's assets and not from retirement plan assets.
The following table sets forth the funded status and cost components of the
Company's supplemental retirement plan at December 31, 1995, 1994 and 1993:
(In thousands) 1995 1994 1993
------------------ ---- ---- ----
Accumulated benefit obligation including
vested benefits of $1,215 only in 1995 $1,221 ($ 899) ($ 706)
====== ====== ======
Projected benefit obligation for service
rendered to date (1,442) (1,224) (1,047)
Plan assets at fair value - - -
------ ------ ------
Projected benefit obligation in excess
of plan assets (1,442) (1,224) (1,047)
Unrecognized prior service cost 332 360 388
Unrecognized net loss 178 77 153
Adjustment required to recognize
minimum liability (289) (112) (200)
------ ------ ------
Unfunded accrued supplementary costs ($1,221) ($ 899) ($ 706)
======= ====== ======
Net pension expense is comprised of the following:
Service cost $ 25 $ 156 $ 134
Interest cost 93 84 63
Net amortization and deferral 28 41 35
Net pension expense $ 146 $ 281 $ 232
======= ====== ======
The unfunded accrued supplementary costs are included in other long-term
accrued expenses.
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<PAGE>
<PAGE>
Retirement Savings Plan
The Company has a voluntary Retirement Savings Plan for all eligible
employees which provides for basic (up to 15% of compensation) employee
contributions. In 1993, the Company's policy was to provide a matching
provision equal to 100% of the first 3% of the employee's basic
contribution. In December 1993, the Board of Directors approved an
amendment to the Retirement Savings Plan which increased the matching
provision to 100% of the first 3% and 50% of the second 3% of the
employee's basic contribution effective January 3, 1994. Effective August
20, 1994, the Board of Directors suspended the matching provisions. Plan
participants may invest in a combination of equity, fixed income and money
market funds. The Company's 1994 and 1993 contributions under the totaled
$365,143 and $386,000, respectively. No contributions were made in 1995.
The plan also provides for a discretionary profit sharing contribution as
determined by the Board of Directors, which is contributed to each of the
participant's individual accounts. There was no contribution for 1995 or
1994. In 1993, the Company provided $128,000 for a profit sharing
contribution.
14. INFORMATION BY GEOGRAPHIC AREA
Information about the Company's foreign operations and export sales is
provided in the following table. Export revenue is foreign revenue produced
by identifiable assets located in the United States while foreign revenue
is generated by identifiable assets located in foreign countries.
In order to achieve an appropriate sharing of operating results between the
Company's subsidiaries, transfers between geographic areas are accounted
for on the basis of a mark-up of manufacturing costs. Operating earnings
are total sales less operating expenses. In computing operating earnings,
none of the following items has been added or deducted: general corporate
expenses, interest income, interest expense and income taxes.
Identifiable assets are those assets of the Company that are identified
with the operations in each geographic area. Corporate assets consisted
primarily of cash and cash equivalents, property, plant and equipment and
notes receivable.
-90-
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
INFORMATION BY GEOGRAPHIC AREA
Years ending December 31,
(in thousands) 1995 1994 1993
-------------- ---- ---- ----
SALES TO UNAFFILIATED CUSTOMERS:
United States $47,329 $40,692 $63,661
Export 1,786 2,723 4,637
United Kingdom 10,893 11,105 12,726
------- ------- -------
Total $60,008 $54,520 $81,024
======= ======= =======
TRANSFERS BETWEEN GEOGRAPHIC AREAS:
United States $ 831 $ 787 $ 1,011
Europe 0 11 9
------- ------- -------
Total $ 831 $ 798 $ 1,020
======= ======= =======
TOTAL SALES:
United States $48,160 $41,479 $64,672
Export 1,786 2,723 4,637
United Kingdom 10,893 11,116 12,735
Eliminations (831) (798) (1,020)
------- ------- -------
Total $60,008 $54,520 $81,024
======= ======= =======
OPERATING EARNINGS (LOSS):
United States ($6,232) ($11,068) $10,617
Europe 1,226 (1,232) 798
------- ------- -------
Subtotal (5,006) (12,300) 11,415
-------
Corporate expenses and other (3,869) (2,289) (2,455)
------- ------- -------
Total operating earnings (loss) (8,875) (14,589) 8,960
Net interest expense & other (2,367) (1,394) (665)
------- ------- -------
Earnings (loss) before income taxes ($11,242) ($15,983) $ 8,295
======= ======= =======
IDENTIFIABLE ASSETS:
United States $34,103 $33,795 $48,226
Europe 8,283 8,761 8,038
------- ------- -------
Subtotal 42,386 42,556 56,264
Corporate and other 5,626 11,164 4,451
------- ------- -------
Total $48,012 $53,720 $60,715
======= ======= =======
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<PAGE>
<PAGE>
15. INFORMATION BY BUSINESS SEGMENT
The Company's operations are classified into two business segments:
Electronic Systems and Telecommunications. The Electronic Systems segment
includes Codar Technology, Inc. based in Longmont, Colorado, NAI
Technologies -- Systems Division Corporation in Columbia, Maryland, and
Lynwood Scientific Developments Limited in Farnham, England.
Codar Technology designs, manufactures, integrates and supports rugged
computer systems, advanced computer peripherals and memory systems for
military and commercial use. Systems provides custom packaged, integrated
computer systems for deployment in shelters, ships, land vehicles and other
demanding environments. Lynwood supplies rugged, environmentally and
electrically screened personal computers and workstations based upon
standard commercial off the shelf technology, targeted to the military and
government markets principally in Europe. With the exception of the U.S.
Government, which accounted for $22,665,000 or 44% of the Electronic
Systems segment's 1995 sales, no single customer accounted for greater than
10% of the Segment's sales.
The Telecommunications segment currently consists of Wilcom, Inc. in
Laconia, New Hampshire. Wilcom designs and manufactures products for use in
the telephone industry. Wilcom's customer base includes the regional Bell
operating companies and independent telephone companies. Three such
customers accounted for 26%, 23% and 13%, respectively, of the
Telecommunications segment's 1995 sales.
Inter-segment sales are accounted for on the basis of a mark-up of
manufacturing costs. Operating earnings are total sales less operating
expenses. In computing operating earnings, none of the following items has
been added or deducted: general corporate expenses, interest income,
interest expense and income taxes.
Identifiable assets by segment are those assets of the Company that are
used in the Company's operations in each segment. Corporate assets consist
primarily of cash and cash equivalents, property, plant and equipment and
notes receivable.
-92-
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
INFORMATION BY INDUSTRIAL SEGMENT
Years ending December 31,
(in thousands) 1995 1994 1993
- -------------- ---- ---- ----
SALES TO UNAFFILIATED CUSTOMERS:
Electronic Systems $51,813 $46,330 $71,202
Telecommunications 8,195 8,190 9,822
------- ------- -------
Total $60,008 $54,520 $81,024
======= ======= =======
INTERSEGMENT SALES:
Electronic Systems $ 831 $ 798 $ 1,020
------- ------- -------
Total $ 831 $ 798 $ 1,020
======= ======= =======
TOTAL SALES:
Electronic Systems $52,644 $47,128 $72,222
Telecommunications 8,195 8,190 9,822
Eliminations (831) (798) (1,020)
------- ------- -------
Total $60,008 $54,520 $81,024
======= ======= =======
OPERATING EARNINGS (LOSS):
Electronic Systems ($4,273) ($11,788) $10,655
Telecommunications (733) (512) 760
------- ------- -------
Subtotal (5,006) (12,300) 11,415
Corporate expenses and other (3,869) (2,289) (2,455)
------- ------- -------
Total operating earnings (loss) (8,875) (14,589) 8,960
Net interest expense & other (2,367) (1,394) (665)
------- ------- -------
Earnings (loss) before
income taxes ($11,242) ($15,983) $ 8,295
======= ======= =======
IDENTIFIABLE ASSETS:
Electronic Systems $35,577 $35,529 $48,198
Telecommunications 6,809 7,027 8,066
------- ------- -------
Subtotal 42,386 42,556 56,264
Corporate and other 5,626 11,164 4,451
------- ------- -------
Total $48,012 $53,720 $60,715
======= ======= =======
CAPITAL EXPENDITURES:
Electronic Systems $ 746 $ 716 $ 1,326
Telecommunications 120 114 146
------- ------- -------
Subtotal 866 830 1,472
Corporate and other 20 105 12
------- ------- -------
Total $ 886 $ 935 $ 1,484
======= ======= =======
DEPRECIATION:
Electronic Systems $ 1,680 $ 2,078 $ 2,202
Telecommunications 359 320 288
------- ------- -------
Subtotal 2,039 2,398 2,490
Corporate and other 940 37 18
------- ------- -------
Total $ 2,979 $ 2,435 $ 2,508
======= ======= =======
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<PAGE>
<PAGE>
16. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries lease office and manufacturing facilities,
automobiles, computers and other equipment under various non-cancelable
operating leases.
Future minimum rental commitments for leases with non-cancelable terms in
excess of one year are as follows:
(in thousands) Amount
-----------------------------------------
1996 $ 1,629,000
1997 1,108,000
1998 1,043,000
1999 852,000
2000 314,000
2001 and thereafter 4,391,000
-----------
Total minimum lease payments $9,337,000
With the acquisition of Lynwood, the Company assumed a 25 year operating
lease for office and manufacturing facilities. Annual future minimum lease
payments through the year 2014, which are included in the above table,
amount to approximately $314,000 per year.
Rental expense amounted to $1,725,000, $1,170,000 and $1,132,000 in 1995,
1994 and 1993, respectively. There was no sublease income in these periods.
Most leases provide for additional payments of real estate taxes, insurance
and other operating expenses applicable to the property, generally over a
base period level. Total rental expense includes such base period expenses
and the additional expense payments as part of the minimum lease payments.
The Company and its subsidiaries are subject to certain legal actions which
arise in the normal course of business. It is management's belief that
these actions will not have a material effect on the Company's consolidated
financial position.
On or about June 28, 1994, TDA Trading Corp. ("TDA"), individually and on
behalf of a class of persons similarly situated, commenced a securities
fraud class action in the United Stated District Court for the Eastern
District of New York against Robert A. Carlson, Richard A. Schneider and
the Company. TDA commenced its action, entitled TDA Trading Corp. v.
Carlson, et al., by filing a complaint (the "Complaint") with the Court.
The Complaint principally alleges that the defendants knowingly and/or
recklessly misrepresented to the public that they expected the Company's
1993 fourth quarter and fiscal year sales and earnings results to continue
to increase at levels substantially above those of prior years at a time
when they supposedly knew but failed to disclose that the Company's fourth
quarter 1993 sales of its Navy Standard Teleprinter and other products
would decrease precipitously. The Complaint further alleges that, as a
result of defendants' alleged failure to disclose these developments, TDA
and other purchasers of common stock were damaged because, it is alleged,
at the time of purchase the price of common stock had been artificially
inflated. Additionally, the Complaint asserts that at the time
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<PAGE>
<PAGE>
these adverse business developments allegedly became known to defendants
and prior to their dissemination to the public, defendants Carlson,
Schneider and other directors of the Company allegedly sold shares of
common stock owned by them personally at price levels which TDA claims were
higher than the true value of these shares.
As relief, TDA essentially seeks damages in an amount to be proven at
trial, together with costs and expenses, including reasonable attorneys',
accountants' and experts' fees. The Complaint also requests that the Court
declare its action against the Company and the individual defendants to be
a proper class action and certify it as class representative and
plaintiff's counsel as counsel for the class. On March 24, 1995, the Court
granted TDA's motion for class certification. The litigation is currently
in the discovery phase.
The Company believes that it has meritorious defenses to the allegations
and claims set forth in the Complaint and that a finding of ultimate
liability against it, if any, would not have a material adverse effect on
its financial position, liquidity or results of operations.
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth quarterly financial information for 1995 and
1994:
Loss
(in thousands, Net Gross Net per
except per share data) sales margin loss share
---------------------- ----- ------ ---- -----
1995
----
First Quarter $12,687 $2,518 ($1,094) ($.15)
Second Quarter 14,084 (1,827)(1) (5,805) (.78)
Third Quarter 15,887 1,790 (2,296) (.31)
Fourth Quarter 17,350 2,427 (2,424) (.33)
------ ------ -------- ------
Total $60,008 $4,908 ($11,619) ($1.57)
======= ====== ======== ======
1994
----
First Quarter $15,516 $1,555 ($7,340) ($1.08)
Second Quarter 14,909 4,258 (374) (0.06)
Third Quarter 12,093 2,666 (831) (0.12)
Fourth Quarter 12,002 1,787 (3,046) (0.43)
------- ------ -------- ------
Total $54,520 $10,266 ($11,591) ($1.69)
======= ======= ======== ======
(1) The Company recorded a charge to cost of sales in the amount of $2,700,000
for increased provisions for slow moving, excess and obsolete inventory and
$2,000,000 for anticipated cost growth on certain long term contracts.
-95-
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
June 29, Dec. 31,
1996 1995
---------- -------
(Audited)
ASSETS
Current Assets:
Cash and cash equivalents $ 1,095 $ 2,605
Accounts receivable, net 14,637 13,735
Inventories, net 14,208 11,995
Deferred tax asset 384 384
Other current assets 446 813
------- -------
Total current assets 30,770 29,532
------- -------
Property, plant and equipment, net 4,945 5,351
Excess of cost over fair value of assets
acquired, net 10,022 10,339
Long-term notes receivable -- 1,190
Other assets 3,154 1,600
------- -------
Total assets $48,891 $48,012
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 537 $ --
Current installments of long-term debt 2,620 2,177
Accounts payable 8,783 9,797
Accrued payroll and commissions 532 768
Other accrued expenses 3,534 6,376
Income taxes payable 509 370
------- -------
Total current liabilities 16,515 19,488
------- -------
Long-term debt 15,951 15,573
Other accrued expenses 2,526 2,481
Deferred income taxes 384 384
------- -------
Total liabilities $35,376 $37,926
------- -------
Shareholders' Equity:
Capital Stock:
Preferred stock, no par value, 2,000,000
shares authorized and unissued $ -- $ --
Common stock, $.10 par value, 25,000,000
shares authorized; shares issued: 8,459,437 846 746
in 1996 and 7,459,437 in 1995 19,122 16,162
Foreign currency translation adjustment 49 43
Retained earnings (deficit) (6,502) (6,865)
------- -------
Total shareholders' equity 13,515 10,086
------- -------
Total liabilities and shareholders' equity $48,891 $48,012
======= =======
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<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands except per share amounts)
(Unaudited)
For the Three Months Ended
June 29, July 1,
1996 1995
---- ----
Net sales $17,354 $14,084
------- -------
Cost of sales 13,804 15,911
------- -------
Gross margin 3,550 (1,827)
------- -------
Selling expense 1,002 1,242
General and administrative expense 1,140 1,408
Research and development 505 485
Other (636) 196
------- -------
Total expenses 2,011 3,331
------- -------
Operating income (loss) 1,539 (5,158)
------- -------
Non-operating income (expense)
Other 15 --
Deferred debt expense (170) (300)
Interest income 46 34
Interest expense (609) (357)
------- -------
(718) (623)
Income (loss) before income taxes 821 (5,781)
Provision for income taxes 6 24
------- -------
Net income (loss) $ 815 $(5,805)
======= =======
Earnings (loss) per common share $ 0.10 $ (0.78)
======= =======
Average shares outstanding 8,513 7,418
======= =======
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<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands except per share amounts)
(Unaudited)
For the Six Months Ended
June 29, July 1,
1996 1995
---- ----
Net sales $33,857 $26,771
------- -------
Cost of sales 27,042 26,080
------- -------
Gross margin 6,815 691
------- -------
Selling expense 2,116 2,506
General and administrative expense 2,510 2,759
Research and development 872 1,026
Other (472) 226
------- -------
Total expenses 5,026 6,517
------- -------
Operating income (loss) 1,789 (5,826)
------- -------
Non-operating income (expense)
Other 15 --
Deferred debt expense (225) (300)
Interest income 101 88
Interest expense (1,174) (751)
------- -------
(1,283) (963)
Income (loss) before income taxes 506 (6,789)
Provision for income taxes 141 110
------- -------
Net income (loss) $ 365 $(6,899)
======= =======
Earnings (loss) per common share $ 0.05 $ (0.94)
======= =======
Average shares outstanding 7,988 7,304
======= =======
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<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
For the Six Months Ended
June 29, July 1,
1996 1995
---- ----
Cash Flows from Operating Activities:
Net earnings (loss) $ 363 $(6,899)
Adjustments to reconcile net loss to cash
provided by (used in) operating activities:
Depreciation and amortization 1,290 1,377
Gain on disposal of property, plant & equipment
and other (790) (4)
Provision for inventory obsolescence 207 2,113
Loss on sale of notes receivable 89 --
Change in assets and liabilities, excluding effects
from acquisitions and foreign currency adjustments:
Accounts receivable (1,296) (188)
Inventories (2,492) 805
Accounts payable and other accrued expenses (4,117) (697)
Income taxes 139 4,184
Other, net (827) 73
------- -------
Net cash flow (used in) provided by
operating activities (7,434) 764
------- -------
Cash Flows from Investing Activities:
Contingent payment on purchase of
KMS Advanced Products -- (26)
Purchase of property, plant and equipment (325) (378)
Proceeds from sale of property, plant and
equipment & other 1,363 417
------- -------
Net cash provided by investing activities 1,038 13
------- -------
Cash Flows from Financing Activities:
Issuances of notes payable 590 6
Issuance of 12% convertible bonds 5,842 --
Payments of notes payable (53) (133)
Payments of long-term debt (2,601) (461)
Receipts of notes receivable 1,101 --
Payments for debt restructuring -- (340)
Proceeds from exercise of stock options
and stock purchase plan -- 25
Net cash provided by (used in) financing activities 4,879 (903)
------- -------
Effect of foreign currency exchange rates on cash 7 40
------- -------
Net decrease in cash and cash equivalents (1,510) (86)
Cash and cash equivalents at beginning of year 2,605 1,658
------- -------
Cash and cash equivalents at end of period $ 1,095 $ 1,572
======= =======
Supplemental disclosure of cash flow information:
Cash paid for (refunded):
Interest $ 1,057 $ 753
Income taxes $ 3 $(3,949)
Non-cash investing and financing activities
Notes receivable from sale of property, plant &
equipment $ -- $ 1,190
Conversion of 12% Notes into common stock $ 2,000 $ --
Common stock issued in debt restructuring $ -- $ 500
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<PAGE>
<PAGE>
OTHER FINANCIAL INFORMATION
UNAUDITED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC") and, in the opinion of management, include all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of financial position, results of operations and cash flows for the
interim periods. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the SEC. The Company believes that the disclosures contained
herein are adequate to make the information presented not misleading. The
consolidated statements of operations for the six months ended June 30, 1996 are
not necessarily indicative of the results to be expected for the full year.
These unaudited financial statements should be read in conjunction with the
audited financial statements and accompanying notes included in the Company's
1995 Annual Report on Form 10-K for the year ended December 31, 1995.
INVENTORIES
Inventories are summarized by major classification as follows:
- --------------------------------------------------------------------------------
June 29, Dec. 31,
1996 1995
---------- -------
(Audited)
(In thousands of dollars)
Raw materials and components $10,105 $11,695
Work-in-process 5,983 4,121
Finished goods 1,050 477
Allowance for obsolescence (2,714) (3,536)
Unliquidated progress payments (216) (762)
------- -------
Inventories, net $14,208 $11,995
======= =======
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<PAGE>
<PAGE>
Independent Auditors' Report
on Consolidated Financial Statement Schedule
Board of Directors and Shareholders
NAI Technologies, Inc.:
Under date of March 1, 1996, we reported on the consolidated balance sheets of
NAI Technologies, Inc. and subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1995, as contained in the annual report on Form 10-K for the year 1995. In
connection with our audits of the aforementioned consolidated financial
statements, we have also audited the related consolidated financial statement
Schedule II (Valuation and Qualifying Accounts). This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits.
In our opinion, the related 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.
KPMG Peat Marwick LLP
Boulder, Colorado
March 1, 1996
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<PAGE>
Schedule II
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
(in thousands of dollars)
- --------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- --------------------------------------------------------------------------------------------------------
Additions
------------------------------
(1) (2)
Balance at Charged to Charged to Balance
Beginning Costs Other Accounts Deductions at End
Description of Period and Expenses Describe Describe of Period
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance deducted from
asset to which it applies
Allowance for doubtful accounts:
Year ended December 31, 1995 $ 133 $ 205 $ 0 $ 196(A) $ 142
Year ended December 31, 1994 172 11 0 50(A) 133
Year ended December 31, 1993 130 42 99 99(A) 172
Allowance for inventory obsolescence reserve:
Year ended December 31, 1995 $2,250 $2,248 $ 23 $ 985(B) $3,536
Year ended December 31, 1994 4,018 2,031 7 3,806(B) 2,250
Year ended December 31, 1993 3,322 387 1,429(C) 1,120(B) 4,018
</TABLE>
- ------------------------
Note A - Uncollected receivables written off, net of recoveries.
Note B - Obsolete inventory scrapped, net of recoveries.
Note C - Included in the purchase of Codar Technology, Inc. - $563.
Included in the purchase price of Lynwood Scientific Dev. Ltd. - $810.
Included in the purchase of the Tollgrade assets - $56.
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<PAGE>
<PAGE>
GLOSSARY
Definitions of the following terms can be found on the pages indicated.
Page
----
Active Investors .......................................................... 1
Additional Warrants ....................................................... 12
Asset Management .......................................................... 35
Bank Lenders .............................................................. 8
Bank Lenders .............................................................. 1
Carlson Employment Agreement .............................................. 39
Codar ..................................................................... 4
Code ...................................................................... 49
Commission ................................................................ 2
Common Stock .............................................................. 1
Common Stock .............................................................. 5
Company ................................................................... 1
Complaint ................................................................. 11
Conversion Price .......................................................... 5
Court ..................................................................... 11
Credit Agreement .......................................................... 1
Demand Rights ............................................................. 47
EBITDA .................................................................... 5
Events of Default ......................................................... 5
Exchange Act .............................................................. 2
Exercise Price ............................................................ 6
Expiration Date ........................................................... 46
Further Units ............................................................. 5
Holmes Shares ............................................................. 1
Investment Transaction .................................................... 5
Lynwood ................................................................... 4
Named Executives .......................................................... 36
Nasdaq .................................................................... 1
NOLs ...................................................................... 55
Noteholders ............................................................... 1
Notes ..................................................................... 5
Notes ..................................................................... 1
NST ....................................................................... 8
OID ....................................................................... 50
original issue discount ................................................... 50
Piggy-Back Rights ......................................................... 47
Placement Agent's Warrants ................................................ 5
Preferred Stock ........................................................... 47
Proposed Regulations ...................................................... 51
Qualified Stated Interest ................................................. 50
RBOCs ..................................................................... 4
Registrable Securities .................................................... 47
Registrant ................................................................ 5
Schneider Employment Agreement ............................................ 39
Securities ................................................................ 1
Securities Act ............................................................ 65
Selling Securityholders ................................................... 1
Service ................................................................... 49
Shareholders .............................................................. 1
Shares .................................................................... 1
Stock Purchase Agreement .................................................. 1
Systems ................................................................... 4
TDA ....................................................................... 11
TEMPEST ................................................................... 4
TIN ....................................................................... 54
Units ..................................................................... 5
Warrant ................................................................... 5
Warrantholders ............................................................ 1
Warrants .................................................................. 1
Wilcom .................................................................... 4
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The estimated expenses in connection with the offering of the Securities
are as follows:
SEC registration fee.................................................$14,967.84
Legal fees and expenses...............................................55,000.00*
Accounting fees and expenses..........................................15,000.00*
Miscellaneous expenses.................................................5,032.16*
--------
Total......................................................$90,000.00*
- ---------------
* Estimated
Item 14. Indemnification of Directors and Officers.
Sections 721-726 of the New York Business Corporation Law provide the following
with respect to the indemnification of directors, officers and employees:
ss. 721. Nonexclusivity of statutory provisions for indemnification of directors
and officers.- The indemnification and advancement of expenses granted pursuant
to, or provided by, this article shall not be deemed exclusive of any other
rights to which a director or officer seeking indemnification or advancement of
expenses may be entitled, whether contained in the certificate of incorporation
or the by-laws or, when authorized by such certificate of incorporation or
by-laws, (i) a resolution of shareholders, (ii) a resolution of directors, or
(iii) an agreement providing for such indemnification, provided that no
indemnification may be made to or on behalf of any director or officer if a
judgment or other final adjudication adverse to the director or officer
establishes that his acts were committed in bad faith or were the result of
active and deliberate dishonesty and were material to the cause of action so
adjudicated, or that he personally gained in fact a financial profit or other
advantage to which he was not legally entitled. Nothing contained in this
article shall affect any rights to indemnification to which corporate personnel
other than directors and officers may be entitled by contract or otherwise under
law.
ss. 722. Authorization for indemnification and officers.-(a) A corporation may
indemnify any person made, or threatened to be made, a party to an action or
proceeding (other than one by or in the right of the corporation to procure a
judgment in its favor), whether civil or criminal, including an action by or in
the right of any other corporation of any type or kind, domestic or foreign, or
any partnership, joint venture, trust, employee benefit plan or other
enterprise, which any director or officer of the corporation served in any
capacity at the request of the corporation, by reason of the fact that he, his
testator or intestate, was a director or officer of the corporation, or served
such other corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise in any capacity, against judgments, fines, amounts paid in
settlement and reasonable expenses, including attorneys' fees actually and
necessarily incurred as a result of such action or proceeding, or any appeal
therein, if such director or officer acted, in good faith, for a purpose which
he reasonably believed to be in, or, in the case of service for any other
corporation or any partnership, joint venture, trust, employee benefit plan or
other enterprise, not opposed to, the best interests of the corporation and, in
criminal actions or proceedings, in addition, had no reasonable cause to believe
that his conduct was unlawful.
(b) The termination of any such civil or criminal action or proceeding by
judgment, settlement, conviction or upon a plea of nolo contendere, or its
equivalent, shall not in itself create a presumption that any such director or
officer did not act, in good faith, for a purpose which he reasonably believed
to be in, or, in the case of service for any other corporation or any
partnership, joint venture, trust, employee benefit plan or other enterprise,
not opposed to, the best interest of the corporation or that he had reasonable
cause to believe that his conduct was unlawful.
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(c) A corporation may indemnify any person made, or threatened to be made, a
party to an action by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that he, his testator or intestate, is or was
a director or officer of the corporation, or is or was serving at the request of
the corporation as a director or officer of any other corporation of any type or
kind, domestic or foreign, of any partnership, joint venture, trust, employee
benefit plan or other enterprise, against amounts paid in settlement and
reasonable expenses, including attorneys' fees, actually and necessarily
incurred by him in connection with the defense or settlement of such action, or
in connection with an appeal therein, if such director or officer acted, in good
faith, for a purpose which he reasonably believed to be in, or, in the case of
service for any other corporation or any partnership, joint venture, trust,
employee benefit plan or other enterprise, not opposed to, the best interests of
the corporation, except that no indemnification under this paragraph shall be
made in respect of (1) a threatened action, or a pending action which is settled
or otherwise disposed of, or (2) any claim, issue or matter as to which such
person shall have been adjudged to be liable to the corporation, unless and only
to the extent that the court in which the action was brought, or, if no action
was brought, any court of competent jurisdiction, determines upon application
that, in view of all the circumstances of the case, the person is fairly and
reasonably entitled to indemnity for such portion of the settlement amount and
expenses as the court deems proper.
(d) For the purpose of this section, a corporation shall be deemed to have
requested a person to serve an employee benefit plan where the performance by
such person of his duties to the corporation also imposes duties on, or
otherwise involves services by, such person to the plan or participants or
beneficiaries of the plan; excise taxes assessed on a person with respect to an
employee benefit plan pursuant to applicable law shall be considered fines; and
action taken or omitted by a person with respect to an employee benefit plan in
the performance of such person's duties for a purpose reasonably believed, by
such person to be in the interest of the participants and beneficiaries of the
plan shall be deemed to be for a purpose which is not opposed to the best
interests of the corporation.
ss. 723. Payment of indemnification other than by court award.-(a) A person who
has been successful, on the merits or otherwise, in the defense of a civil or
criminal action or proceeding of the character described in section 722 shall be
entitled to indemnification as authorized in such section.
(b) Except as provided in paragraph (a), any indemnification under section 722
or otherwise permitted by section 721, unless ordered by a court under section
724 (Indemnification of directors and officers by a court) shall be made by the
corporation, only if authorized in the specific case:
(1) By the board acting by a quorum consisting of directors who are not parties
to such action or proceeding upon a finding that the director or officer has met
the standard of conduct set forth in section 722 or established pursuant to
section 721, as the case may be, or,
(2) If a quorum under subparagraph (1) is not obtainable or, even if obtainable,
a quorum of disinterested directors so directs:
(A) By the board upon the opinion in writing of independent legal counsel that
indemnification is proper in the circumstances because the applicable standard
of conduct set forth in such sections has been met by such director or officer,
or
(B) By the shareholders upon a finding that the director or officer has met the
applicable standard of conduct set forth in such sections.
(c) Expenses incurred in defending a civil or criminal action or proceeding may
be paid by the corporation in advance of the final disposition of such action or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount as, and to the extent, required by paragraph (a) of
section 725.
ss. 724. Indemnification of directors and officers by a court.-(a)
Notwithstanding the failure of a corporation to provide indemnification, and
despite any contrary resolution of the board or of the shareholders in the
specific case under section 723 (Payment of indemnification other than by court
award), indemnification shall be awarded by a court to the extent authorized
under section 722 (Authorization for indemnification of directors and officers),
and paragraph (a) of section 723. Application therefor may be made, in every
case, either:
(1) In the civil action or proceeding in which the expenses were incurred or
other amounts were paid, or
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<PAGE>
(2) To the supreme court in a separate proceeding, in which case the application
shall set forth the disposition of any previous application made to any court
for the same or similar relief and also reasonable cause for the failure to make
application for such relief in the action or proceeding in which the expenses
were incurred or other amounts were paid.
(b) The application shall be made in such manner and form as may be required by
the applicable rules of court or, in the absence thereof, by direction of a
court to which it is made. Such application shall be upon notice to the
corporation. The court may also direct that notice be given at the expense of
the corporation to the shareholders and such other persons as it may designate
in such manner as it may require.
(c) Where indemnification is sought by judicial action, the court may allow a
person such reasonable expenses, including attorneys' fees, during the pendency
of the litigation as are necessary in connection with his defense therein, if
the court shall find that the defendant has by his pleadings or during the
course of the litigation raised genuine issues of fact or law.
ss. 725. Other provisions affecting indemnification of directors and
officers.-(a) All expenses incurred in defending a civil or criminal action or
proceeding which are advanced by the corporation under paragraph (c) of section
723 (Payment of indemnification other than by court award) or allowed by a court
under paragraph (c) of section 724 (Indemnification of directors and officers by
a court) shall be repaid in case the person receiving such advancement or
allowance is ultimately found, under the procedure set forth in this article,
not to be entitled to indemnification or, where indemnification is granted, to
the extent the expenses so advanced by the corporation or allowed by the court
exceed the indemnification to which he is entitled.
(b) No indemnification, advancement or allowance shall be made under this
article in any circumstance where it appears:
(1) That the indemnification would be inconsistent with the law of the
jurisdiction of incorporation of a foreign corporation which prohibits or
otherwise limits such indemnification;
(2) That the indemnification would be inconsistent with a provision of the
certificate of incorporation, a by-law, a resolution of the board or of the
shareholders, an agreement or other proper corporate action, in effect at the
time of the accrual of the alleged cause of action asserted in the threatened or
pending action or proceeding in which the expenses were incurred or other
amounts were paid, which prohibits or otherwise limits indemnification; or
(3) If there has been a settlement approved by the court, that the
indemnification would be inconsistent with any condition with respect to
indemnification expressly imposed by the court in approving the settlement.
(c) If any expenses or other amounts are paid by way of indemnification,
otherwise than by court order or action by the shareholders, the corporation
shall, not later than the next annual meeting of shareholders unless such
meeting is held within three months from the date of such payment, and, in any
event, within fifteen months from the date of such payment, mail to its
shareholders of record at the time entitled to vote for the election of
directors a statement specifying the persons paid, the amounts paid, and the
nature and status at the time of such payment of the litigation or threatened
litigation.
(d) If any action with respect to indemnification of directors and officers is
taken by way of amendment of the by-laws, resolution of directors, or by
agreement, then the corporation shall, not later than the next annual meeting of
shareholders, unless such meeting is held within three months from the date of
such action, and, in any event, within fifteen months from the date of such
action, mail to its shareholders of record at the time entitled to vote for the
election of directors a statement specifying the action taken.
(e) Any notification required to be made pursuant to the foregoing paragraph (c)
or (d) of this section by any domestic mutual insurer shall be satisfied by
compliance with the corresponding provisions of section one thousand two hundred
sixteen of the insurance law.
(f) The provisions of this article relating to indemnification of directors and
officers and insurance therefor shall apply to domestic corporations and foreign
corporations doing business in this state, except as provided in section 1320
(Exemption from certain provisions).
ss. 726. Insurance for indemnification of directors and officers.-(a) Subject to
paragraph (b), a corporation shall have power to purchase and maintain
insurance:
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<PAGE>
(1) To indemnify the corporation for any obligation which it incurs as a result
of the indemnification of directors and officers under the provisions of this
article, and
(2) To indemnify directors and officers in instances in which they may be
indemnified by the corporation under the provisions of this article, and
(3) To indemnify directors and officers in instances in which they may not
otherwise be indemnified by the corporation under the provisions of this article
provided the contract of insurance covering such directors and officers
provides, in a manner acceptable to the superintendent of insurance, for a
retention amount and for co-insurance.
(b) No insurance under paragraph (a) may provide for any payment, other than
cost of defense, to or on behalf of any director or officer:
(1) If a judgment or other final adjudication adverse to the insured director or
officer establishes that his acts of active and deliberate dishonesty were
material to the cause of action so adjudicated, or that he personally gained in
fact a financial profit or other advantage to which he was not legally entitled,
or
(2) In relation to any risk the insurance of which is prohibited under the
insurance law of this state.
(c) Insurance under any or all subparagraphs of paragraph (a) may be included in
a single contract or supplement thereto. Retrospective rated contracts are
prohibited.
(d) The corporation shall, within the time and to the persons provided in
paragraph (c) of section 725 (Other provisions affecting indemnification of
directors or officers), mail a statement in respect of any insurance it has
purchased or renewed under this section, specifying the insurance carrier, date
of the contract, cost of the insurance, corporate positions insured, and a
statement explaining all sums, not previously reported in a statement to
shareholders, paid under any indemnification insurance contract.
(e) This section is the public policy of this state to spread the risk of
corporate management, notwithstanding any other general or special law of this
state or of any other jurisdiction including the federal government.
Paragraph 15 of the Restated Certificate of Incorporation of the Company
provides as follows:
The liability to the Corporation and its shareholders of each and every person
who is at any time a director of the Corporation, in such person's capacity as
such director, is, and shall be, limited and eliminated to the full extent
authorized or permitted by law (as now or hereafter in effect). Any repeal or
modification of this Paragraph shall not adversely affect any right or
protection of any person existing at the time of such repeal or modification.
Section 6.1 of the Amended and Restated By-laws of the Company provides as
follows:
Section 6.1. Indemnification. To the full extent authorized or permitted by law
(as now or hereafter in effect), the Corporation shall indemnify any person who
shall at any time be made or be threatened to be made a party to or otherwise
involved in any civil or criminal action or proceeding by reason of the fact
that such person, or such person's testator or intestate, is or was a director
or officer of the Corporation or by reason of the fact that such director or
officer, at the request of the Corporation, is or was serving any other
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise in any capacity, and the Corporation shall pay the expenses incurred
by any such person in defending any such action or proceeding as such expenses
are incurred, including in advance of the final disposition of such action or
proceeding. Nothing contained herein shall affect any rights to indemnification
to which employees other than directors and officers may be entitled by law. No
amendment or repeal of this Section 6.1 shall apply to or have any effect on any
right to indemnification or advancement of expenses provided hereunder with
respect to any acts or omissions occurring prior to such amendment or repeal.
In furtherance and not in limitation of the powers conferred by statute, the
Corporation may enter into agreements providing indemnification to the full
extent authorized or permitted by law (as now or hereafter in effect) and
including as part thereof provisions with respect to the creation of trust
funds, the granting of security interests and the use of other means (including,
without limitation, letters of credit, surety bonds
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and other similar arrangements) to ensure the payment of such amounts as may
become necessary to effect indemnification as provided therein or elsewhere.
Item 15. Recent Sales of Unregistered Securities.
On February 15, 1996, NAI Technologies, Inc., a New York corporation (the
"Registrant"), sold in a private offering 7,235 units (the "Units"), each Unit
consisting of $1,000 principal amount of the Registrant's 12% Convertible
Subordinated Promissory Notes due 2001 (the "Notes") and a detachable warrant
(the "Warrant") to purchase the Registrant's common stock, par value $.10 per
share (the "Common Stock"), at a purchase price of $1,000 per Unit, for an
aggregate purchase price of $7,235,000 to selected qualified investors (the
"Investment Transaction"). The Notes may be converted by the holders into Common
Stock of the Company at any time at a conversion price equal to $2.00 per share,
subject to adjustment. Each Warrant entitles the holder thereof to purchase
specified numbers of shares of Common Stock at an exercise price equal to $2.50
per share, subject to adjustment.
On February 23, 1996, the Registrant sold 760 additional Units (the "Additional
Units") for an aggregate purchase price of approximately $760,000 as part of the
Investment Transaction while on February 29, 1996, the Registrant sold 247
additional Units (the "Further Units") for an aggregate purchase price of
approximately $247,000 as part of the Investment Transaction.
On February 15, 1996, Commonwealth Associates, who acted as the Registrant's
Placement Agent in connection with the Investment Transaction, and its designees
purchased for $.001 per warrant, warrants to purchase 723,500 shares of Common
Stock, each at an exercise price of $2.50 per share, subject to adjustment in
certain events (the "Placement Agent's Warrants"). The Placement Agent purchased
100,700 additional warrants on when the Additional Units and the Further Units
were purchased. Commonwealth received a fee equal to 8% of the gross proceeds of
the Investment Transaction together with the reimbursement of accountable
expenses up to $200,000 for its services.
On October 13, 1995 and December 14, 1995, Charles S. Holmes, a director of the
Registrant, purchased two subordinated notes of the Registrant each in the
principal amount of $1,000,000. Such notes were exchanged for 2,000 Units in the
Investment Transaction. Warrants to purchase an aggregate of 1,200,000 shares
were issued to Mr. Holmes for past advisory services in connection with the
Investment Transaction and the engagement of the Commonwealth.
In December 1995 and January 1996, Active Investors II, Ltd. purchased
subordinated notes of the Registrant in the aggregate principal amount of
$900,000. C. Shelton James, a director of the Registrant, is the President and a
director of Active Investors II, Ltd. Such notes were exchanged for 900 Units in
the Investment Transaction. On May 2, 1996, Active Investors II, Ltd. purchased
an additional 100 Units as part of the Investment Transaction. Active Investors
II, Ltd. and certain affiliated limited partnerships currently own approximately
5.57% of the Registrant's Common Stock.
The foregoing securities were issued and sold in the Investment Transaction in
accordance with Section 4(2) of the Securities Act of 1933, as amended.
In April 1995, The Bank of New York and Chemical Bank each received 125,000
shares of Common Stock in connection with the execution of the Amended and
Restated Credit Agreement dated as of April 12, 1995 between such entities and
the Registrant. No further consideration was given for such shares. Such
issuance was made in accordance with Section 4(2) of the Securities Act of 1933,
as amended.
On November 3, 1994, Active Investors II, Ltd. purchased 363,636 shares of
Common Stock of the Registrant for $1,000,000 in cash. Such sale was made in
accordance with Section 4(2) of the Securities Act of 1933, as amended.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits:
3.1 Restated Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3(a) to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 29, 1991).
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3.2 Amended and Restated By-laws (incorporated by reference to Exhibit
3(b) to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended June 29, 1991).
4.1 Warrant registered in the name of Mr. Holmes to Purchase 300,000
shares of Common Stock of the Company on or before February 15, 2002
(incorporated by reference to Exhibit 3 to Mr. Holmes Current Report
on Schedule 13D dated May 9, 1996 filed with the Commission).
4.1 Form of 12% Convertible Subordinated Promissory Note, due January 15,
2001, of the Registrant (incorporated by reference to Exhibit 1 to the
Registrant's Current Report on Form 8-K dated February 15, 1996 filed
with the Commission).
4.2 Form of Warrant to Purchase Common Stock of the Registrant, on or
before February 15, 2002 (incorporated by reference to Exhibit 2 to
the Registrant's Current Report on Form 8-K dated February 15, 1996
filed with the Commission).
4.3 Registration Rights Agreement, dated as of February 13, 1996, between
the Registrant and the Noteholders and Warrantholders (incorporated by
reference to Exhibit 4 to the Registrant's Current Report on Form 8-K
dated February 15, 1996 filed with the Commission).
5 Opinion of Whitman Breed Abbott & Morgan.*
10.1 Letter Agreement, dated May 9, 1996, between Charles S. Holmes and the
Company (incorporated by reference to Exhibit 1 to the Registrant's
Current Report on Form 8-K dated May 9, 1996 filed with the
Commission).
10.2 Amended and Restated Credit Agreement among the Registrant and
Chemical Bank, a New York banking corporation ("Chemical"), The Bank
of New York, a New York Banking corporation ("BNY"), and each of the
other financial institutions which from time to time becomes a party
thereto (together with Chemical and BNY, the "Banks"), BNY, as
administrative agent, and Chemical as collateral agent (incorporated
by reference to Exhibit 10 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1994 filed with the
Commission).
10.3 First Amendment, dated as of August 14, 1995, to the Amended and
Restated Credit Agreement, dated as of April 12, 1995, among the
Registrant and the Bank Lenders (incorporated by reference to Exhibit
10.5 to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1995 filed with the Commission).
10.4 Second Amendment, dated as of October 13, 1995, to the Amended and
Restated Agreement, dated as of April 12, 1995, among the Registrant
and the Bank Lenders (incorporated by reference to Exhibit 10.6 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1995 filed with the Commission).
10.5 Third Amendment, dated as of November 6, 1995, to the Amended and
Restated Credit Agreement, dated as of April 12, 1995, among the
Registrant and the Bank Lenders (incorporated by reference to Exhibit
10.7 to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1995 filed with the Commission).
10.6 Fourth Amendment, dated as of January 5, 1996, to Amended and Restated
Credit Agreement, dated as of April 12, 1995, as previously amended,
among the Registrant, Chemical Bank and BNY (incorporated by reference
to Exhibit 6 to the Registrant's Current Report on Form 8-K dated
February 15, 1996 filed with the Commission).
10.7 Fifth Amendment, dated as of February 13, 1996, to Amended and
Restated Credit Agreement, dated as of April 12, 1995, as previously
amended (the "Credit Agreement"), among the Registrant, Chemical Bank
and BNY (incorporated by reference to Exhibit 7 to the Registrant's
Current Report on Form 8-K dated February 15, 1996 filed with the
Commission).
10.8 Amendment No. 1 to Registration Rights Agreement, dated as of February
13, 1996, to that certain Registration Rights Agreement, dated as of
April 12, 1995, as amended, between the Registrant and BNY and
Chemical (incorporated by reference to Exhibit 8 to the Registrant's
Current Report on Form 8-K dated February 15, 1996 filed with the
Commission).
10.9 Securities Purchase Agreement, dated as of October 13, 1995, by and
between the Registrant and Charles S. Holmes (incorporated by
reference to Exhibit 10.1 to the
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Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1995 filed with the Commission).
10.10 12% Subordinated Promissory Note due 1996 of the Registrant
(incorporated by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended September
30, 1995 filed with the Commission).
10.11 Placement Agency Agreement dated as of December 14, 1995, between the
Company and Commonwealth Associates (incorporated by reference to
Exhibit 2 to the Registrant's Current Report on Form 8-K dated
February 15, 1996 filed with the Commission).
10.12 Employment Agreement, dated as of October 16, 1995, between the
Registrant and Robert A. Carlson (incorporated by reference to Exhibit
10.3 to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1995 filed with the Commission).
10.13 Employment Agreement, dated as of October 16, 1995, between the
Registrant and Richard A. Schneider (incorporated by reference to
Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1995 filed with the Commission).
10.14 Common Stock Purchase Agreement dated as of November 3, 1994 by and
between the Registrant and Active Investors II, Ltd. (incorporated by
reference to Exhibit 10(a) to the Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended October 1, 1994 filed with
the Commission).
10.15 Agreement, dated January 13, 1993, among the shareholders of Lynwood
and the Registrant, including the form of warrant delivered in
connection therewith (incorporated by reference to Exhibit 1 to the
Registrant's Report on Form 8-K dated January 13, 1993 filed with the
Commission).
10.16 Indenture, dated July 15, 1996, between the Registrant and First
Trust National Association, as trustee.
12 Computation of Ratios.*
21 List of Subsidiaries (incorporated by reference to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1995).
23.1 Consent of KPMG Peat Marwick LLP.*
23.2 Consent of Whitman Breed Abbott & Morgan (included in Exhibit 5).*
24 Power of Attorney (included in Part II of the Registration Statement
(Registration No. 333-3837) filed with the Commission on May 16,
1996).
25 Statement of Eligibility of Trustee.
*Previously filed.
(b) Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts (included on pages 98
and 99 of this Registration Statement).
Schedules not listed above have been omitted either because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or Notes thereto.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement;
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(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
provided, however, that paragraphs (l)(i) and (l)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Registrant
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual report
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934
that is incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions described
under Item 15 above, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling person of
the Registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with the securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed in
the Securities Act of 1933 and will be governed by the final adjudication
of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Company certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing on Form S-1 and has duly caused this Amendment No. 3
to Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the Town of Longmont, State of Colorado, on the
13th day of August, 1996.
NAI TECHNOLOGIES, INC.
By /s/ Robert A. Carlson
------------------------------
Robert A. Carlson
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to Registration Statement has been signed below by the
following persons, in the capacities indicated, on August 13, 1996.
By /s/ Robert A. Carlson
------------------------------
Robert A. Carlson
Chairman and Chief Executive Officer
and Director (principal executive officer)
By /s/ Richard A. Schneider
------------------------------
Richard A. Schneider
Executive Vice President, Treasurer,
Chief Financial Officer, Secretary
and Director (principal financial
and accounting officer)
By /s/ Stephen A. Barre*
------------------------------
Stephen A. Barre
Director
By /s/ C. Shelton James*
------------------------------
C. Shelton James
Director
By /s/ Charles S. Holmes*
------------------------------
Charles S. Holmes
Director
By
------------------------------
Edward L. Hennessy
Director
By /s/ Dennis McCarthy*
------------------------------
Dennis McCarthy
Director
- --------------------
* Richard A. Schneider, pursuant to a Power of Attorney executed by each of the
directors and officers noted above and filed with the Securities and Exchange
Commission, by signing his name hereto, does hereby sign and execute this
Amendment No. 3 to Registration Statement on Form S-1 on behalf of each of the
persons noted above in the capacities indicated.
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NAI TECHNOLOGIES, INC., Issuer
-----------------------------
$6,342,000
12% Convertible Subordinated Promissory Notes
---------------------------
Indenture
Dated as of July 15, 1996
FIRST TRUST NATIONAL ASSOCIATION
Trustee
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TABLE OF CONTENTS
ARTICLE 1 DEFINITIONS AND INCORPORATION
BY REFERENCE.................................... 1
Section 1.1 Definitions..................................... 1
Section 1.2 Other Definitions............................... 9
Section 1.3 Incorporation by Reference of Trust
Indenture Act.......................... 9
Section 1.4 Rules of Construction........................... 9
ARTICLE 2 THE SECURITIES.................................. 10
Section 2.1 Form and Dating................................. 10
Section 2.2 Execution and Authentication.................... 10
Section 2.3 Registrar and Paying Agent...................... 11
Section 2.4 Paying Agent to Hold Money in
Trust.................................. 12
Section 2.5 Securityholder Lists............................ 13
Section 2.6 Transfer and Exchange........................... 13
Section 2.7 Replacement Securities.......................... 13
Section 2.8 Outstanding Securities.......................... 14
Section 2.9 Treasury Securities............................. 14
Section 2.10 Temporary Securities............................ 14
Section 2.11 Cancellation.................................... 15
Section 2.12 Defaulted Interest.............................. 15
Section 2.13 Home Office Payment Agreements.................. 15
ARTICLE 3 REDEMPTION...................................... 16
Section 3.1 Notices to Trustee.............................. 16
Section 3.2 Selection of Securities to Be
Redeemed............................... 16
Section 3.3 Notice of Redemption............................ 17
Section 3.4 Effect of Notice of Redemption.................. 17
Section 3.5 Deposit of Redemption Price..................... 17
Section 3.6 Securities Redeemed in Part..................... 18
ARTICLE 4 COVENANTS....................................... 18
Section 4.1 Payment of Securities........................... 18
Section 4.2 SEC Reports, Financial Reports.................. 18
Section 4.3 Compliance Certificate.......................... 19
Section 4.4 Corporate Existence............................. 20
Section 4.5 Taxes and Assessments........................... 20
Section 4.6 Liens........................................... 21
Section 4.7 Indebtedness.................................... 21
Section 4.8 Investments..................................... 21
Section 4.9 Payments........................................ 21
Section 4.10 Disposition of Assets........................... 22
Section 4.11 Affiliate Transactions.......................... 22
Section 4.12 Maintenance of Properties....................... 22
Section 4.13 Stay, Extension and Usury Laws.................. 23
ARTICLE 5 SUCCESSORS...................................... 23
Section 5.1 When Company or Its
Subsidiaries May Merge etc............. 23
Section 5.2 Successor Corporation Substituted............... 24
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ARTICLE 6 DEFAULTS AND REMEDIES........................... 24
Section 6.1 Events of Default............................... 24
Section 6.2 Acceleration.................................... 26
Section 6.3 Other Remedies.................................. 26
Section 6.4 Waiver of Past Defaults......................... 26
Section 6.5 Control by Majority............................. 27
Section 6.6 Limitation on Suits............................. 27
Section 6.7 Rights of Holders to Receive Payment............ 27
Section 6.8 Collection Suit by Trustee...................... 28
Section 6.9 Trustee May File Proofs of Claim................ 28
Section 6.10 Priorities...................................... 28
Section 6.11 Undertaking for Costs........................... 29
ARTICLE 7 TRUSTEE......................................... 29
Section 7.1 Duties of Trustee............................... 29
Section 7.2 Rights of Trustee............................... 30
Section 7.3 Individual Rights of Trustee.................... 31
Section 7.4 Trustee's Disclaimer............................ 31
Section 7.5 Notice of Defaults.............................. 31
Section 7.6 Reports by Trustee to Holders................... 32
Section 7.7 Compensation and Indemnity...................... 32
Section 7.8 Replacement of Trustee.......................... 33
Section 7.9 Successor Trustee by Merger etc................. 34
Section 7.10 Eligibility; Disqualification................... 34
Section 7.11 Preferential Collection of Claims
Against Company........................ 34
ARTICLE 8 DISCHARGE OF INDENTURE.......................... 35
Section 8.1 Termination of Company's Obligations............ 35
Section 8.2 Application of Trust Money...................... 36
Section 8.3 Repayment to Company............................ 36
Section 8.4 Reinstatement................................... 36
ARTICLE 9 AMENDMENTS...................................... 37
Section 9.1 Without Consent of Holders...................... 37
Section 9.2 With Consent of Holders......................... 37
Section 9.3 Compliance with Trust Indenture Act............. 38
Section 9.4 Revocation and Effect of Consents............... 38
Section 9.5 Notation on or Exchange of
Securities............................. 39
Section 9.6 Trustee Protected............................... 39
ARTICLE 10 SUBORDINATION................................... 39
Section 10.1 Securities Subordinated to Senior
Indebtedness........................... 39
Section 10.2 Liquidation; Dissolution; Bankruptcy............ 40
Section 10.3 Default on Senior Indebtedness.................. 42
Section 10.4 When Distribution Must Be Paid Over............. 42
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Section 10.5 Notice by Company............................... 43
Section 10.6 Subrogation..................................... 43
Section 10.7 Relative Rights................................. 43
Section 10.8 Subordination May Not Be Impaired by
Company......................................... 44
Section 10.9 Distribution or Notice to
Representatives........................ 44
Section 10.10 Rights of Trustee and Paying Agent.............. 44
Section 10.11 Trustee Entitled to Assume Payments
Not Prohibited in Absence of Notice.... 45
Section 10.12 Application by Trustee of Monies
Deposited With It...................... 45
Section 10.13 Trustee's Compensation Not
Prejudiced............................. 46
Section 10.14 Officer's Certificate........................... 46
Section 10.15 Certain Payments................................ 46
Section 10.16 Names of Representatives........................ 46
Section 10.17 Article 10 Not To Prevent Events of
Default or Limit Right To
Accelerate............................. 46
Section 10.18 Reliance by Holders of Senior
Indebtedness on Subordination
Provisions............................. 47
Section 10.19 Proof of Claim.................................. 47
Section 10.20 No Fiduciaries Duty to Holders
of Senior Indebtedness................. 47
ARTICLE 11 MISCELLANEOUS................................... 48
Section 11.1 Trust Indenture Act Controls.................... 48
Section 11.2 Notices......................................... 48
Section 11.3 Communication by Holders with Other
Holders................................ 48
Section 11.4 Certificate and Opinion as to
Conditions Precedent................... 49
Section 11.5 Statements Required in Certificate
or Opinion............................. 49
Section 11.6 Rules by Trustee and Agents..................... 49
Section 11.7 Legal Holidays.................................. 50
Section 11.8 Counterparts.................................... 50
Section 11.9 Variable Provisions............................. 50
Section 11.10 Governing Law................................... 51
Section 11.11 No Adverse Interpretation of
Other Agreements....................... 51
Section 11.12 Successors...................................... 51
Section 11.13 Severability.................................... 51
Section 11.14 Qualification of Indenture...................... 51
Section 11.15 Table of Contents, Headings, etc................ 51
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ARTICLE 12 CONVERSION ..................................... 52
Section 12.1 Conversion of the Note. ........................ 52
Section 12.2 Reservation. .................................. 56
Section 12.3 Delivery of Shares and/or New Note. ............ 56
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INDENTURE dated as of July 15, 1996 among NAI TECHNOLOGIES, INC., a New
York corporation (the "Company"), and FIRST TRUST NATIONAL ASSOCIATION, a
national association, as Trustee (the "Trustee").
Each party agrees as follows for the benefit of the other parties and for
the equal and ratable benefit of the holders of the Company's 12% Convertible
Subordinated Promissory Notes due January 15, 2001 (the "Securities"):
ARTICLE 1
DEFINITIONS AND INCORPORATION
BY REFERENCE
Section 1.1 Definitions.
"Affiliate," with respect to any Person, means the following: (i) any other
Person that at such time directly or indirectly through one or more
intermediaries controls, or is controlled by or is under common control with
such first Person or (ii) any Person beneficially owning or holding, directly or
indirectly, 10% or more of any class of voting or equity interests of the
Company or any Subsidiary or any corporation of which the Company and its
Subsidiaries beneficially own or hold, in the aggregate, directly or indirectly,
10% of more of any class of voting or equity interests. As used in such
definition, "controls", "controlled by" and "under common control", as used with
respect to an Person, shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management policies of such
Person, whether through the ownership of voting securities, by agreement or
otherwise.
"Agent" means any Registrar, Paying Agent or co- registrar.
"Bank Credit Agreement" has the meaning set forth in Section 10.1 hereof.
"Bankruptcy Law" means Title 11, U.S. Code or any similar Federal, state or
foreign law for the relief of debtors.
"Capital Stock" means with respect to any Person any and all shares,
interests, warrants, rights, options, participations or other equivalents
(however designated) of, in or to corporate stock, including of, in or to common
stock and preferred stock (whether or not included in shareholders' equity).
"Change in Control" any of the following events or circumstances: (i)
individuals who, at the beginning of any
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period of twenty-four (24) consecutive months, constitute the Company's board of
directors (together with any new director whose election by the Company's board
of directors or whose nomination for election by the Company's shareholders was
approved by a vote of at least two-thirds of the directors then still in office
who either were directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason (other
than death or disability) to constitute a majority of the Company's board of
directors then in office; (ii) any person or related persons constituting a
group (as such terms are used the Exchange Act) become the "beneficial owners"
(as such term is used under the Exchange Act), directly or indirectly of more
than fifty percent (50%) of the total voting power of all classes then
outstanding of the Company's voting stock; or (iii) the acquisition after the
date hereof by any person or related persons constituting a group of the power
to elect, appoint or cause the election or appointment of at least a majority of
the members of the board of directors of the Company; or (iv) the acquisition
after the date hereof by any person or related persons constituting a group of
all or substantially all of the properties and assets of the Company and its
Subsidiaries, on a consolidated basis; provided, however, that no Change in
Control shall be deemed to have occurred in connection with, or pursuant to, the
initial issuance and sale of the Notes.
"Closing Price" the closing price per share of the Company's Common Stock
on the principal national securities exchange on which the Common Stock is
listed or admitted to trading or, if not listed or traded on any such exchange,
on the National Market System of the National Association of Securities Dealers
Automated Quotations System ("Nasdaq"), or if not listed or traded on any such
exchange or system, the average of the bid and asked price per share on Nasdaq
or, if such quotations are not available, the fair market value per share of
Common Stock as reasonably determined by the Board of Directors of the Company.
"Common Stock" shall mean the common stock, par value $.10 per share, of
the Company.
"Company" means the Person named as such above until a successor replaces
it in accordance with Article 5, and thereafter means the successor.
"Consolidated Net Income" means the net income (or deficit) of the Company
and its Subsidiaries for any period (taken as a cumulative whole) after
deducting, without duplication, all operating expenses, provisions for all taxes
and reserves (including reserves for deferred income taxes) and all other proper
deductions, all determined in
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accordance with GAAP on a consolidated basis, after eliminating all intercompany
items and after deducting portions of income properly attributable to outside
minority interests, if any, in any Subsidiaries; provided, however, that there
shall be excluded (a) any income or deficit of any other Person accrued prior to
the date it becomes a Subsidiary or merges into or consolidates with the Company
or another Subsidiary of the Company, (b) the income (or deficit) of any other
Person (other than a Subsidiary of the Company) in which the Company or any
Subsidiary has any ownership interest, except to the extent that any such income
has been actually received by the Company or such Subsidiary in the form of cash
dividends or similar distributions, (c) any deferred credit or amortization
thereof from the acquisition of any properties of assets of any other Person,
(d) any aggregate net income (but not any aggregate net loss) during such period
arising from the sale, exchange or other distribution of capital assets (such
term to include all fixed assets, whether tangible or intangible, all inventory
sold in conjunction with the disposition of fixed assets and all securities),
(e) any income resulting from the write-up of assets after the date hereof, (f)
any gains properly classified as extraordinary in accordance with GAAP, (g)
proceeds of life insurance policies to the extent such proceeds exceed premiums
paid to maintain such life insurance policies, (h) any income of a Subsidiary
which is unavailable for the payment of dividends, and (i) any gain arising from
the acquisition of securities, or the extinguishment of any indebtedness of the
Company or any of its Subsidiaries or the termination of an employee benefit
plan.
"Corporation" includes corporations, associations, companies and business
trusts.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Documents" means the Indenture, the Securities and all security
agreements, mortgages, deeds of trust, financing statements, lease assignments,
guaranties and other agreements and instruments, together with any assignments,
endorsements of, exhibits, schedules or other attachments to all of the
foregoing, delivered in connection with the transactions contemplated hereby or
thereby, all as amended, supplemented or otherwise modified from time to time.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
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"GAAP" means United States generally accepted accounting principles,
consistently applied.
"Governmental Authority" means any agency, authority, board, bureau,
commission, department, office or instrumentality of any nature whatsoever of
any city or other political subdivision or otherwise and whether now or
hereafter in existence, or any officer or official thereof.
"Holder" or "Securityholder" means a Person in whose name a Security is
registered from time to time.
"Indebtedness" means at any time and with any respect to any Person, (i)
all indebtedness of such Person for borrowed money, (ii) all indebtedness of
such Person for the deferred purchase price of property or services (other than
property, including inventory, and services purchased, and expense accruals and
deferred compensation items arising, in the ordinary course of business,
provided that the same shall not be overdue (i.e., the earlier of ninety (90)
days from the invoice date or the date the obligee commences an action to
recover such amounts), or if overdue, are being contested in good faith and by
appropriate proceedings), (iii) all obligations of such Person evidenced by
notes, bonds, debentures or other similar instruments (other than performance,
surety and appeal bonds arising in the ordinary course of business), (iv) all
indebtedness of such Person created or arising under any conditional sale or
other title retention agreement with respect to property acquired by such Person
(even though the rights and remedies of the seller or lender under such
agreement in the event of default are limited to repossession or sale of such
property), (v) all obligations of such Person under leases which have been or
should be, in accordance with GAAP, recorded as capital leases, to the extent
required to be so recorded, (vi) all reimbursement, payment or similar
obligations of such Person, contingent or otherwise, under acceptance, letter of
credit or similar facilities (vii) all Indebtedness referred to in clauses (i)
through (vi) above guaranteed directly or indirectly by such Person including
without limitation through any agreement (A) to pay or purchase such
Indebtedness or to advance or supply funds for the payment or purchase of such
Indebtedness, (B) to purchase, sell or lease (as lessee or lessor) property, or
to purchase or sell services, primarily for the purpose of enabling the debtor
to make payment of such Indebtedness or to assure the holder of such
Indebtedness against loss in respect of such Indebtedness, (C) to supply funds
to or in any other manner invest in the debtor (including any agreement to pay
for property or services irrespective of whether such property is received or
such services are rendered) or (D) otherwise to assure a creditor against loss
in respect of such Indebtedness, and (viii) all Indebtedness
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referred to in clauses (i) through (vii) above secured by (or for which the
holder of such Indebtedness has an existing right, contingent or otherwise, to
be secured by) any Lien upon property (including, without limitation, accounts
and contract rights) owned by such Person, even though such Person has not
assumed or become liable for the payment of such Indebtedness.
"Indenture" means this Indenture as amended or supplemented from time to
time.
"Investments" means any direct or indirect purchase or other acquisition by
a Person of, or a beneficial interest in, Capital Stock or other securities of
any other Person other than a Person that prior to the relevant time was a
subsidiary of that Person, or any direct or indirect loan, advance (other than
advances to employees for moving and travel expenses, drawing accounts and
similar expenditures in the ordinary course of business) or capital contribution
by that Person to any other Person including all Indebtedness and accounts
receivable from that other Person that are not current assets or did not arise
from sales to that other Person in the ordinary course of business and any
agreement to purchase, sell or lease assets, products, supplies, materials,
transportation or services, or to advance funds and/or guaranty such, for the
purpose of giving financial assurance to any creditors of any Person, or grant
any lien on property of such Person to secure any obligations of another Person.
"Lien" any mortgage, deed of trust, pledge, security interest, encumbrance,
lien or charge of any kind whatsoever.
"Officer's Certificate" means a certificate signed by any duly authorized
officer, who must be the Chairman of the Board, the President, the Chief
Executive Officer, the Executive Vice President, the Chief Financial Officer,
the Treasurer or a Vice President of the Company or a Subsidiary thereof, as the
context may indicate.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"1996 EBITDA" means Consolidated Net Income for the fiscal year ended
December 31, 1996, plus, to the extent deducted in determining such Consolidated
Net Income and without duplication, (j) the sum for such period, of (a) the
aggregate amount of all interest (including capitalized interest) accrued or to
accrue (whether or not actually paid) during such period in respect of any
Indebtedness of
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the Company and its Subsidiaries, (b) any amortized discount in respect of any
such Indebtedness issued at discount, and (c) any fees or commissions payable in
connection with any letters of credit; (k) current and deferred taxes on income
and profit; (l) depreciation; and (m) amortization.
"Notes" means the 12% Convertible Subordinated Promissory Notes due January
15, 2001.
"Permitted Investments" means any of the following:
(i) direct obligations of, or obligations the principal of and interest on
which are unconditionally guaranteed by, the United States of America (of by any
agency thereof to the extent such obligations are backed by the full faith and
credit of the United States of America), in each case maturing within twelve
months from the date of acquisition thereof;
(ii) without limiting the provisions of clause (iv) below, investments in
commercial paper maturing within one year from the date of acquisition thereof
and having, at such date of acquisition, the highest credit rating obtainable
from Standard & Poor's Corporation (or a similar rating by any similar
organization which rates commercial papers);
(iii) investments in certificates of deposits or banker's acceptances and
time deposits maturing within twelve months from the date of acquisition thereof
issued or guaranteed by or placed with (a) any domestic office of the bank with
whom the Company maintains its cash management system or (b) any domestic office
of any other commercial bank of recognized standing organized under the laws of
the United States of America or any state thereof that has a combined capital
and surplus and undivided profits of not less than $100,000,000 and is the
principal banking subsidiary of a bank holding company having a long-term
unsecured debt rating of at least "A" or the equivalent thereof from the
Standard & Poor's Corporation or at least "A2" or the equivalent thereof from
Moody's Investors Service, Inc.;
(iv) investments in commercial paper maturing within six months from the
date of acquisition and issued by the holding company of any commercial bank of
recognized standing organized under the laws of the United States of America or
any state thereof that has (A) a combined capital and surplus in excess of
$250,000,000 and (B) commercial paper rated at least "A" or the equivalent
thereof from the Standard & Poor's Corporation or at least "A2" or the
equivalent thereof from Moody's Investors Service, Inc. (or
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has a similar rating by any similar organization that rates commercial paper);
or
(v) investments in money market funds substantially all the assets of which
are comprised of securities of the types described in clauses (i) through (vi)
above.
"Permitted Lien" means (i) Liens in existence on the date hereof; (ii)
Liens created for the benefit of the holders of Senior Indebtedness; (iii) Liens
imposed by law for taxes, assessments or charges of any governmental authority
for claims not yet due or which are being contested in good faith by appropriate
proceedings and with respect to which adequate reserves or other appropriate
provisions are being maintained in accordance with GAAP; (iv) statutory Liens of
landlords and Liens of carriers, warehousemen, mechanics, materialmen and other
Liens imposed by law created in the ordinary course of business for amounts not
yet due, which are not overdue by more than sixty (60) days or which are being
contested in good faith by appropriate proceedings and with respect to which
adequate reserves or other appropriate provisions are being maintained in
accordance with GAAP; (v) Liens incurred or deposits made in the ordinary course
of business in connection with workers' compensation, unemployment insurance and
other types of social security benefits or to secure the performance of tenders,
bids, leases, contracts (other than for the repayment of indebtedness),
statutory obligations and other similar obligations or arising as a result of
progress payments under government contracts; (vi) easements (including, without
limitation, reciprocal easement agreements and utility agreements),
rights-of-way, covenants, consents, reservations, encroachments, variations and
zoning and other restrictions, charges or encumbrances (whether or not
recorded), which in the aggregate are not substantial in amount, and which do
not interfere materially with the ordinary conduct of the business of the
Company and which do not materially detract from the property to which they
attach or materially impair the use thereof to the Company; (vii) Liens covering
real property or personal property in existence at the time of acquisition
thereof by the Company and purchase money Liens upon or in any property acquired
or held in the ordinary course of business to secure the purchase price of such
property or to secure indebtedness permitted by Section 9(g) of the Notes solely
for the purpose of financing the acquisition of such property and no such Lien
covers, or is extended to cover, any other property owned by the Company; and
(viii) extensions, renewals or replacements of any Lien referred to in clauses
(i) through (vii) above.
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"Person" and "person" any natural person, corporation, division of a
corporation, partnership, limited liability company, trust, joint venture,
association, company, estate, unincorporated organization or government or any
agency or political subdivision thereof.
"Representative" means the indenture trustee or other trustee, agent or
representative, if any, for an issue of Senior Indebtedness.
"Restricted Securities" means Securities which were acquired by the Holder
thereof other than pursuant to an effective registration statement under the
Securities Act of 1933, as amended, or acquired in a public transaction that
complies with Rules 144 or 144A (or any successor rules) under such Act, whether
or not the exemption provided by paragraph (k) of Rule 144 (or any comparable
exemption) is available.
"SEC" means the Securities and Exchange Commission, or any successor
Governmental Authority.
"Securities" means the securities issued under this Indenture.
"Senior Indebtedness" has the meaning set forth in Section 10.1 hereof.
"Securities" means the 12% Convertible Subordinated Promissory Notes due
February 15, 2001, being issued and sold pursuant to the Confidential Private
Placement Memorandum and this Indenture.
"Subsidiaries" with respect to any Person, any corporation, association or
other business entity (whether now existing or hereafter organized) of which at
least a majority of the securities or other ownership interests having ordinary
voting power for the election of directors is, at the time as of which any
determination is being made, owned or controlled by such Person or one or more
subsidiaries of such Person.
"TIA" means the Trust Indenture Act of 1939 (15 U.S. Code ss.ss.
77aaa-77bbbb), as amended, as in effect on the date of this Indenture, until
such time as this Indenture is qualified under the TIA, and thereafter as in
effect on the date on which this Indenture is qualified under the TIA, except as
otherwise provided in Section 9.3.
"Trustee" means the Person named as such above until a successor replaces
it in accordance with the applicable provisions of this Indenture and thereafter
means the successor.
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"Trust Officer" means the any officer or assistant officer of the Trustee
assigned by the Trustee to administer its corporate trust matters.
Section 1.2 Other Definitions.
Defined in
Terms Section
----- -------
"Event of Default" 6.1
"Legal Holiday" 11.7
"Officer" 11.9
"Paying Agent" 2.3
"Registrar" 2.3
"U.S. Government Obligations" 8.1
Section 1.3 Incorporation by Reference of Trust Indenture Act.
Whenever this Indenture refers to a provision of the TIA, the provision is
incorporated by reference in and made a part of this Indenture.
The following TIA terms used in this Indenture have the following meanings:
"indenture securities" means the Securities;
"indenture security holder" means a Securityholder;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the Trustee;
"obligor" on the Securities means the Company and any other obligor upon
the Securities.
All other terms used in this Indenture that are defined by the TIA, defined
by TIA reference to another statute or defined by SEC rule under the TIA have
the meanings so assigned to them.
Section 1.4 Rules of Construction.
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning assigned
to it in accordance with GAAP;
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(3) "or" is not exclusive;
(4) words in the singular include the plural, and in the plural
include the singular; and
(5) provisions apply to successive events and transactions.
ARTICLE 2
THE SECURITIES
Section 2.1 Form and Dating.
The Securities shall be substantially in the form of Exhibit A, which is
part of this Indenture. The Securities may have notations, legends or
endorsements required by law, stock exchange rule or usage. Each Security shall
be dated the date of its authentication. After the Securities have ceased to be
Restricted Securities, the Company shall deliver to the Trustee a printed form
of Security.
The terms and provisions contained in the Securities shall constitute, and
are hereby expressly made, a part of this Indenture, and to the extent
applicable, the Company and the Trustee, by their execution and delivery of this
Indenture, expressly agree to such terms and provisions and to be bound thereby.
Section 2.2 Execution and Authentication.
One Officer, duly authorized, shall sign the Securities for the Company by
manual or facsimile signature. The Company's seal shall be reproduced on the
Securities.
If an officer whose signature is on a Security no longer holds that office
at the time the Security is authenticated, the Security shall nevertheless be
valid.
A Security shall not be valid until authenticated by the manual signature
of the Trustee. The signature shall be conclusive evidence that the Security has
been authenticated under this Indenture.
The Trustee shall authenticate Securities for original issue in the
aggregate principal amount of up to $6,342,000 upon a written order of the
Company signed by two Officers. The aggregate principal amount of Securities
outstanding at any time may not exceed $6,342,000, except as provided in Section
2.7.
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The Trustee may appoint an authenticating agent acceptable to the Company
to authenticate Securities. An authenticating agent may authenticate Securities
whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent. An
authenticating agent has the same rights as an Agent to deal with the Company or
an Affiliate.
Section 2.3 Registrar and Paying Agent.
The Company shall maintain in the county where the principal corporate
office of the Trustee is located and in such other locations it shall determine
(i) an office or agency where Securities may be presented for registration of
transfer or for exchange ("Registrar") and (ii) an office or agency where
Securities may be presented for payment ("Paying Agent"); provided, however,
that neither the Company nor any of its Affiliates may service as Paying Agent
or Registrar. The Registrar shall keep a register of the Securities and of their
transfer and exchange. The Company shall appoint one or more co-registrars and
one or more paying agents. The term "Paying Agent" includes any paying agent.
Subject to the foregoing provisions, the Company may change any Paying Agent,
Registrar or co-registrar upon notice to the Trustee. The Company shall notify
the Trustee of the name and address of any Agent not a party to this Indenture.
If the Company fails to appoint or maintain another entity as Registrar or
Paying Agent, the Trustee shall act as such.
The Company shall, if the Securities are listed on the New York Stock
Exchange, designate as authenticating agent, co-registrar and Paying Agent with
respect to the Securities a bank or trust company in good standing, organized
under the laws of the United States of America or any State, doing business in
or having a correspondent relationship with a bank or trust company doing
business in the Borough of Manhattan, City of New York, State of New York, and
having a capital and surplus (including subordinated capital notes and earned
surplus) aggregating at least $100,000,000. Whenever, pursuant to this
Indenture, the Trustee is obligated, empowered or authorized to perform any act
with respect to the authentication and issuance of the Securities, or their
transfer, other than the authentication and issuance of Securities upon original
issue or in cases of Securities mutilated, destroyed, lost or stolen, such act
may be performed by the authenticating agent and co-registrar, notwithstanding
anything in this Indenture to the contrary. Whenever, pursuant to this
Indenture, the Trustee is obligated, empowered or authorized to perform any act
with respect to payment of the principal of (and premium, if any) or interest on
the Securities, such
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acts may be performed by the Paying Agent, notwithstanding anything in this
Indenture to the contrary.
The Company covenants that whenever necessary to avoid or fill a vacancy in
the office of authenticating agent, co-registrar and Paying Agent, the Company
will appoint a successor authenticating agent, co-registrar and Paying Agent so
that there shall, at all times that the Securities are listed for trading on the
New York Stock Exchange, be one or more offices or agencies in the Borough of
Manhattan, City of New York, State of New York, acceptable to the New York Stock
Exchange, where securities may be presented or surrendered for payment and where
Securities may be surrendered for registration of transfer or exchange.
In case, at the time of the appointment of a successor to the
authenticating agent, any of the Securities shall have been authenticated but
not delivered, any such successor may adopt the certificate of authentication of
the original authenticating agent or of any successor to it as authenticating
agent hereunder, and deliver such Securities so authenticated; and in case at
any time any of the Securities shall not have been authenticated, any successor
to the authenticating agent by merger or consolidation may authenticate such
securities either in the name of its predecessor hereunder or in the name of the
successor authenticating agent; and in all such cases such certificate shall
have the full force which it is anywhere in the Securities or in this Indenture
provided that the certificate of authentication shall have.
Section 2.4 Paying Agent to Hold Money in Trust.
The Company shall require each Paying Agent other than the Trustee to agree
in writing that the Paying Agent will hold in trust for the benefit of
Securityholders or the Trustee all money received by the Paying Agent for the
payment of principal or interest or other amounts owed on the Securities
(whether such money has been paid to it by the Company or any other obligor on
the Securities or any other Person), and will notify the Trustee of any default
by the Company (or any other obligor on the Securities or any other Person) in
making any such payment. While any such default continues, the Trustee may
require a Paying Agent to pay all money held by it to the Trustee. The Company
at any time may require a Paying Agent to pay all money held by it to the
Trustee. Upon payment over to the Trustee, the Paying Agent (if other than the
Company or a Subsidiary) shall have no further liability for the money. The
Trustee shall not be responsible for paying interest while holding any money in
trust, unless otherwise previously agreed to in
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writing. If the Company or a Subsidiary acts as Paying Agent, it shall segregate
and hold in a separate trust fund for the benefit of the Securityholders all
money held by it as Paying Agent.
Section 2.5 Securityholder Lists.
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
Securityholders. If the Trustee is not the Registrar, the Company and any other
obligor shall furnish to the Trustee on or before each interest payment date and
at such other times as the Trustee may request in writing, but in any event at
least semi-annually, a list in such form and as of such date as the Trustee may
reasonably require of the names and addresses of Securityholders.
Section 2.6 Transfer and Exchange.
(a) Where Securities are presented to the Registrar or a co-registrar with
a request to register a transfer or to exchange them for an equal principal
amount of Securities of other denominations, the Registrar shall, register the
transfer or make the exchange if its requirements for such transactions are met
(including, if required by the Company for transfers with respect to which no
registration statement has been declared effective, an opinion of counsel to the
Holder requesting transfer that an exemption from registration under the
Securities Act of 1933, as amended, is available for such transfer). To permit
registrations of transfer and exchanges, the Company shall issue and the Trustee
shall authenticate Securities at the Registrar's request. No service charge
shall be required of the Holder for any registration of transfer or exchange
(except as otherwise expressly permitted herein), but the Company may require
payment of a sum sufficient to cover any transfer tax or similar governmental
charge payable in connection therewith (other than any such transfer tax or
similar governmental charge payable upon exchanges pursuant to Section 2.10, 3.6
or 9.5).
(b) The Company shall not be required (i) to issue, register the transfer
of or exchange Securities during a period beginning at the opening of business
15 days before the day of any selection of Securities for redemption under
Section 3.2 and ending at the close of business on the day of selection or (ii)
to register the transfer or exchange of any Security so selected for redemption
in whole or in part, except the unredeemed portion of any Security being
redeemed in part.
Section 2.7 Replacement Securities.
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If the Holder of a Security claims that the Security has been lost,
damaged, destroyed or wrongfully taken, the Company shall issue and the Trustee
shall authenticate a replacement Security if the Trustee's requirements are met.
If required by the Trustee or the Company, an indemnity bond must be provided
which is sufficient in the judgment of both to protect the Company, the Trustee,
any Agent or any authenticating agent from any loss which any of them may suffer
if a Security is replaced. The Company may charge for its expenses in replacing
a Security. The Company is not required to provide a replacement Security that
is called for redemption in accordance with its terms.
Every replacement Security is an additional obligation of the Company and
shall be entitled to the benefits of this Indenture.
Section 2.8 Outstanding Securities.
The Securities outstanding at any time are all the Securities authenticated
by the Trustee except for those canceled by it, those delivered to it for
cancellation and those described in this Section as not outstanding.
If a Security is replaced pursuant to Section 2.7, it ceases to be
outstanding unless the Trustee receives proof satisfactory to it that the
replaced Security is held by a bona fide purchaser.
If Securities are considered paid under Section 4.1, they cease to be
outstanding and interest on them ceases to accrue.
Subject to Section 2.9, a Security does not cease to be outstanding because
the Company or an Affiliate of the Company holds the Security.
Section 2.9 Treasury Securities.
In determining whether the Holders of the required principal amount of
Securities have concurred in any direction, waiver or consent, Securities owned
by the Company, any of its Subsidiaries or any other obligor on the Securities
or an Affiliate of the Company, any of its Subsidiaries or any other obligor on
the Securities shall be considered as though they are not outstanding, except
that for the purposes of determining whether the Trustee shall be protected in
relying on any such direction, waiver or consent, only Securities which the
Trustee knows are so owned shall be so disregarded.
Section 2.10 Temporary Securities.
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Until definitive Securities are ready for delivery, the Company may prepare
and the Trustee shall authenticate temporary Securities. Temporary securities
shall be substantially in the form of definitive Securities but may have
variations that the Company considers appropriate for temporary Securities
without charge to the Securityholders. Without unreasonable delay, the Company
shall prepare and the Trustee shall authenticate definitive securities in
exchange for temporary Securities without charge to the Securityholders.
Section 2.11 Cancellation.
The Company at any time may deliver Securities to the Trustee for
cancellation. The Registrar and Paying Agent shall forward to the Trustee any
Securities surrendered to them for registration of transfer, exchange or
payment. The Trustee shall cancel all Securities surrendered for registration of
transfer, exchange, payment, replacement or cancellation and shall dispose of
canceled Securities as the Company directs. The Company may not issue new
securities to replace Securities that it has paid or that have been delivered to
the Trustee for cancellation.
Section 2.12 Defaulted Interest.
If the Company fails to make a payment of interest on the Securities, it
shall pay such defaulted interest plus any interest payable on the defaulted
interest, if any, in any lawful manner. It may pay such defaulted interest, plus
any such interest payable on it, to the Persons who are Securityholders on a
subsequent special record date. The Company shall fix any such record date and
payment date. At least 15 days before any such record date, the Company shall
mail to Securityholders a notice that states the record date, payment date and
amount of such interest to be paid.
Section 2.13 Home Office Payment Agreements.
Notwithstanding any provisions of this Indenture and of the Securities to
the contrary, payments of interest on, and all or any portion of the principal
of, any Security, other than the final payment of principal on a Security, shall
be made by the Paying Agent directly to the Holder of such Security or their
designee without surrender or presentation thereof to the Paying Agent, if the
Company has so agreed with such Holder and has filed with the Trustee a copy of
an agreement between the Company and such Holder (or the Person for whom such
Holder is a nominee) providing that (i) such payment will be so made and (ii)
such Holder (or the Person for whom such Holder is a nominee) will, before
selling, transferring or otherwise disposing of any such Security, make a
notation thereon, or
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submit the same to the Trustee for notation thereon, of the date to which
interest has been paid with respect thereof and, in the event redemptions
previously have been made thereof, surrender the same to the Trustee in exchange
for a Security or Securities aggregating the same principal amount as the
unredeemed principal amount of the Securities surrendered. The Company will
indemnify and save the Trustee and Paying Agent harmless against any liability
resulting from any act or omission to act on the part of the Company in
connection with any such agreement or which the Paying Agent may incur as a
result of making any payment in accordance with any such agreement.
ARTICLE 3
REDEMPTION
Section 3.1 Notices to Trustee.
If the Company elects to redeem the Securities pursuant to the optional
redemption provisions of Paragraph 1(d) of the Securities, or is required to
redeem Securities pursuant to the mandatory redemption provisions of Paragraph
1(f) of the Securities, it shall notify the Trustee in writing of the redemption
date and the principal amount of the Securities to be redeemed.
The Company shall give each notice provided for in this Section not more
than 60 days and not less than 30 days before the redemption date (unless a
shorter notice period shall be satisfactory to the Trustee); provided, however,
that the Trustee shall have no liability to any Holder if it deems such shorter
notice period satisfactory to it.
Section 3.2 Selection of Securities to Be Redeemed.
If less than all of the Securities are to be redeemed, the Trustee shall
select the Securities to be redeemed on a substantially pro rata basis in
multiples of $1,000 among the Holders of Securities. The amount of remaining
Securities shall be calculated as the aggregate principal amount of Securities
originally issued hereunder less the aggregate principal amount of any
Securities previously redeemed. The Trustee shall make the selection not more
than 60 days and not less than 30 days before the redemption date from
outstanding Securities not previously called for redemption.
The Trustee shall promptly notify the Company of the Securities or portions
of Securities to be called for redemption. The Trustee may select for redemption
portions of the principal of Securities that have denominations
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larger than $1,000. Securities and portions of them it selects shall be in
amounts of $1,000 or integral multiples of $1,000. Provisions of this Indenture
that apply to Securities called for redemption also apply to portions of
Securities called for redemption.
Section 3.3 Notice of Redemption.
At least 30 days but not more than 60 days before a redemption date, the
Company shall mail by first class mail, postage prepaid a notice of redemption
to each Holder whose Securities are to be redeemed.
The notice shall identify the Securities to be redeemed and shall state:
(1) the redemption date;
(2) the redemption price;
(3) if any Security is being redeemed in part, the portion of the principal
amount of such Security to be redeemed and that, after the redemption date, upon
surrender of such Security, a new Security or Securities in principal amount
equal to the unredeemed portion will be issued;
(4) the name and address of the Paying Agent;
(5) that Securities called for redemption must be surrendered to the Paying
Agent to collect the redemption price;
(6) that interest on Securities called for redemption ceases to accrue on
and after the redemption date; and
(7) the paragraph of the Securities pursuant to which the Securities called
for redemption are being redeemed.
At the Company's written request which shall include an Officer's
Certificate setting forth the information to be stated in such notice, the
Trustee shall give the notice of redemption in the Company's name and at the
Company's expense.
Section 3.4 Effect of Notice of Redemption.
Once notice of redemption is mailed, Securities called for redemption
become due and payable on the redemption date at the price set forth in the
Security.
Section 3.5 Deposit of Redemption Price.
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On or before the redemption date, the Company shall deposit with the
Trustee or with the Paying Agent immediately available funds sufficient to pay
the redemption price of and accrued interest on all Securities to be redeemed on
that date. The Trustee or the Paying Agent shall return to the Company any money
not required to pay the redemption price of all Securities to be redeemed.
Section 3.6 Securities Redeemed in Part.
Upon surrender of a Security that is redeemed in part, the Company shall
issue and the Trustee shall authenticate for the Holder at the expense of the
Company a new Security equal in principal amount to the unredeemed portion of
the Security surrendered.
ARTICLE 4
COVENANTS
Section 4.1 Payment of Securities.
The Company shall pay the principal of and interest on the Securities on
the dates and in the manner provided in the Securities. Principal and interest
shall be considered paid on the date due if the Paying Agent (other than the
Company or a Subsidiary or an Affiliate) holds on that date money designated for
and sufficient to pay all principal and interest and any other amounts then due.
To the extent lawful, the Company shall pay interest on (i) overdue
principal and (ii) installments of interest overdue, at the rates provided in
the Securities. The obligation of the Company described in the preceding
sentence is absolute and unconditional, irrespective of any tax or accounting
treatment of such obligation.
Section 4.2 SEC Reports, Financial Reports.
So long as the Securities shall remain outstanding and the Company is
subject to the filing requirements of Section 13(a), 13(c) or 15(d) of the
Exchange Act, the Company shall transmit or cause to be transmitted to the
Trustee and the Holders, promptly after the same are sent or become publicly
available, copies of any and all financial statements and reports which are made
available to its shareholders and all periodic and other reports, proxy
statements, registration statements and other materials filed by it with the
SEC, or any other governmental authority succeeding to any or all of the
functions of said commission, or any national securities exchange or stock
market, as the case may be.
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If the Company is not subject to filing requirements, the Company shall
transmit or cause to be transmitted to the Trustee and the Holders annual and
quarterly reports containing audited annual financial statements and related
notes thereto and unaudited quarterly financial statements, respectively.
Subsequent to the qualification of the Indenture under the TIA, the Company
also shall comply with the provisions of TIA ss. 314(a). The Company shall
timely comply with its reporting and filing obligations under applicable federal
securities law.
The foregoing requirements do not replace or supersede and are in addition
to the requirements set forth in the Securities and in any of the Documents.
Notwithstanding anything to the contrary herein, the Trustee will have no
duty to review such documents for purposes of determining compliance with any
provision of this Indenture.
Section 4.3 Compliance Certificate.
(a) The Company shall deliver to the Trustee and Holders of at least
$1,000,000 in aggregate principal amount of Securities, within ninety (90) days
after the end of each fiscal year and within forty-five (45) days after the end
of each fiscal quarter, an Officer's Certificate stating that a review of the
activities of the Company and its Subsidiaries during the preceding fiscal
period has been made under the supervision of the signing officer with a view to
determining whether the Company has kept, observed, performed and fulfilled its
obligations under this Indenture and the Documents, as applicable, and further
stating (including all relevant calculations in reasonable detail), as to such
officer signing such certificate, that to the best of his or her knowledge the
Company has kept, observed, performed and fulfilled each and every covenant
contained in this Indenture and the Documents, as applicable, and is not in
default in the performance or observance of any of the terms, provisions and
conditions hereof or thereof (or, if a Default or Event of Default shall have
occurred, describing all such Defaults or Events of Default of which he or she
may have knowledge) and that to the best of his or her knowledge no event has
occurred and remains in existence by reason of which payments on account of the
principal of or interest, if any, on the Securities are prohibited, or if such
event has occurred, a description of the event.
(b) So long as not contrary to the then current recommendations of the
American Institute of Certified Public Accountants or to a written policy
adopted by the independent,
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public accountants of the Company and its Subsidiaries which has been previously
applied (a copy of which shall be delivered to the Trustee), the annual
financial statements delivered pursuant to Section 4.2 shall be accompanied by a
written statement of the independent public accountants of the Company that in
making the examination necessary for certification of such financial statements
nothing has come to their attention which would lead them to believe that the
Company has violated any provisions of Article 4 or 5 of this Indenture or any
of the Documents pursuant to engagement instructions directing such
determination of compliance, or, if any such violation has occurred, specifying
the nature and period of existence thereof, it being understood that such
accountants shall not be liable directly or indirectly to any Person for any
failure to obtain knowledge of any such violation that would not be disclosed in
the course of an audit examination conducted in accordance with generally
accepted auditing standards.
(c) The Company will, so long as any of the Securities are outstanding,
deliver to the Trustee and the Securityholders, within two days of becoming
aware of (i) any Default, Event of Default or default in the performance of any
covenant, agreement or condition contained in this Indenture or any Document or
(11) any default under the Credit Agreement or (iii) any event of default under
any other mortgage, indenture, instrument or agreement as that term is used in
Section 6.1, an Officer's Certificate specifying such Default, Event of Default,
default, or event of default.
Section 4.4 Corporate Existence.
The Company shall, and shall cause its Subsidiaries to, do or cause to be
done all things necessary to preserve, renew and keep in full force and effect
its corporate existence, material rights, licenses, permits and franchises and
comply in all material respects with all laws and regulations applicable to it.
Section 4.5 Taxes and Assessments.
The Company shall, and shall cause its Subsidiaries to, pay and discharge
all taxes, assessments and governmental charges or levies imposed upon it or
upon its income or profits or in respect of its property, before the same shall
become in default (which, for purposes of this Note, shall mean the earlier of
ninety (90) days from its due date or invoice date, as the case may be, or the
date upon which such obligee commences an action or proceeding to recover such
amount), provided, however, that the Company shall not be required to pay and
discharge or to cause to be paid and discharged any such tax, assessment,
charge, levy or claim so long as the validity or amount thereof shall be
contested in
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good faith by appropriate proceedings (if the Company shall have set aside on
its books adequate reserves therefor).
Section 4.6 Liens.
The Company shall not, and shall not permit any of its Subsidiaries to,
incur, create, assume or suffer to exist any Lien on any property or assets,
income or profits of the Company, now owned or hereafter acquired, other than
Permitted Liens.
Section 4.7 Indebtedness.
The Company shall not, and shall not permit any of its Subsidiaries to,
contract, create, incur, assume or suffer to exist any Indebtedness, except for
(i) Senior Indebtedness; (ii) Indebtedness under this Note and the other Notes
in an aggregate principal amount not to exceed $9,500,000; (iii) Indebtedness
between Subsidiaries and between any Subsidiary and the Company; (iv)
Indebtedness existing on the date hereof; (v) Indebtedness of Lynwood Scientific
Developments Limited, a corporation organized under the laws of the United
Kingdom, to Midland Bank plc. in an aggregate amount not to exceed $2,000,000 or
the U.S. dollar equivalent in English pounds; (vi) Indebtedness of Codar
Technology, Inc., a Colorado corporation, to MetLife Capital Corp. and Colorado
National Leasing, Inc. in an aggregate amount not to exceed $1,200,000; and
(vii) all extensions, renewals and refundings of any of the foregoing.
Section 4.8 Investments.
The Company shall not, and shall not permit any of its Subsidiaries to,
purchase, hold or acquire any capital stock, evidence of indebtedness or other
securities of, make or permit to exist any loans or advances to, or make or
permit to exist any investment (by way of transfers of property, contributions
to capital, acquisitions of businesses or acquisitions of assets other than in
the ordinary course of business, or otherwise) or any other interest in, any
other Person, except for Permitted Investments.
Section 4.9 Payments.
The Company shall not, and shall not permit any of its Subsidiaries to,
declare or pay, directly or indirectly, any dividends or make any other
distribution or payment, whether in cash, property, securities or a combination
thereof, with respect to (whether by reduction of capital or otherwise) any
shares of capital stock (or any options, warrants, rights or other equity
securities or agreements relating to any capital stock) now or hereafter
outstanding, or purchase, redeem, retire or otherwise acquire for value any
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shares of its capital stock or warrants or options therefor now or hereafter
outstanding, or set apart any sum for the aforesaid purposes, in any fiscal
year, provided that the Company may declare stock splits and pay dividends
payable solely in shares of any class of its capital stock and the Subsidiaries
may make cash distributions or payments to the Company.
Section 4.10 Disposition of Assets.
The Company shall not, and shall not permit any of its Subsidiaries to,
sell or otherwise dispose of any assets, including the capital stock of any of
its Subsidiaries, except for (i) sales of inventory, fixtures and equipment in
the ordinary course of business, (ii) sales of assets having a book value not
exceeding $100,000 in the aggregate, and (iii) the sale of certain vacant
property owned by the Company located in Hauppauge, New York.
Section 4.11 Affiliate Transactions.
Subsequent to the date hereof, the Company shall not, and shall not permit
any Subsidiary to, directly or indirectly, enter into or permit to exist any
transaction or series of related transactions (including, but not limited to,
the purchase, sale or exchange of property, the making of any investment, the
giving of any guarantee or the rendering of any service) with any Affiliate of
the Company (other than transactions among the Company and any wholly-owned
Subsidiary) unless (i) such transaction or series of related transactions is on
terms no less favorable to the Company or such Subsidiary than those that could
be obtained in a comparable arm's length transaction with a Person that is not
an Affiliate, and (ii) such transaction or series of related transactions is
approved by a majority of the Board of Directors of the Company (including a
majority of the disinterested directors), which approval is set forth in a board
resolution of the Company certifying that such transaction or series of
transactions complies with the immediately preceding clause (i).
Section 4.12 Maintenance of Properties.
The Company shall, and shall cause each of its Subsidiaries to, keep all
properties useful in the business of the Company in good working order and
condition except to the extent that discontinuing the operation or maintenance
of any such properties is, in the judgment of the Company, desirable in the
conduct of its business.
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Section 4.13 Stay, Extension and Usury Laws.
The Company covenants (to the extent that it may lawfully do so) that it
will not at any time insist upon, plead or in any manner whatsoever claim or
take the benefit or advantage of, any stay, extension or usury law wherever
enacted, now or at any time hereafter in force, which may affect the covenants
or the performance of this Indenture or any other Document; and the Company (to
the extent it may lawfully do so) hereby expressly waives all benefit or
advantage of any such law, and covenants that it will not, by resort to any such
law, hinder, delay or impede the execution of any power herein granted to the
Trustee, but will suffer and permit the execution of every such power as though
no such law has been enacted.
Section 4.14 Merger, Consolidation, etc.
Neither the Company nor any Subsidiary shall consolidate or merge with, or
convey, transfer or lease substantially all of its assets in a single
transaction or series of transactions to, any other Person unless (i) the
successor formed by such consolidation or the survivor of such merger or the
Person that acquires by conveyance, transfer or lease substantially all of the
assets of the Company as an entirety, as the case may be (the "Successor"),
shall have executed and delivered to Holder its assumption of the due and
punctual performance of all the obligations under this Note, (ii) such Successor
shall be a corporation organized and existing under the laws of the United
States of America, any state thereof or the District of Columbia, and (iii) no
event referred to in Section 8 shall have occurred and be continuing.
ARTICLE 5 SUCCESSORS
Section 5.1 When Company or Its Subsidiaries May Merge etc.
(a) Neither the Company nor any Subsidiary shall consolidate or merge with,
or convey, transfer or lease substantially all of its assets in a single
transaction or series of transactions to, any other Person unless (i) the
successor formed by such consolidation or the survivor of such merger or the
Person that acquires by conveyance, transfer or lease substantially all of the
assets of the Company as an entirety, as the case may be (the "Successor"),
shall expressly assume by a supplemental indenture the due and punctual
performance of all the obligations under the Securities, (ii) such Successor
shall be a corporation
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organized and existing under the laws of the United States of America, any state
thereof or the District of Columbia, and (iii) no Event of Default (and no event
that, after notice or lapse of time, or both, would become an Event of Default)
shall have occurred and be continuing.
The Company shall deliver to the Trustee prior to the consummation of the
proposed transaction an Officer's Certificate to the foregoing effect and an
Opinion of Counsel stating that the proposed transaction and such supplemental
indenture comply with this Indenture.
(b) Notwithstanding any of the provisions contained in this Article 5, any
Subsidiary of the Company may consolidate or merge with or into, or sell,
convey, assign, transfer or otherwise dispose of all or substantially all of its
assets to, the Company, or any other Subsidiary of the Company so long as the
Company or a Subsidiary of the Company shall be the continuing corporation.
Section 5.2 Successor Corporation Substituted.
Upon any consolidation or merger, or any sale, lease, conveyance or other
disposition of assets in accordance with Section 5.1, the successor corporation,
formed by such consolidation or into or with which the Company or any Subsidiary
is merged or to which such sale, lease, conveyance or other disposition is made
shall succeed to, and be substituted for, and may exercise every right and power
of, the Company under this Indenture and the Documents with the same effect as
if such successor Person had been named as the Company herein or therein;
provided, however, that the predecessor Company, in the case of a sale, lease,
conveyance or other disposition shall not be released from the obligation to pay
the principal of and interest on the Securities or the obligations under any of
the Documents
ARTICLE 6
DEFAULTS AND REMEDIES
Section 6.1 Events of Default.
An "Event of Default" occurs if:
(i) the Company defaults in the payment of any installment of interest
required to be made on this Note and such default shall continue for a
period of ten (10) days;
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(ii) the Company defaults in making any payment of principal on this
Note required to be made on this Note;
(iii) any obligation of the Company or any Subsidiary for the payment
of borrowed money in excess of $500,000 becomes or is declared to be due
and payable prior to its expressed maturity, unless the validity of any
such indebtedness or obligation is being contested in good faith by
appropriate proceedings;
(iv) any warrant of attachment, execution or other writ is levied upon
any property or assets of the Company or any Subsidiary in excess of
$500,000 and is not discharged or stayed (including stays resulting from
the filing of an appeal) within thirty (30) days;
(v) all or any substantial part of the assets or properties of the
Company or any Subsidiary are condemned, seized or appropriated by any
government or governmental authority; or any order is entered in any
proceeding directing the winding-up, dissolution or split-up of the
Company;
(vi) the Company or any Subsidiary hereafter makes an assignment for
the benefit of creditors, or files a petition in bankruptcy as to itself,
is adjudicated insolvent or bankrupt, petitions any receiver of or any
trustee for the Company or any substantial part of the property of the
Company under any bankruptcy, reorganization, arrangement, readjustment of
debt, dissolution or liquidation law or statute of any jurisdiction,
whether or not hereafter in effect; or if there is hereafter commenced
against the Company any such proceeding and an order approving the petition
is entered or such proceeding remains undismissed for a period of sixty
(60) days, or the Company by any act or omission to act indicates its
consent to or approval of or acquiescence in any such proceeding or the
appointment of any receiver of, or trustee for, the Company or any
substantial part of its properties, or suffers any such receivership or
trusteeship to continue undischarged for a period of sixty (60) days; or
(vii) the Company defaults in the due observance or performance, in
any material respect,
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of any covenant, condition or agreement to be observed or performed
pursuant to the terms of this Note (other than a default which is
specifically provided for in this Section 6) and such default continues
unremedied for more than thirty (30) days after notice thereof to the
Company.
Section 6.2 Acceleration.
If an Event of Default occurs and is continuing, the Trustee by notice to
the Company, or the Holders of at least 25% in principal amount of the then
outstanding Securities by notice to the Company, and the Trustee, may declare
the unpaid principal of and any accrued interest on all the Securities to be due
and payable. Upon such declaration, the principal and interest shall be due and
payable immediately. The Holders of a majority in principal amount of the then
outstanding Securities by notice to the Trustee may rescind an acceleration and
its consequences if the rescission would not conflict with any judgment or
decree and if all existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because of the
acceleration.
Section 6.3 Other Remedies.
If an Event of Default occurs and is continuing, the Trustee may pursue any
available remedy to collect the payment of principal or interest on the
Securities or to enforce the performance of any provision of the Securities,
this Indenture or the Documents.
The Trustee may maintain a proceeding even if it does not possess any of
the Securities or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Securityholder in exercising any right or remedy
accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. All remedies are
cumulative to the extent permitted by law.
Section 6.4 Waiver of Past Defaults.
The Holders of a majority in principal amount of the then outstanding
Securities by notice to the Trustee may waive an existing Default or Event of
Default and its consequences except a continuing Default or Event of Default in
the payment of the principal of or interest on any Security.
Section 6.5 Control by Majority.
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The Holders of a majority in principal amount of the then outstanding
Securities may direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee or exercising any trust or power
conferred on it. However, the Trustee may refuse to follow any direction that
conflicts with law or this Indenture, that is unduly prejudicial to the rights
of other Securityholders, or would involve the Trustee in personal liability.
Section 6.6 Limitation on Suits.
A Securityholder may pursue a remedy with respect to this Indenture or the
Securities only if:
(1) the Holder gives to the Trustee notice of a continuing Event of
Default;
(2) the Holders of at least 25% in principal amount of the then
outstanding Securities make a written request to the Trustee to pursue the
remedy;
(3) such Holder or Holders offer to the Trustee indemnity satisfactory
to the Trustee against any loss, liability or expense;
(4) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer of indemnity; and
(5) during such 60-day period the Holders of a majority in principal
amount of the then outstanding securities do not give the Trustee a
direction inconsistent with the request.
A Securityholder may not use this Indenture to prejudice the rights of another
Securityholder or to obtain a preference or priority over another
Securityholder.
Section 6.7 Rights of Holders to Receive Payment.
Notwithstanding any other provision of this Indenture, the right of any
Holder of a Security to receive payment of principal and interest on the
Security, on or after the respective due dates expressed in the Security, or to
bring suit for the enforcement of any such payment on or after such respective
dates, shall not be impaired or affected without the consent of the Holder.
Section 6.8 Collection Suit by Trustee.
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If an Event of Default specified in Section 6.1(i) or (ii) occurs and is
continuing, the Trustee may recover judgment in its own name and as trustee of
an express trust against the Company or any other obligor on the Securities for
the whole amount of principal and interest remaining unpaid on the Securities
and interest on overdue principal and interest and such further amount as shall
be sufficient to cover the costs and, to the extent lawful, expenses of
collection, including the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel.
Section 6.9 Trustee May File Proofs of Claim.
The Trustee may file such proofs of claim and other papers or documents as
may be necessary or advisable in order to have the claims of the Trustee and the
Securityholders allowed in any judicial proceedings relative to the Company or
any other obligor or their respective creditors or property. Nothing herein
contained shall be deemed to authorize the Trustee to authorize or consent to or
accept or adopt on behalf of any Securityholder any plan of reorganization,
arrangement, adjustment or composition affecting the Securities or the rights of
any Holder thereof, or to authorize the Trustee to vote in respect of the claim
of any Securityholder in any such proceeding.
Section 6.10 Priorities.
If the Trustee collects any money pursuant to this Article or by exercise
of its remedies under the Documents, it shall pay out the money in the following
order:
First: to the Trustee for amounts due under Section 7.7 hereof;
Second: to holders of Senior Indebtedness to the extent permitted under
Article 10 hereof;
Third: to Securityholders for amounts due and unpaid on the Securities for
principal and interest and premium, if any, ratably, first to
interest, then principal and then premium, according to the amounts
due and payable on the Securities for principal and interest and
premium, if any, respectively; and
Fourth: to Securityholders for other amounts due under the Indenture, the
Securities and the other Documents; and
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Fifth: to the Company or any other obligors on the Securities, as their
interests may appear, or as a court of competent jurisdiction may
direct.
The Trustee may fix a record date and payment date for any payment to
Securityholders.
Section 6.11 Undertaking for Costs.
In any suit for the enforcement of any right or remedy under this Indenture
or in any suit against the Trustee for any action taken or omitted by it as a
Trustee, a court in its discretion may require the filing by any party litigant
in the suit of an undertaking to pay the costs of the suit, and the court in its
discretion may assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in the suit, having due regard to the merits and good
faith of the claims or defenses made by the party litigant. This Section does
not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.7,
or a suit by Holders of more than 10% in principal amount of the then
outstanding Securities.
ARTICLE 7
TRUSTEE
Section 7.1 Duties of Trustee.
(a) If an Event of Default has occurred and is continuing, the Trustee
shall exercise such of the rights and powers vested in it by this Indenture, and
use the same degree of care and skill in their exercise, as a prudent person
would exercise or use under the circumstances in the conduct of his or her own
affairs.
(b) Except during the continuance of an Event of Default:
(1) The Trustee need perform only those duties that are specifically
set forth in this Indenture and no others.
(2) In the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of
the opinions expressed therein, upon certificates or opinions furnished to
the Trustee and conforming to the requirements of this Indenture. However,
the Trustee shall examine the
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certificates and opinions to determine whether or not they conform to the
requirements of this Indenture.
(c) The Trustee may not be relieved from liability for its own negligent
action, its own negligent failure to act or its own willful misconduct, except
that:
(1) This paragraph does not limit the effect of paragraph (b) of this
Section.
(2) The Trustee shall not be liable for any error of judgment made in
good faith by a Trust Officer, unless it is proved that the Trustee was
negligent in ascertaining the pertinent facts.
(3) The Trustee shall not be liable with respect to any action it
takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 6.5.
(d) Every provision of this Indenture that in any way relates to the
Trustee is subject to paragraphs (a), (b) and (c) of this Section.
(e) The Trustee may refuse to perform any duty or exercise any right or
power unless it receives indemnity satisfactory to it against any loss,
liability or expense.
(f) The Trustee shall not be liable for interest on any money received by
it except as the Trustee may agree in writing with the Company. Money held in
trust by the Trustee need not be segregated from other funds except to the
extent required by law.
(g) Except with respect to Section 4.1, the Trustee shall have no duty to
inquire as to the performance of the Company's covenants in Article 4. In
addition, the Trustee shall not be deemed to have knowledge of any Default or
Event of Default except (i) any Event of Default occurring pursuant to Sections
6.1(a), 6.1(b) and 4.1 or (ii) any Default or Event of Default of which the
Trustee shall have received written notification or obtained actual knowledge.
Section 7.2 Rights of Trustee.
(a) The Trustee may rely on any document believed by it to be genuine and
to have been signed or presented by the proper Person. The Trustee need not
investigate any fact or matter stated in the document.
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(b) Before the Trustee acts or refrains from acting, it may require an
Officer's Certificate or an opinion of Counsel, or both. The Trustee shall not
be liable for any action it takes or omits to take in good faith in reliance on
such Officer's Certificate or opinion of Counsel.
(c) The Trustee may act through agents and shall not be responsible for the
misconduct or negligence of any agent appointed with due care.
(d) The Trustee shall not be liable for any action it takes or omits to
take in good faith which it believes to be authorized or within its rights or
powers.
(e) The Trustee may consult with an attorney and shall not be liable for
any action it takes or omits to take in reliance on such attorney's advice.
Section 7.3 Individual Rights of Trustee.
The Trustee in its individual or any other capacity may become the owner or
pledgee of Securities and may otherwise deal with the Company or an Affiliate of
the Company with the same rights it would have if it were not Trustee. Any Agent
may do the same with like rights. However, the Trustee is subject to Sections
7.10 and 7.11.
Section 7.4 Trustee's Disclaimer.
The Trustee makes no representation as to the validity or adequacy of this
Indenture, the Securities or any other Document, it shall not be accountable for
the Company's use of the proceeds from the Securities, and it shall not be
responsible for any statement of the Company in the Indenture or any other
Document or any statement in any Security other than its authentication.
Section 7.5 Notice of Defaults.
If a Default or Event of Default occurs and is continuing and if it is
known to the Trustee, the Trustee shall mail to Securityholders a notice of the
Default or Event of Default within 15 days after it occurs. Except in the case
of a Default or Event of Default in payment on any Security (including any
failure to make any mandatory redemption payment required hereunder), the
Trustee may withhold the notice if and so long as a committee of its Trust
officers in good faith determines that withholding the notice is in the
interests of Securityholders.
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Section 7.6 Reports by Trustee to Holders.
Within 60 days after the reporting date stated in Section 11.9, the Trustee
shall mail to Securityholders a brief report dated as of such reporting date
that complies with TIA ss. 313(a). The Trustee also shall comply with TIA ss.
313(b)(1) and TIA ss. 313(b)(2). The Trustee shall also transmit by mail all
reports as required by TIA ss. 313(c).
Commencing at the time this Indenture is qualified under the TIA, a copy of
each report at the time of its mailing to Securityholders shall be filed with
the SEC and each stock exchange on which the Securities are listed. The Company
shall notify the Trustee when the Securities are listed on any stock exchange.
Section 7.7 Compensation and Indemnity.
The Company shall pay to the Trustee from time to time reasonable
compensation for its services hereunder. The Trustee's compensation shall not be
limited by any law on compensation of a trustee of an express trust. The Company
shall reimburse the Trustee upon request for all reasonable out-of-pocket
expenses incurred by it. Such expenses shall include the reasonable compensation
and out-of-pocket expenses of the Trustee's agents and counsel.
The Company shall indemnify the Trustee against any loss or liability
incurred by it except as set forth in the next paragraph. The Trustee shall
notify the Company promptly of any claim for which it may seek indemnity. The
Company shall defend the claim and the Trustee shall cooperate in the defense.
The Trustee may have separate counsel, and the Company shall pay the reasonable
fees and expenses of such counsel. The Company need not pay for any settlement
made without its consent, which consent shall not be unreasonably withheld.
The Company need not reimburse any expense or indemnify against any loss or
liability incurred by the Trustee through negligence or bad faith.
To secure the Company's payment obligations in this Section, the Trustee
shall have a lien prior to the Securities on all money or property held or
collected by the Trustee, except that held in trust to pay principal and
interest on particular Securities.
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When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 6.01(vi) or (vii) occurs, the expenses and the
compensation for the services are intended to constitute expenses of
administration under any Bankruptcy Law.
Section 7.8 Replacement of Trustee.
A resignation or removal of the Trustee and appointment of a successor
Trustee shall become effective only upon the successor Trustee's acceptance of
appointment as provided in this Section.
The Trustee may resign by so notifying the Company in writing. The
Holders of a majority in principal amount of the then outstanding
Securities may remove the Trustee by so notifying the Trustee and the
Company in writing. The Company may remove the Trustee if:
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged as bankrupt or insolvent or an order
for relief is entered with respect to the Trustee under any Bankruptcy
Law;
(3) a custodian or public officer takes charge of the Trustee or
its property; or
(4) the Trustee becomes incapable of acting or is not performing
to the satisfaction of Holders of a majority in aggregate principal
amount of the then outstanding Securities.
If the Trustee resigns or is removed or if a vacancy exists in the office
of Trustee for any reason, the Company and any other obligor shall promptly
appoint a successor Trustee. Within one year after the successor Trustee takes
office, the Holders of a majority in principal amount of the then outstanding
Securities may appoint a successor Trustee to replace the successor Trustee
appointed by the Company.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee (at the expense of
the Company), the Company or the Holders of at least 10% in principal amount of
the then outstanding Securities may petition any court of competent jurisdiction
for the appointment of a successor Trustee.
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If the Trustee fails to comply with Section 7.10, any Securityholder may
petition any court of competent jurisdiction for the removal of the Trustee and
the appointment of a successor Trustee.
A successor Trustee shall deliver a written acceptance of its appointment
to the retiring Trustee and to the Company. Thereupon the resignation or removal
of the retiring Trustee shall become effective, and the successor Trustee shall
have all the rights, powers and duties of the Trustee under this Indenture. The
successor Trustee shall mail a notice of its succession to Securityholders. The
retiring Trustee shall promptly transfer all property held by it as Trustee to
the successor Trustee, subject to the lien provided for in Section 7.7.
Notwithstanding replacement of the Trustee pursuant to this Section 7.8, the
Company's obligations under Section 7.7 hereof shall continue for the benefit of
the retiring trustee with respect to expenses and liabilities incurred by it
prior to such replacement.
Section 7.9 Successor Trustee by Merger etc.
If the Trustee consolidates, merges or converts into, or transfers all or
substantially all of its corporate trust business to, another corporation, the
successor corporation without any further act shall be the successor Trustee.
Section 7.10 Eligibility; Disqualification.
This Indenture shall always have a Trustee who satisfies the requirements
of TIA ss. 310(a)(1). The Trustee shall always have a combined capital and
surplus as stated in Section 11.9. The Trustee is subject to TIA ss. 310(b),
including the optional provision permitted by the second sentence of TIA ss.
310(b)(9)
Section 7.11 Preferential Collection of Claims Against Company.
The Trustee is subject to TIA ss. 311(a), excluding any creditor
relationship listed ln TIA ss. 311(b). A Trustee who has resigned or been
removed shall be subject to TIA ss. 311(a) to the extent indicated therein.
ARTICLE 8
DISCHARGE OF INDENTURE
Section 8.1 Termination of Company's Obligations.
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This Indenture shall cease to be of further effect (except that the
Company's obligations under Section 7.7 and the Company's and the Trustee's
obligations under Section 8.3 shall survive) when all outstanding Securities
theretofore authenticated and issued have been delivered to the Trustee for
cancellation, and the Company has paid all sums payable hereunder and under the
other Documents. In addition, on or after February 23, 1999, the Company may
terminate all of their respective obligations under this Indenture (except the
Company's obligations under Sections 7.7 and 8.3) if:
(1) the Company irrevocably deposits in trust with the Trustee money
or U.S. Government Obligations sufficient to pay principal and interest and
premium, if any, on the Securities to maturity or redemption, as the case
may be, and to pay all other sums payable by it hereunder; and
(2) the Company shall have delivered to the Trustee an opinion of
Counsel satisfactory to the Trustee that the Holders of the Securities
should not recognize income, gain or loss for federal income tax purposes
as a result of the Company's exercise of its option under this Section 8.1
and will be subject to federal income tax on the same amount and in the
same manner and at the same times as would have been the case if such
option had not been exercised.
However, the Company's obligations in Sections 2.3, 2.4, 2.5, 2.6, 2.7, 4.1,
7.7, 8.3 and 8.4 shall survive until the Securities are no longer outstanding.
Thereafter, only the Company's obligations in Sections 7.7 and 8.3 shall
survive.
After a deposit made pursuant to this Section 8.1, the Trustee upon request
shall acknowledge in writing the discharge of the Company's obligations under
this Indenture except for those surviving obligations specified above.
"U.S. Government Obligations" means direct obligations of the United States
of America, or obligations unconditionally guaranteed by the United States of
America, for the payment of which the full faith and credit of the United States
of America is pledged. In order to have money available on a payment date to pay
principal or interest on the Securities, the U.S. Government Obligations shall
be payable as to principal or interest on or before such payment date in such
amounts as will provide the necessary money. U.S. Government Obligations shall
not be callable at the issuer's option.
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Section 8.2 Application of Trust Money.
The Trustee shall hold in trust money or U.S. Government Obligations
deposited with it pursuant to Section 8.1. It shall apply the deposited money
and the money from U.S. Government Obligations through the Paying Agent and in
accordance with this Indenture to the payment of principal and interest on the
Securities.
Section 8.3 Repayment to Company.
The Trustee and the Paying Agent shall promptly pay to the Company upon
request any excess money or securities held by them at any time.
The Trustee and the Paying Agent shall pay to the Company upon request any
money held by them for the payment of principal or interest that remains
unclaimed for two years after the date upon which such payment shall have become
due; provided, however, that the Company shall have first caused notice of such
payment to the Company to be mailed to each Securityholder entitled thereto no
less than 30 days prior to such payment. After payment to the Company,
Securityholders entitled to the money must look to the Company for payment as
general creditors unless an applicable abandoned property law designates another
Person.
Section 8.4 Reinstatement.
If (i) the Trustee or Paying Agent is unable to apply any money in
accordance with Section 8.2 by reason of any order or judgment of any court or
governmental authority enjoining, restraining or otherwise prohibiting such
application and (ii) the Holders of at least a majority in principal amount of
the then outstanding Securities so request by written notice to the Trustee, the
Company's obligations under this Indenture and the Securities shall be revived
and reinstated as though no deposit had occurred pursuant to Section 8.1 until
such time as the Trustee or Paying Agent is permitted to apply all such money in
accordance with Section 8.2.
ARTICLE 9
AMENDMENTS
Section 9.1 Without Consent of Holders.
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The Company and the Trustee may amend this Indenture, the Securities or the
other Documents without the consent of any Securityholder:
(1) to comply with Section 5.1;
(2) to comply with any requirements of the SEC in connection with the
qualification or requalification of this Indenture under the TIA;
(3) to cure an ambiguity; or
(4) to provide for uncertificated Securities in addition to
certificated Securities.
Within five (5) days after an amendment under this Section becomes
effective, the Company shall mail to Securityholders and the Trustee a notice
briefly describing the amendment.
Section 9.2 With Consent of Holders.
Subject to Section 6.7, the Company and the Trustee may amend this
Indenture, the Securities or any other Document with the written consent of the
Holders of at least a majority in principal amount of the then outstanding
Securities. Subject to Sections 6.4 and 6.7, the Holders of a majority in
principal amount of the Securities then outstanding may also waive compliance in
a particular instance by the Company with any provision of this Indenture or the
Securities or any other Document.
However, without the consent of each Securityholder affected, an amendment
or waiver under this Section may not:
(1) reduce the amount of Securities whose Holders must consent to an
amendment or waiver;
(2) reduce the rate of or change the time for payment of interest on
any Security;
(3) reduce the principal of or change the fixed maturity of any
Security or alter the redemption provisions with respect thereto;
(4) make any Security payable in money other than that stated in the
Security;
(5) make any change in Section 6.4, 6.7 or 9.2 (this sentence); or
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(6) waive a default in the payment of the principal of, or interest or
premium on, any Security.
To secure a consent of the Holders under this Section it shall not be
necessary for the Holders to approve the particular form of any proposed
amendment or waiver, but it shall be sufficient if such consent approves the
substance thereof.
Within five (5) days after an amendment or waiver under this Section
becomes effective, the Company shall mail to Securityholders and the Trustee a
notice briefly describing the amendment or waiver.
Section 9.3 Compliance with Trust Indenture Act.
From the date on which this Indenture is qualified under the TIA, every
amendment, waiver or supplement under this Indenture or the Securities shall
comply with the TIA as then in effect.
Section 9.4 Revocation and Effect of Consents.
Until an amendment or waiver becomes effective, a consent to it by a Holder
of a Security is a continuing consent by the Holder and every subsequent Holder
of a Security or portion of a Security that evidences the same Indebtedness as
the consenting Holder's Security, even if notation of the consent is not made on
any Security. However, any such Holder or subsequent Holder may revoke the
consent as to his Security or portion of a Security if the Trustee receives
notice of revocation before the date on which the Trustee receives an Officer's
Certificate certifying that the Holders of the requisite principal amount of
Securities have consented to the amendment or waiver (or before such later date
as may be required by law or stock exchange rule).
The Company may, but shall not be obligated to, fix a record date for the
purpose of determining the Holders entitled to consent to any amendment or
waiver. If a record date is fixed, then notwithstanding the provisions of the
immediately preceding paragraph, those Persons who were Holders at such record
date (or their duly designated proxies), and only those Persons, shall be
entitled to consent to such amendment or waiver or to revoke any consent
previously given, whether or not such Persons continue to be Holders after such
record date. No consent shall be valid or effective for more than 90 days after
such record date unless consents from Holders of the principal amount of
Securities required hereunder for such amendment or waiver to be
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effective shall have also been given and not revoked within such 90-day period.
After an amendment or waiver becomes effective it shall bind every
Securityholder, unless it is of the type described in any of clauses (1) through
(6) of Section 9.2. In such case, the amendment or waiver shall bind each Holder
of a Security who has consented to it and every subsequent Holder of a Security
that evidences the same debt as the consenting Holder's Security.
Section 9.5 Notation on or Exchange of Securities.
The Trustee may place an appropriate notation about an amendment or waiver
on any Security thereafter authenticated. The Company in exchange for all
Securities may issue and the Trustee shall authenticate new Securities that
reflect the amendment or waiver.
Section 9.6 Trustee Protected.
The Trustee shall sign all supplemental indentures, except that the Trustee
need not sign any supplemental indenture that adversely affects its rights. The
Trustee may request an opinion of Counsel and an Officer's Certificate stating
that such supplemental indenture is permitted hereunder and all conditions
precedent have been complied with in the form set forth in Sections 10.4, 10.5,
11.4 and 11.5.
ARTICLE 10
SUBORDINATION
Section 10.1 Securities Subordinated to Senior Indebtedness.
The Company agrees, and each Holder by accepting a Security agrees, that
the Indebtedness evidenced by the Securities, including for all purposes of this
Article 10, all repurchase and redemption obligations with respect to the
Securities, is subordinated in right of payment, to the extent and in the manner
provided in this Article 10, to the prior payment in full of all existing and
future Senior Indebtedness and that the subordination is for the benefit of and
enforceable by the holders of Senior Indebtedness, and authorizes and directs
the Trustee to take such action as may be necessary or appropriate to
acknowledge or effectuate the subordination as provided in this Article 10 and
appoints the Trustee as attorney-in-fact for any and all such purposes.
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Only Indebtedness of the Company which is Senior Indebtedness shall rank
senior to the Securities in accordance with the provisions set forth herein. For
purposes hereof, Senior Indebtedness is defined as:
(i) the principal of, premium, if any, and any interest (including,
without limitation, any interest on interest and post-bankruptcy petition
interest) on, all liabilities of the Company (including, without
limitation, all liabilities of the Company with respect to any costs and
expenses), direct or contingent, joint, several or independent, now or
hereafter existing, due or to become due, whether created directly or
acquired by assignment or otherwise, under or in respect of that certain
Amended and Restated Credit Agreement, dated as of April 12, 1995, among
the Company, The Bank of New York, Chemical Bank and the other parties
referred to therein (as heretofore and as hereafter amended, modified and
supplemented from time to time, the "Bank Credit Agreement") and any of the
other Loan Documents (as defined in the Bank Credit Agreement); and
(ii) all extensions, renewals and refundings of any of the foregoing
(provided that the amount of any debt incurred in connection with such
extension, renewal or refunding does not exceed the amount of the
outstanding obligations of the Company under the Bank Credit Agreement at
the time of the extension, renewal or refunding (whether for interest,
principal or fees, or expenses incurred by the holders of Senior
Indebtedness for the protection of collateral and reasonable costs of
collection));
provided, however, that the term "Senior Indebtedness" shall not include any
indebtedness expressly subordinated in writing to the Notes or any indebtedness
owed to affiliates of the Company. This Article 10 shall remain in full force
and effect as long as any Senior Indebtedness is outstanding.
Section 10.2 Liquidation; Dissolution; Bankruptcy.
Upon any payment or distribution, whether of cash, securities or other
property, to creditors of the Company in a liquidation (total or partial),
reorganization or dissolution of the Company, whether voluntary or involuntary,
or in a bankruptcy, reorganization, insolvency, receivership, assignment for the
benefit of creditors, marshalling of assets
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or similar proceeding relating to each of the Company or its properties:
(1) holders of Senior Indebtedness shall be entitled to receive
payment in full, in cash or cash equivalents, of such Senior Indebtedness
before Holders shall be entitled to receive from the Company any payment of
principal of, or interest on, or any other distribution with respect to,
the securities; and
(2) until the Senior Indebtedness is paid in full as provided in
clause (1) above, any distribution to which Holders would be entitled from
the Company but for this Article 10 shall be made to the holders of Senior
Indebtedness as their interests may appear;
in each case except that Holders may receive shares of stock and debt securities
that are subordinated to Senior Indebtedness to at least the same extent and
pursuant to the same or more stringent terms as are the Securities.
Upon any distribution of assets of the Company referred to in this
Section 10.2, the Trustee and the Holders shall be entitled to rely upon
any order or decree of a court of competent jurisdiction in which such
bankruptcy, reorganization, insolvency, receivership, assignment for the
benefit of creditors, marshalling of assets or similar proceedings are
pending, or a certificate of the liquidating trustee or agent or other such
person making any distribution to the Trustee or to the Holders, for the
purpose of ascertaining the persons entitled to participate in such
distribution, the holders of Senior Indebtedness, the amount thereof or
payable thereon, the amount or amounts paid or distributed thereon and all
other facts pertinent thereto or to this Section 10.2. The Trustee shall be
entitled to rely on the delivery to it of a written notice by a person
representing himself to be a holder of Senior Indebtedness or a
Representative, as the case may be, to establish that such notice has been
given by a holder of Senior Indebtedness or a Representative, as the case
may be. In the event that the Trustee determines, in good faith, that
further evidence is required with respect to the right of any person, as a
holder of Senior Indebtedness, to participate in any payment or
distribution pursuant to this Section 10.2, the Trustee may request such
person to furnish evidence to the reasonable satisfaction of the Trustee as
to the amount of such Senior Indebtedness held by such person, as to the
extent to which such person is entitled to participation in such payment or
distribution and as to other facts pertinent to the rights of such person
under this Section 10.2, and, if such evidence is
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not furnished, the Trustee may defer any payment to such person (or to the
Securityholder) pending judicial determination as to the right of such person to
receive such payment.
Section 10.3 Default on Senior Indebtedness.
During the continuance of any event of default with respect to Senior
Indebtedness pursuant to which the maturity of such Senior Indebtedness may
be accelerated immediately without further notice (except such notice as
may be required to effect such acceleration), upon the occurrence of
receipt by the Trustee of written notice from the Representative with
respect to, or the holders of at least a majority in aggregate principal
amount of, such Senior Indebtedness then outstanding, no direct or indirect
payment may be made by the Company upon or in respect of the Securities for
a period (a "Payment Blockage Period") commencing on the earlier of the
date of receipt of such notice by the Trustee or the date of such
acceleration and ending 120 days thereafter (unless such Payment Blockage
Period shall be terminated by written notice to the Trustee from such
Representative or such holders). Not more than one Payment Blockage Period
in the aggregate may be commenced with respect to the Securities during any
period of 360 consecutive days, irrespective of the number of defaults with
respect to Senior Indebtedness during such period. In no event will a
Payment Blockage Period extend beyond 119 days from the date such payment
upon or in respect of the Securities was due; and there must be 180 days in
any 360-day period in which no Payment Blockage Period is in effect as to
the Company. For all purposes of this Section 10.3, no default or event of
default which existed or was continuing on the date of the commencement of
the Payment Blockage Period with respect to the Senior Indebtedness
initiating such Payment Blockage Period shall be, or be made, the basis for
the commencement of a subsequent Payment Blockage Period by the
Representative or requisite holders of such Senior Indebtedness whether or
not within a period of 360 consecutive days unless such default or event of
default shall have been cured or waived for a period of not less than 90
consecutive days.
Section 10.4 When Distribution Must Be Paid Over.
In the event that the Company shall make any payment to the Trustee
pursuant to the Securities at a time when such payment is prohibited by Section
10.2 or 10.3, such payment shall be held by the Trustee, in trust for the
benefit of, and shall be paid forthwith over and delivered to, the holders of
Senior Indebtedness (pro rata as to each of such holders on
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the basis of the respective amounts of Senior Indebtedness held by them) or
their Representatives, as their respective interests may appear, for application
to the payment of all Senior Indebtedness remaining unpaid to the extent
necessary to pay all Senior Indebtedness in full in accordance with its terms,
after giving effect to any concurrent payment or distribution to or for the
holders of Senior Indebtedness.
If a distribution is made to Holders that because of this Article 10 should
not have been made to them, the Holders who receive the distribution shall hold
it in trust for holders of Senior Indebtedness and pay it over to them as their
interests may appear.
Section 10.5 Notice by Company.
The Company shall promptly notify the Trustee and any Paying Agent by an
appropriate Officer's Certificate of the Company delivered to a Trust Officer
and the Paying Agent of any facts known to the Company that would cause a
payment under the Securities of principal of or interest on the Securities to
violate this Article 10, but failure to give such notice shall not affect the
subordination of the Securities to the Senior Indebtedness provided in this
Article 10.
Section 10.6 Subrogation.
After all Senior Indebtedness is paid in full and all commitments to
advance Senior Indebtedness have been terminated, and until the Securities are
paid in full pursuant to the Securities and this Indenture or otherwise, Holders
shall be subrogated to the rights of holders of Senior Indebtedness to receive
distributions applicable to Senior Indebtedness to the extent that distributions
otherwise payable to Holders have been applied to payment of Senior
Indebtedness. A distribution made under this Article 10 to holders of Senior
Indebtedness which otherwise would have been made to Holders is not, as between
the Company and the Holders, a payment by the Company on Senior Indebtedness.
Section 10.7 Relative Rights.
This Article 10 defines the relative rights of Holders and holders of
Senior Indebtedness. Nothing in this Indenture (but subject to the provisions of
paragraph 5 of the Securities) shall:
(1) impair, as between the Company and the Holders, the obligation of
the Company, which is absolute
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and unconditional, to pay principal of and interest on the Securities in
accordance with their terms;
(2) affect the relative rights of Holders and creditors of the Company
other than such creditors as are holders of Senior Indebtedness;
(3) prevent the Trustee or any Holder from exercising its available
remedies upon a Default or Event of Default subject to the rights of
holders of Senior Indebtedness to receive distributions otherwise payable
to Holders; or
(4) create or imply the existence of any commitment on the part of the
holders of Senior Indebtedness to extend credit to the Company other than
as set forth in the terms governing such Senior Indebtedness.
Section 10.8 Subordination May Not Be Impaired by Company.
No right of any present or future holder of Senior Indebtedness to enforce
the subordination of the Indebtedness evidenced by the Securities and the
Guaranties and this Article 10 shall be impaired by any act or failure to act by
the Company or anyone in custody of its assets or property or by its failure to
comply with this Indenture.
Section 10.9 Distribution or Notice to Representatives.
Whenever a distribution is to be made or a notice given to holders of
Senior Indebtedness, the distribution may be made and the notice given to their
Representatives, if any.
Section 10.10 Rights of Trustee and Paying Agent.
Notwithstanding Section 10.2 or 10.3, the Trustee or any Paying Agent may
continue to make payments of principal of or interest on the Securities unless,
in the case of the Trustee, a Trust Officer or, in the case of a Paying Agent
other than the Trustee, an officer of such Paying Agent, shall have received, at
least three Business Days prior to the date such payments are due and payable,
written notice of the occurrence of an event under Section 10.2 or 10.3 and that
any payment under the Securities would violate this Article 10. Only the Company
or a Representative with respect to or holders of a least a majority in
principal amount of an issue of Senior Indebtedness may give such notice.
Nothing
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contained in this Section 10.10 shall limit the right of any holder of Senior
Indebtedness to recover payments as contemplated by Section 10.4.
The Trustee in its individual or any other capacity may hold Senior
Indebtedness with the same rights it would have if it were not Trustee. Any
Agent may do the same with like rights. The Trustee shall be entitled to all the
rights set forth in this Article 10 with respect to Senior Indebtedness which
may at any time be held by it, to the same extent as any other holder of Senior
Indebtedness; and nothing in Article 7 shall deprive the Trustee of any of its
rights as such holder, except as otherwise provided by the TIA.
Section 10.11 Trustee Entitled to Assume Payments Not Prohibited in Absence
of Notice.
Notwithstanding any of the provisions of this Article 10 or any other
provision of this Indenture, unless a Trust Officer has received a written
notice pursuant to Section 10.10, the Trustee shall not at any time be charged
with knowledge of the existence of any facts which would prohibit the making of
any payment to or by the Trustee, and in the absence of such written notice the
Trustee may make such payment without liability or obligation to the Senior
Indebtedness.
Section 10.12 Application by Trustee of Monies Deposited With It.
Nothing contained in this Article 10 or elsewhere in this Indenture, or in
the Securities, shall (i) affect the obligation of the Company to make, or
prevent the Company from making, at any time except as specified in Section 10.2
or 10.3 to the extent provided therein, payments at any time pursuant to the
Securities, (ii) prevent the application by the Trustee or any Paying Agent of
any monies or the proceeds of any U.S. Government Obligations received from the
Company and held by the Trustee or such Paying Agent in trust for the benefit of
the Holders of Securities as to which notice of redemption shall have been
given, to the payment of or on account of the principal of or interest on the
Securities if, at the time such notice was given, a payment by the Company under
the Securities would not have been prohibited by the foregoing provisions of
this Article 10 or (iii) prevent the application by the Trustee or any Paying
Agent of any monies or the proceeds of any U.S. Government Obligations deposited
with it by the Company under Article B hereof to the payment of or on account of
the principal of or interest on the Securities if, at the time of such deposit,
a payment by the
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Company under the Securities would not have been prohibited by the foregoing
provisions of this Article 10.
Section 10.13 Trustee's Compensation Not Prejudiced.
Nothing in this Article 10 shall apply to claims of, or payments to, the
Trustee pursuant to Section 7.7.
Section 10.14 Officer's Certificate.
If there occurs any event referred to in Section 10.2, the Company, as the
case may be, shall promptly give to the Trustee an Officer's Certificate (on
which the Trustee may conclusively rely) identifying all holders of Senior
Indebtedness and the principal amount of Senior Indebtedness then outstanding
held by each such holder and stating the reasons why such Officer's Certificate
is being delivered to the Trustee.
Section 10.15 Certain Payments.
Nothing in this Article 10 shall prevent or delay (i) the Company from or
in redeeming any Securities pursuant to Sections 4.13 or 4.28 of this Indenture
or paragraph 1(d) or (f) of the Securities or (ii) the receipt by the Holders of
payments of principal of and interest on the Securities as provided in Section
8.2.
Section 10.16 Names of Representatives.
The Company shall from time to time, upon request of the Trustee, provide
to the Trustee an Officer's Certificate setting forth the name and address of
each Representative of all outstanding Senior Indebtedness.
Section 10.17 Article 10 Not To Prevent Events of Default or Limit Right To
Accelerate.
The failure to make a payment pursuant to the Securities by reason of any
provision in this Article 10 shall not be construed as preventing the occurrence
of a Default. Nothing in this Article 10 shall have any effect on the right of
the Holders or the Trustee to accelerate the maturity of the Securities.
Section 10.18 Reliance by Holders of Senior Indebtedness on Subordination
Provisions.
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Each Holder by accepting a Security acknowledges and agrees that the
foregoing subordination provisions are, and are intended to be, an inducement
and a consideration to each holder of any Senior Indebtedness, whether such
Senior Indebtedness was created or acquired before or after the issuance of the
Securities, to acquire and continue to hold, or to continue to hold, such Senior
Indebtedness and such holder of Senior Indebtedness shall be deemed conclusively
to have relied on such subordination provisions in acquiring and continuing to
hold, or in continuing to hold, such Senior Indebtedness. No provision in any
supplemental indenture which modifies this Article 10 in any manner adverse to
the holders of Senior Indebtedness shall be effective against the holders of
Senior Indebtedness who have not consented thereto in accordance with the
provisions of the documents governing such Senior Indebtedness.
Section 10.19 Proof of Claim.
In the event that the Company is subject to any proceeding under any
Bankruptcy Law and the Holders and the Trustee fail to file any proof of claim
permitted to be filed in such proceeding with respect to the Securities, then
any Representative of Senior Indebtedness may file such proof of claim no
earlier than the later of (i) the expiration of 15 days after such
Representative notifies the Trustee of its intention to do so and (ii) 30 days
preceding the last day permitted to file such claim.
Section 10.20 No Fiduciaries Duty to Holders of Senior Indebtedness.
With respect to the holders of Senior Indebtedness, the Trustee undertakes
to perform or to observe only such of its covenants and obligations as are
specifically set forth in this Article 10, and no implied covenants or
obligations with respect to the holders of Senior Indebtedness shall be read
into this Indenture against the Trustee. The Trustee shall not be deemed to owe
any fiduciary duty to the holders of Senior Indebtedness, and, subject to the
provisions of Article 7, the Trustee shall not be liable to any holder of Senior
Indebtedness if it shall mistakenly pay over or deliver to Holders, the Company
or any other person, monies or assets to which any holder of Senior Indebtedness
shall be entitled by virtue of this Article 10 or otherwise.
ARTICLE 11
MISCELLANEOUS
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Section 11.1 Trust Indenture Act Controls.
If any provision of this Indenture limits, qualifies or conflicts with
another provision which is required to be included in this Indenture by the TIA,
the required provision shall control.
Section 11.2 Notices.
Any notice or communication by the Company or the Trustee to any of the
others is duly given if in writing and delivered in Person or mailed by
first-class mail to the others' addresses stated in Section 11.10. The Company
or the Trustee by notice to the others may designate additional or different
addresses for subsequent notices or communications.
Any notice or communication to a Securityholder shall be mailed by
first-class mail to his address shown on the register kept by the Registrar.
Failure to mail a notice or communication to a Securityholder or any defect in
it shall not affect its sufficiency with respect to other Securityholders.
If a notice or communication is mailed in the manner provided above within
the time prescribed, it is duly given, whether or not the addressee receives lt.
If the Company mails a notice or communication to Securityholders, it shall
mail a copy to the Trustee and each Agent at the same time.
All other notices or communications shall be in writing.
Section 11.3 Communication by Holders with Other Holders.
Securityholders may communicate pursuant to TIA ss. 312(b) with other
Securityholders with respect to their rights under this Indenture or the
Securities. The Company, the Trustee, the Registrar and anyone else shall have
the protection of TIA ss. 312(c).
Section 11.4 Certificate and Opinion as to Conditions Precedent.
Upon any request or application by the Company or any other obligor to the
Trustee to take any action under this Indenture, the Company or any other
obligor, as the case may be, shall furnish to the Trustee:
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(a) an Officer's Certificate stating that, in the opinion of the
signer, all conditions precedent, if any, provided for in this Indenture
relating to the proposed action have been complied with; and
(b) an opinion of Counsel stating that, in the opinion of such
counsel, all such conditions precedent have been complied with.
Section 11.5 Statements Required in Certificate or Opinion.
Each certificate or opinion with respect to compliance with a condition or
covenant provided for in this Indenture shall include:
(1) a statement that the Person making such certificate or opinion has
read such covenant or condition;
(2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of such Person, he has made such
examination or investigation as is necessary to enable him to express an
informed opinion as to whether or not such covenant or condition has been
complied with; and
(4) a statement as to whether or not, in the opinion of such Person,
such condition or covenant has been complied with.
Section 11.6 Rules by Trustee and Agents.
The Trustee may make reasonable rules for action by or a meeting of
Securityholders. The Registrar or Paying Agent may make reasonable rules and set
reasonable requirements for its functions.
Section 11.7 Legal Holidays.
A "Legal Holiday" is a Saturday, a Sunday or a day on which banking
institutions in the State of New York are not required to be open. If a payment
date is a Legal Holiday at a place of payment, payment may be made at that place
on the next succeeding day that is not a Legal Holiday, and no interest shall
accrue for the intervening period.
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Section 11.8 Counterparts.
This Indenture may be executed in any number of counterparts and by the
parties hereto in separate counterparts, each of which when so executed shall be
deemed to be an original and all of which taken together shall constitute one
and the same agreement.
Section 11.9 Variable Provisions.
"Officer" means the Chairman of the Board, the President, the Executive
Vice President, any Vice President, the Chief Financial Officer, the Treasurer,
the Secretary, any Assistant Treasurer or any Assistant Secretary of the Company
or a subsidiary thereof, as the context may indicate.
The Company initially appoints the Trustee as Paying Agent, Registrar and
authenticating agent.
The first certificate pursuant to Section 4.3 shall be for the first fiscal
year of each of the Company ending on or after the date of this Indenture.
The reporting date for Section 7.6 is May 15 of each year. The first
reporting date is May 15, 1997.
The Trustee shall always have a combined capital and surplus (including
subordinated capital notes) of at least $25,000,000 as set forth in its most
recent published annual report of condition.
The Company's address is:
2405 Trade Centre Avenue
Longmont, Colorado 80503
Attention: Richard A. Schneider
Executive Vice President
The Trustee's address is:
First Trust National Association
First Trust Center
180 East Fifth Street
St. Paul, Minnesota 55101
Attention: Richard H. Prokosch
Section 11.10 Governing Law.
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THE LAWS OF THE STATE OF NEW YORK SHALL GOVERN THIS INDENTURE AND THE
SECURITIES, WITHOUT REGARD TO THE CONFLICTS OF LAWS PROVISIONS THEREOF.
Section 11.11 No Adverse Interpretation of Other Agreements.
This Indenture may not be used to interpret another indenture, loan or debt
agreement of the Company or any of its subsidiaries. Any such indenture, loan or
debt agreement may not be used to interpret this Indenture.
Section 11.12 Successors.
All agreements of the Company in this Indenture and the Securities shall
bind their respective successors. All agreements of the Trustee in this
Indenture shall bind its successor.
Section 11.13 Severability.
In case any provision in this Indenture or in the Securities shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
Section 11.14 Qualification of Indenture.
The Company shall qualify this Indenture under the TIA in accordance with
the terms and conditions of the Securities and shall pay all costs and expenses
(including attorneys' fees for the Company, the Trustee and the Holders of the
Securities) incurred in connection therewith, including, but not limited to,
costs and expenses of qualification of the Indenture and the Securities and
printing this Indenture and the Securities. In connection with any such
qualification of this Indenture under the TIA, the Trustee shall be entitled to
receive from the Company any such Officers' Certificates, opinions of Counsel or
other documentation as it may reasonably request.
Section 11.15 Table of Contents, Headings, etc.
The Table of Contents, Cross-Reference Table and Headings of the Articles
and Sections of this Indenture have been inserted for convenience of reference
only, are not to be considered a part hereof, and shall in no way modify or
restrict any of the terms or provisions hereof.
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ARTICLE 12
CONVERSION
Section 12.1 Conversion of the Note.
The Holder will have the right, exercisable at any time on or before the
Maturity Date, by notice to the Company at its principal office, at the Holder's
option, to convert the then unpaid principal amount of this Note (or any portion
hereof that is an integral multiple of $1,000) into 500 fully paid and
non-assessable shares of Common Stock for each $1,000 face amount of Notes,
representing a conversion price equal to $2.00 per share, subject to adjustment
as set forth below (the "Conversion Price"). The Company may at any time, by
notice to the Holder, require the conversion of Notes in accordance with this
Section 12, and the Holder shall promptly surrender its Note for conversion
following such notice, provided that the Closing Price for the Common Stock for
thirty (30) consecutive trading days prior to such notice is equal to or greater
than $6.00 per share.
Subject to the right of the Holder on the date of conversion to receive all
interest on such Note accrued through such date of conversion, no adjustment for
interest or dividends will be made upon the conversion of the Notes. No
fractional shares will be issued upon conversion, but if the conversion results
in a fraction, the fair market value of such fractional share of Common Stock
(which shall be the closing price of such shares on the exchange or market on
which the Common Stock is then traded) will be paid by the Company in cash. This
right of conversion shall cease upon payment in full of all principal and
interest and other amounts due in respect of the Notes. Nothing contained in
this paragraph shall authorize the payment of interest to the Holder when the
terms of the Notes otherwise prohibit the same.
The occurrence of any of the events shall trigger an adjustment from time
to time to the Conversion Price and the number of shares of Common Stock into
which the Notes shall be converted (the "Conversion Shares"):
(a) Recapitalization, Reclassification and Succession. If any
recapitalization of the Company or reclassification of its Common Stock or any
merger or consolidation of the Company into or with a corporation or other
business entity, or the sale or transfer of all or substantially all of the
Company's assets or of any successor corporation's assets to any other
corporation or business entity (any such corporation or other business entity
being
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included within the meaning of the term "successor corporation") shall be
effected, at any time while the Notes remain outstanding, then, as a condition
of such recapitalization, reclassification, merger, consolidation, sale or
transfer, lawful and adequate provision shall be made whereby the Holder of the
Notes thereafter shall have the right to receive upon the conversion of the
Notes as provided in this Section 12 and in lieu of the shares of Common Stock
immediately theretofore issuable upon the conversion of the Notes, such shares
of capital stock, securities or other property as may be issued or payable with
respect to or in exchange for a number of outstanding shares of Common Stock
equal to the number of shares of Common Stock immediately theretofore issuable
upon the conversion of the Notes had such recapitalization, reclassification,
merger, consolidation, sale or transfer not taken place, and in each such case,
the terms of this Indenture and the Notes shall be applicable to the shares of
stock or other securities or property receivable upon the conversion of the
Notes after such consummation.
(b) Subdivision or Combination of Shares. If the Company at any time while
the Notes remain outstanding shall subdivide or combine its Common Stock, the
Conversion Price and the Conversion Shares shall be proportionately adjusted.
(c) Stock Dividends and Distributions. If the Company at any time while the
Notes are outstanding shall issue or pay the holders of its Common Stock, or
take a record of the holders of its Common Stock for the purpose of entitling
them to receive, a dividend payable in, or other distribution of, Common Stock,
then (i) the Conversion Price shall be adjusted in accordance with Section 12(e)
and (ii) the number of Conversion Shares shall be adjusted to the number of
shares of Common Stock that the Holder would have owned immediately following
such action had the Notes been converted immediately prior thereto.
(d) Stock and Rights Offering to Shareholders. If at any time after the
date of issuance of the Notes, the Company shall issue or sell, or fix a record
date for the purposes of entitling holders of its Common Stock to receive, (i)
Common Stock or (ii) rights, options or warrants entitling the holders thereof
to subscribe for or purchase Common Stock (or securities convertible or
exchangeable into or exercisable for Common Stock), in any such case, at a price
per share (or having a conversion, exchange or exercise price per share) that is
less than the lowest Closing Price during the twenty (20) consecutive trading
days immediately preceding the date of such issuance or sale or such record date
then, immediately after the date of such issuance or sale or on such record
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date, (A) the Conversion Price shall be adjusted in accordance with Section
12(e) and (B) the number of Conversion Shares shall be adjusted to that number
determined by multiplying the number of Conversion Shares immediately before the
date of such issuance or sale or such record date by a fraction, the denominator
of which will be the number of shares of Common Stock outstanding on such date
plus the number of shares of Common Stock that the aggregate offering price of
the total number of shares so offered for subscription or purchase (or the
aggregate initial conversion price, exchange price or exercise price of the
convertible securities or exchangeable securities or rights, options or
warrants, as the case may be, so offered) would purchase at such Closing Price,
and the numerator of which will be the number of shares of Common Stock
outstanding on such date plus the number of additional shares of Common Stock
offered for subscription or purchase (or into which the convertible or
exchangeable securities or rights, options or warrants so offered are initially
convertible or exchangeable or exercisable, as the case may be).
If the Company shall at any time after the date of issuance of the Notes
distribute to all holders of its Common Stock any shares of capital stock of the
Company (other than Common Stock) or evidences of its indebtedness or assets
(excluding cash dividends or distributions paid from retained earnings or
current year's or prior year's earnings of the Company) or rights or warrants to
subscribe for or purchase any of its securities (excluding those referred to in
the immediately preceding paragraph)(any of the foregoing being hereinafter in
this paragraph called the "Securities"), then in each such case, the Company
shall reserve shares or other units of such securities for distribution to the
Holders upon conversion of the Notes so that, in addition to the shares of
Common Stock to which such Holders are entitled, such Holders will receive upon
such exercise the amount and kind of such Securities which such Holders would
have received if the Holders had, immediately prior to the record date for the
distribution of the Securities, converted the Notes.
(e) Conversion Price Adjustment. Whenever the number of Conversion Shares
is adjusted, as herein provided, the Conversion Price payable upon the
conversion of the Notes shall be adjusted to that price determined by
multiplying the Conversion Price immediately prior to such adjustment by a
fraction (i) the numerator of which shall be the number of Conversion Shares
immediately prior to such adjustment, and (ii) the denominator of which shall be
the number of Conversion Shares immediately thereafter.
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(f) 1996 EBITDA Adjustment. The Conversion Price shall additionally be
adjusted in the following circumstances:
(a) if the Company shall achieve 1996 EBITDA in an amount of less than
$6,000,000, the Conversion Price shall be reduced to $1.50 per share; and
(b) if the Company shall achieve 1996 EBITDA in an amount of less than
$4,750,000 (together with the $6,000,000 amount referred to above, the
"Adjusted Amounts"), the Conversion Price shall be reduced to $1.00 per
share;
provided, however, that in the event the Company sells all of the capital stock
or all or substantially all of the assets of one or more of its Subsidiaries in
1996, the Adjusted Amounts for 1996 will be reduced by the amount or amounts set
forth in Schedule A to the Notes in respect of the Subsidiary or Subsidiaries so
involved. In the event any such sale occurs during 1996, the applicable Adjusted
Amount will be reduced by multiplying it by a fraction, the numerator of which
is the number of days of the year remaining after any such sale and the
denominator is 365.
(g) Certain Shares Excluded. The number of shares of Common Stock
outstanding at any given time for purposes of the adjustments set forth in this
Section 12 shall exclude any shares then directly or indirectly held in the
treasury of the Company.
(h) Deferral and Cumulation of De Minimis Adjustments. The Company shall
not be required to make any adjustment pursuant to this Section 12 if the amount
of such adjustment should be less than one percent (1%) of the Conversion Price
in effect immediately before the event that would otherwise have given rise to
such adjustment. In such case, however, any adjustment that would otherwise have
been required to be made shall be made at the time of and together with the next
subsequent adjustment which, together with any adjustment or adjustments so
carried forward, shall amount to not less than one percent (1%) of the
Conversion Price in effect immediately before the event giving rise to such next
subsequent adjustment.
(i) Duration of Adjustment. Following each computation or readjustment
provided in this Section 12, the new adjusted Conversion Price and number of
Conversion Shares
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shall remain in effect until a further computation or readjustment thereof is
required.
Section 12.2 Reservation. The Company hereby agrees that at all times there
shall be reserved for issuance upon the conversion of the Notes such number of
shares of its Common Stock as shall be required for issuance upon conversion of
the Notes. The Company further agrees that all shares which may be issued upon
the conversion of the rights represented by the Notes will be duly authorized
and will, upon issuance and against payment of the Conversion Price, be validly
issued, fully paid and non-assessable, free from all taxes, liens, charges and
preemptive rights with respect to the issuance thereof, other than taxes, if
any, in respect of any transfer occurring contemporaneously with such issuance
and other than transfer restrictions imposed by federal and state securities
laws.
Section 12.3 Delivery of Shares and/or New Note. The Company shall deliver
a certificate or certificates for shares of its Common Stock issuable on
conversion of the Notes as soon as practicable after surrender of the Notes for
conversion, but the person or persons to whom such certificates are issuable
shall be considered the holder of record of the shares of Common Stock from the
time the Notes are surrendered. Except as described above, the Notes are not
otherwise convertible into shares of Common Stock. Upon conversion of only a
portion of the Notes, the Trustee shall issue and deliver to, or upon the
written order of, the Holder hereof, at the expense of the Company, a new Note
covering the principal amount of the Note not converted, which new Note shall
entitle the holder thereof to interest on the principal amount thereof to the
same extent as if the unconverted portion of the Note had not been surrendered
for conversion.
[signature page follows]
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SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed as of the date first written above.
NAI TECHNOLOGIES, INC.
By_________________________
Attest:
___________________________ (SEAL)
FIRST TRUST NATIONAL ASSOCIATION
Trustee
By_________________________
Attest:
___________________________ (SEAL)
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EXHIBIT A
CUSIP No. 62872H 11 5
No. _____ $__________
NAI TECHNOLOGIES, INC.
12% CONVERTIBLE SUBORDINATED PROMISSORY NOTE
Maturity Date: January 15, 2001
THIS NOTE AND THE COMMON STOCK THAT MAY BE ISSUABLE TO THE HOLDER HEREOF HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
SOLD, PLEDGED, HYPOTHECATED, DONATED OR OTHERWISE TRANSFERRED WITHOUT COMPLIANCE
WITH THE REGISTRATION OR QUALIFICATION PROVISIONS OF APPLICABLE FEDERAL AND
STATE SECURITIES LAWS OR APPLICABLE EXEMPTIONS THEREFROM.
FOR VALUE RECEIVED, NAI TECHNOLOGIES, INC., a New York corporation (the
"Company"), promises to pay to ______________________, the registered holder or
registered assigns hereof (the "Holder"), the principal amount of _____________
Dollars ($_________) payable on the fifteenth day of January 2001 (the "Maturity
Date"), together with interest on the outstanding principal amount of this Note
at the rate of twelve percent (12%) per annum calculated on the basis of a 360
day year, such interest to be payable in arrears on a quarterly basis on the
fifteenth day of January, April, July and October of each year, commencing on
April 15, 1996. In the event that any payment of any principal and/or interest
hereunder is not paid when due as provided for herein, and without affecting any
of the Holder's other rights and remedies, the unpaid principal balance hereof
shall thereafter accrue interest at the defaulted rate specified in Section
11(a) of this Note.
This Note is one of a series of the Company's 12% Convertible Subordinated
Promissory Notes (collectively, the "Notes"), issued pursuant to that certain
Confidential Private Placement Memorandum, dated December 15, 1995, as
supplemented (the "Memorandum"). Capitalized terms used and not otherwise
defined herein shall have the respective meanings attributed thereto in Section
13.
I. Payments and Prepayments.
(1) Payments of principal and interest on this Note shall be made at
the principal office of the Trustee, located at 180 East Fifth Street, St. Paul,
Minnesota 55101, or such other place or places within the United States as may
be specified by the Holder of this Note in a written notice to the Company at
least ten (10) business days before a given payment date.
(2) Payments of principal and interest on this Note shall be made in
lawful money of the United States of America by mailing the Trustee's good check
in the proper
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amount to the Holder at least three days prior to the due date of each payment
or otherwise transferring funds so as to be received by the Holder on the due
date of each such payment; provided, however, that, in the event that the
principal amount of this Note is at least $1,000,000, the Company shall make
payment by wire transfer to an account such Holder may specify in writing to the
Company at least three days prior to the due date of each payment.
(3) If any payment on this Note becomes due and payable on a Saturday,
Sunday or other day on which commercial banks in New York, New York are
authorized or required by law to close, the maturity thereof shall be extended
to the next succeeding business day and, with respect to payments of principal,
interest thereon shall be payable during such extension at the then applicable
rate.
(4) Subject to the provisions of Section 4 and 5 below, this Note is
subject to prepayment, in whole but not in part, at the option of the Company,
at any time after the third anniversary of the date hereof, without premium or
penalty. In the event of any partial payment of principal or accrued interest,
for whatever reason, or prepayment, any such partial payment of principal and/or
interest or prepayment of principal on the Notes shall be allocated among the
respective Notes and holders thereof so that the amount of such payments to each
holder shall bear as nearly as practicable the same ratio to the aggregate
amount then to be paid as the principal amount of the Notes then held by such
holder bears to the aggregate principal amount of Notes then outstanding.
(5) The Company will give the Holder written notice indicating the
amount of any prepayment and the proposed date thereof not more than sixty (60)
days and not less than thirty (30) days prior to any such prepayment of this
Note.
(6) Subject to the provisions of Sections 4 and 5 below, the Company
shall, within thirty (30) business days of the occurrence of a Change in Control
(as defined in Section 13 hereof), offer, by written notice to the Holder in
accordance with Section 1(e), to prepay this Note, in whole and not in part,
without premium or penalty. Holder may accept the offer to prepay made pursuant
to this Section 1(f) by causing notice of such acceptance to be delivered to the
Company at least ten (10) days prior to the proposed prepayment date (or such
longer period as may be required by law). A failure by Holder to respond to an
offer to prepay pursuant to this Section 1(f) within the requisite time period
shall be deemed to constitute a rejection of such offer.
II. Obligation Absolute. The obligations under this Note are absolute and
unconditional obligations of the Company and no modification, release, consent,
waiver, rearrangement or amendment shall impair the obligations of the Company
hereunder.
III. Security. The payment of this Note and the Company's obligations
hereunder, and under the Warrant and the Registration Rights Agreement (as such
terms are defined in the Memorandum) are not secured by any collateral.
IV. Subordination. (1) The Company for itself, its successors and assigns,
covenants and agrees, and each Holder of this Note, its successors and assigns,
by its acceptance of this Note likewise covenants and agrees, that to the extent
provided below the payment of the
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principal of and interest on this Note is hereby expressly subordinated and
junior in right of payment, to the extent and in the manner hereinafter set
forth, to all Senior Indebtedness (as hereinafter defined). For purposes hereof,
Senior Indebtedness is defined as:
(i) the principal of, premium, if any, and any interest (including,
without limitation, any interest on interest and post-bankruptcy petition
interest) on, all liabilities of the Company (including, without
limitation, all liabilities of the Company with respect to any costs and
expenses), direct or contingent, joint, several or independent, now or
hereafter existing, due or to become due, whether created directly or
acquired by assignment or otherwise, under or in respect of that certain
Amended and Restated Credit Agreement, dated as of April 12, 1995, among
the Company, The Bank of New York, Chemical Bank and the other parties
referred to therein (as heretofore and as hereafter amended, modified and
supplemented from time to time, the "Bank Credit Agreement") and any of the
other Loan Documents (as defined in the Bank Credit Agreement); and
(ii) all extensions, renewals and refundings of any of the foregoing
(provided that the amount of any debt incurred in connection with such
extension, renewal or refunding does not exceed the amount of the
outstanding obligations of the Company under the Bank Credit Agreement at
the time of the extension, renewal or refunding (whether for interest,
principal or fees, or expenses incurred by the holders of Senior
Indebtedness for the protection of collateral and reasonable costs of
collection));
provided, however, that the term "Senior Indebtedness" shall not include any
indebtedness expressly subordinated in writing to the Notes or any indebtedness
owed to affiliates of the Company.
(2) Upon the acceleration of any Senior Indebtedness or upon the
maturity of the entire principal amount of any Senior Indebtedness by lapse of
time, acceleration or otherwise, all such Senior Indebtedness which has been so
accelerated or matured shall first indefeasibly be paid in full before any
payment is made by the Company or any person acting on behalf of the Company on
account of any obligations evidenced by this Note.
(3) Notwithstanding anything to the contrary contained herein, the
Company shall not (i) pay any principal portion of this Note so long as any
Senior Indebtedness remains outstanding or (ii) pay any interest payable under
this Note if there exists a Default or Event of Default (as such terms are
defined in the instruments evidencing Senior Indebtedness) with respect to any
Senior Indebtedness (hereinafter referred to as a "Blockage Event").
The Company shall resume payment of interest payable under this Note and a
Blockage Event shall be deemed to have terminated:
(i) when such Default or Event of Default on Senior Indebtedness, as
applicable, is cured or waived;
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(ii) when the Holder hereof shall have cured any such Default or Event
of Default on Senior Indebtedness to the extent such Default or Event of
Default can be cured by payment of money, which amount shall be added to
the principal amount owing to the Holder pursuant to this Note; or
(iii) 180 days after the occurrence of such Default or Event of
Default, provided, that at the end of such 180 days, if any of the
following events exists or occurs, the Blockage Event shall continue: (A) a
Default in payment of any amount with respect to the Senior Indebtedness;
(B) an acceleration of the Senior Indebtedness; or (C) the occurrence of an
event of the type described in Section 5 hereof, provided, further, that a
Blockage Event with respect to a single specified Default or Event of
Default may be deemed to occur only once for each 360 day period.
(4) At any time there exists a Blockage Event, (i) the Company shall
not, directly or indirectly, make any payment of any part of this Note, (ii) the
Holder hereof shall not demand or accept from the Company or any other person
any such payment or cancel, set-off or otherwise discharge any part of the
indebtedness represented by this Note, and (iii) neither the Company nor the
Holder hereof shall otherwise take or permit any action prejudicial to or
inconsistent with the priority position of any holder of Senior Indebtedness
over the Holder of this Note. Notwithstanding the foregoing or any other
provision of this Note to the contrary, the occurrence and continuance of a
Blockage Event shall not limit or in any other manner affect the exercise of the
Holder's conversion rights pursuant to Section 6.
(5) Any holder of Senior Indebtedness is hereby authorized to demand
specific performance of this Note, whether or not the Company shall have
complied with the provisions hereof applicable to it, at any time when the
Holder hereof shall have failed to comply with any provision hereof applicable
to such Holder. The Holder hereby irrevocably waives any defense based on the
adequacy of a remedy at law which might be asserted as a bar to the remedy of
specific performance hereof in any action brought therefor by any holder of
Senior Indebtedness. The Holder further (i) waives presentment, demand, notice
and protest in connection with all negotiable instruments evidencing Senior
Indebtedness, notice of any loan made, extension granted or other action taken
in reliance hereon and all demands and notices of every kind in connection with
this Note or Senior Indebtedness; and (ii) assents to any renewal, extension or
postponement of the time of payment of Senior Indebtedness or any other
indulgence with respect thereto, to any substitution, exchange or release of
collateral therefor and to the addition or release of any person primarily or
secondarily liable thereon.
(6) The Company and the Holder shall execute and deliver to any holder
of Senior Indebtedness such further instruments and shall take such further
action as such holder of Senior Indebtedness may at any time or times reasonably
request in order to evidence the subordination of the obligations hereunder and
to otherwise carry out the provisions and intent of this Note.
(7) No right of any holder of Senior Indebtedness to enforce the
subordination of the obligations shall be impaired by any act or failure to act
by the Company or the Holder or by their failure to comply with this Note or any
other agreement or document
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evidencing, related to or securing the obligations hereunder. Without in any way
limiting the generality of the preceding sentence, the holders of Senior
Indebtedness may, at any time and from time to time, without the consent of or
notice to the Holder, without incurring responsibility to the Holder and without
impairing or releasing the subordination provided in this Note or the
obligations of the Holder hereof to the holders of Senior Indebtedness, do any
one or more of the following: (i) change the manner, place or terms of payment
of, or renew or alter, any Senior Indebtedness, or otherwise amend or supplement
in any manner, any Senior Indebtedness, or otherwise amend or supplement in any
manner, any Senior Indebtedness or any instrument evidencing the same or any
agreement under which Senior Indebtedness is outstanding; (ii) sell, exchange,
release or otherwise deal with any property pledged, mortgaged or otherwise
securing any Senior Indebtedness; (iii) release any Person or entity liable in
any manner for the collection of any Senior Indebtedness; and (iv) exercise or
refrain from exercising any rights against the Company or any other Person or
entity.
(8) In the event that the Company shall make any payment or prepayment
to the Holder on account of the obligations under this Note which is prohibited
by this Section 4, such payment shall be held by the Holder, in trust for the
benefit of, and shall be paid forthwith over and delivered to, the holders of
Senior Indebtedness (pro rata as to each of such holders on the basis of the
respective amounts and priorities of Senior Indebtedness held by them) to the
extent necessary to pay all Senior Indebtedness due to such holders of Senior
Indebtedness in full in accordance with its terms (whether or not such Senior
Indebtedness is due and owing), after giving effect to any concurrent payment or
distribution to or for the holders of such Senior Indebtedness.
(9) After all Senior Indebtedness indefeasibly is paid in full and
until the obligations under this Note are paid in full, the Holder shall be
subrogated to the rights of holders of Senior Indebtedness to the extent that
distributions otherwise payable to the Holder have been applied to the payment
of Senior Indebtedness. For purposes of such subrogation, no payments or
distributions to holders of such Senior Indebtedness of any cash, property or
securities to which the Holder would be entitled except for the provisions of
this Section 4 and no payment over pursuant to the provisions of this Section 4
to holders of such Senior Indebtedness by the Holder, shall, as between the
Company, its creditors, other than holders of such Senior Indebtedness, and the
Holder, be deemed to be a payment by the Company to or on account of such Senior
Indebtedness, it being understood that the provisions of this Section 4 are
solely for the purpose of defining the relative rights of the holders of such
Senior Indebtedness, on the one hand, and the Holder hereof, on the other hand.
V. Primacy of Senior Indebtedness Claims as Against the Holder. In any
insolvency, receivership, bankruptcy, dissolution, liquidation or reorganization
proceeding, or in any other proceeding, whether voluntary or involuntary, by or
against the Company under any bankruptcy or insolvency law or laws relating to
relief of debtors, to compositions, extensions or readjustments of indebtedness:
(1) the claims of any holders of Senior Indebtedness against the
Company shall be paid indefeasibly in full in cash before any payment is made to
the Holder;
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(2) until all Senior Indebtedness is indefeasibly paid in full in cash
any distribution to which the Holder would be entitled but for this Section 5
shall be made to holders of Senior Indebtedness; and
(3) the holders of Senior Indebtedness shall have the right to
enforce, collect and receive every such payment or distribution and give
acquittance therefor. In furtherance of the foregoing, in the event that the
Company shall file or have filed against it a petition under any chapter of
Title 11 of the United States Code or any comparable statute, with the result
that the Company is excused from the obligation to pay all or any part of the
amount otherwise payable in respect of the Senior Indebtedness during the period
subsequent to the commencement of such proceedings, the Holder agrees that all
or such part of such amount shall be payable out of, and to that extent diminish
and be at the expense of, the Holder's reorganization dividends or other
distributions in respect of any claim filed by it as a creditor or interest
holder. In the event the holders of Senior Indebtedness receive amounts in
excess of payment in full (in cash) of amounts outstanding in respect of Senior
Indebtedness (without giving effect to whether claims in respect of the Senior
Indebtedness are allowed in any insolvency proceeding), the holders of the
Senior Indebtedness shall pay such excess amounts to the Holder.
VI. Conversion. The Holder of this Note will have the right, exercisable at
any time on or before the Maturity Date, by notice to the Company at its
principal office, at the Holder's option, to convert the then unpaid principal
amount of this Note (or any portion hereof that is an integral multiple of
$1,000) into 500 fully paid and non-assessable shares of common stock, par value
$.10 per share, of the Company (the "Common Stock") for each $1,000 face amount
of this Note, representing a conversion price equal to $2.00 per share, subject
to adjustment as set forth below (the "Conversion Price"). The Company may at
any time, by notice to the Holder, require the conversion of this Note in
accordance with this Section 6, and the Holder shall promptly surrender this
Note for conversion following such notice, provided that the Closing Price for
the Common Stock for thirty (30) consecutive trading days prior to such notice
is equal to or greater than $6.00 per share.
Subject to the right of the Holder on the date of conversion to receive all
interest on such Note accrued through such date of conversion, no adjustment for
interest or dividends will be made upon the conversion of this Note. No
fractional shares will be issued upon conversion, but if the conversion results
in a fraction, the fair market value of such fractional share of Common Stock
(which shall be the closing price of such shares on the exchange or market on
which the Common Stock is then traded) will be paid by the Company in cash. This
right of conversion shall cease upon payment in full of all principal and
interest and other amounts due in respect of this Note. Nothing contained in
this paragraph shall authorize the payment of interest to the Holder when the
terms of this Note otherwise prohibit the same.
The occurrence of any of the following events shall trigger an adjustment
from time to time to the Conversion Price and the number of shares of Common
Stock into which this Note shall be converted (the "Conversion Shares"):
(1) Recapitalization, Reclassification and Succession. If any
recapitalization of the Company or reclassification of its Common Stock or any
merger or
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consolidation of the Company into or with a corporation or other business
entity, or the sale or transfer of all or substantially all of the Company's
assets or of any successor corporation's assets to any other corporation or
business entity (any such corporation or other business entity being included
within the meaning of the term "successor corporation") shall be effected, at
any time while this Note remains outstanding, then, as a condition of such
recapitalization, reclassification, merger, consolidation, sale or transfer,
lawful and adequate provision shall be made whereby the Holder of this Note
thereafter shall have the right to receive upon the conversion hereof as
provided in this Section 6 and in lieu of the shares of Common Stock immediately
theretofore issuable upon the conversion of this Note, such shares of capital
stock, securities or other property as may be issued or payable with respect to
or in exchange for a number of outstanding shares of Common Stock equal to the
number of shares of Common Stock immediately theretofore issuable upon the
conversion of this Note had such recapitalization, reclassification, merger,
consolidation, sale or transfer not taken place, and in each such case, the
terms of this Note shall be applicable to the shares of stock or other
securities or property receivable upon the conversion of this Note after such
consummation.
(2) Subdivision or Combination of Shares. If the Company at any time
while this Note remains outstanding shall subdivide or combine its Common Stock,
the Conversion Price and the Conversion Shares shall be proportionately
adjusted.
(3) Stock Dividends and Distributions. If the Company at any time
while this Note is outstanding shall issue or pay the holders of its Common
Stock, or take a record of the holders of its Common Stock for the purpose of
entitling them to receive, a dividend payable in, or other distribution of,
Common Stock, then (i) the Conversion Price shall be adjusted in accordance with
Section 6(e) and (ii) the number of Conversion Shares shall be adjusted to the
number of shares of Common Stock that the Holder would have owned immediately
following such action had this Note been converted immediately prior thereto.
(4) Stock and Rights Offering to Shareholders. If at any time after
the date of issuance of this Note, the Company shall issue or sell, or fix a
record date for the purposes of entitling holders of its Common Stock to
receive, (i) Common Stock or (ii) rights, options or warrants entitling the
holders thereof to subscribe for or purchase Common Stock (or securities
convertible or exchangeable into or exercisable for Common Stock), in any such
case, at a price per share (or having a conversion, exchange or exercise price
per share) that is less than the lowest Closing Price during the twenty (20)
consecutive trading days immediately preceding the date of such issuance or sale
or such record date then, immediately after the date of such issuance or sale or
on such record date, (A) the Conversion Price shall be adjusted in accordance
with Section 6(e) and (B) the number of Conversion Shares shall be adjusted to
that number determined by multiplying the number of Conversion Shares
immediately before the date of such issuance or sale or such record date by a
fraction, the denominator of which will be the number of shares of Common Stock
outstanding on such date plus the number of shares of Common Stock that the
aggregate offering price of the total number of shares so offered for
subscription or purchase (or the aggregate initial conversion price, exchange
price or exercise price of the convertible securities or exchangeable securities
or rights, options or warrants, as the case may be, so offered) would purchase
at such Closing Price, and the numerator of which will be the number of shares
of Common Stock outstanding on such date plus the number of additional shares of
Common Stock offered for subscription or purchase (or into which the
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convertible or exchangeable securities or rights, options or warrants so offered
are initially convertible or exchangeable or exercisable, as the case may be).
If the Company shall at any time after the date of issuance of this
Note distribute to all holders of its Common Stock any shares of capital stock
of the Company (other than Common Stock) or evidences of its indebtedness or
assets (excluding cash dividends or distributions paid from retained earnings or
current year's or prior year's earnings of the Company) or rights or warrants to
subscribe for or purchase any of its securities (excluding those referred to in
the immediately preceding paragraph)(any of the foregoing being hereinafter in
this paragraph called the "Securities"), then in each such case, the Company
shall reserve shares or other units of such securities for distribution to the
Holder upon conversion of this Note so that, in addition to the shares of Common
Stock to which such Holder is entitled, such Holder will receive upon such
exercise the amount and kind of such Securities which such Holder would have
received if the Holder had, immediately prior to the record date for the
distribution of the Securities, converted this Note.
(5) Conversion Price Adjustment. Whenever the number of Conversion
Shares is adjusted, as herein provided, the Conversion Price payable upon the
conversion of this Note shall be adjusted to that price determined by
multiplying the Conversion Price immediately prior to such adjustment by a
fraction (i) the numerator of which shall be the number of Conversion Shares
immediately prior to such adjustment, and (ii) the denominator of which shall be
the number of Conversion Shares immediately thereafter.
(6) 1996 EBITDA Adjustment. The Conversion Price shall additionally be
adjusted in the following circumstances:
(a) if the Company shall achieve 1996 EBITDA (as such term is
defined in Section 13(h)) in an amount of less than $6,000,000, the
Conversion Price shall be reduced to $1.50 per share; and
(b) if the Company shall achieve 1996 EBITDA in an amount of less
than $4,750,000 (together with the $6,000,000 amount referred to
above, the "Adjusted Amounts"), the Conversion Price shall be reduced
to $1.00 per share;
provided, however, that in the event the Company sells all of the capital stock
or all or substantially all of the assets of one or more of its Subsidiaries in
1996, the Adjusted Amounts for 1996 will be reduced by the amount or amounts set
forth in Schedule A hereto in respect of the Subsidiary or Subsidiaries so
involved. In the event any such sale occurs during 1996, the applicable Adjusted
Amount will be reduced by multiplying it by a fraction, the numerator of which
is the number of days of the year remaining after any such sale and the
denominator is 365.
(7) Certain Shares Excluded. The number of shares of Common Stock
outstanding at any given time for purposes of the adjustments set forth in this
Section 6 shall exclude any shares then directly or indirectly held in the
treasury of the Company.
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(8) Deferral and Cumulation of De Minimis Adjustments. The Company
shall not be required to make any adjustment pursuant to this Section 6 if the
amount of such adjustment should be less than one percent (1%) of the Conversion
Price in effect immediately before the event that would otherwise have given
rise to such adjustment. In such case, however, any adjustment that would
otherwise have been required to be made shall be made at the time of and
together with the next subsequent adjustment which, together with any adjustment
or adjustments so carried forward, shall amount to not less than one percent
(1%) of the Conversion Price in effect immediately before the event giving rise
to such next subsequent adjustment.
(9) Duration of Adjustment. Following each computation or readjustment
provided in this Section 6, the new adjusted Conversion Price and number of
Conversion Shares shall remain in effect until a further computation or
readjustment thereof is required.
(10) Reservation. The Company hereby agrees that at all times there
shall be reserved for issuance upon the conversion of this Note such number of
shares of its Common Stock as shall be required for issuance upon conversion of
this Note. The Company further agrees that all shares which may be issued upon
the conversion of the rights represented by this Note will be duly authorized
and will, upon issuance and against payment of the Conversion Price, be validly
issued, fully paid and non-assessable, free from all taxes, liens, charges and
preemptive rights with respect to the issuance thereof, other than taxes, if
any, in respect of any transfer occurring contemporaneously with such issuance
and other than transfer restrictions imposed by federal and state securities
laws.
(i) Delivery of Shares and/or New Note. The Company shall deliver a
certificate or certificates for shares of its Common Stock issuable on
conversion of this Note as soon as practicable after surrender of this Note for
conversion, but the person or persons to whom such certificates are issuable
shall be considered the holder of record of the shares of Common Stock from the
time this Note is surrendered. Except as described above, this Note is not
otherwise convertible into shares of Common Stock. Upon conversion of only a
portion of this Note, the Company shall issue and deliver to, or upon the
written order of, the Holder hereof, at the expense of the Company, a new Note
covering the principal amount of this Note not converted, which new Note shall
entitle the holder thereof to interest on the principal amount thereof to the
same extent as if the unconverted portion of this Note had not been surrendered
for conversion.
VII. Notices to Holders.
(1) Notice of Record Date. In case:
(i) the Company shall take a record of the holders of its Common
Stock (or other stock or securities at the time receivable upon the
conversion of this Note) for the purpose of entitling them to receive
any dividend (other than a cash dividend payable out of earned surplus
of the Company) or other distribution, or any right to subscribe for
or purchase any shares of stock of any class or any other securities,
or to receive any other right;
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(ii) of any capital reorganization of the Company, any
reclassification of the capital stock of the Company, any
consolidation with or merger of the Company into another corporation,
or any conveyance of all or substantially all of the assets of the
Company to another corporation; or
(iii) of any voluntary dissolution, liquidation or winding-up of
the Company;
then, and in each such case, the Company will mail or cause to be mailed to the
Holder hereof at the time outstanding a notice specifying, as the case may be,
(i) the date on which a record is to be taken for the purpose of such dividend,
distribution or right, and stating the amount and character of such dividend,
distribution or right, or (ii) the date on which such reorganization,
reclassification, consolidation, merger, conveyance, dissolution, liquidation or
winding-up is to take place, and the time, if any, is to be fixed, as of which
the holders of record of Common Stock (or such stock or securities at the time
receivable upon the conversion of this Note) shall be entitled to exchange their
shares of Common Stock (or such other stock or securities) for securities or
other property deliverable upon such reorganization, reclassification,
consolidation, merger, conveyance, dissolution, liquidation or winding-up. Such
notice shall be mailed at least thirty (30) days prior to the record date
therein specified, or if no record date shall have been specified therein, at
least thirty (30) days prior to such other specified date.
(2) Certificate of Adjustment. Whenever the Conversion Price or the
number of Conversion Shares shall be adjusted pursuant to Section 6 hereof, the
Company shall promptly make a certificate signed by its President or a Vice
President and by its Treasurer or Assistant Treasurer or its Secretary or
Assistant Secretary, setting forth in reasonable detail the event requiring the
adjustment, the amount of the adjustment, the method by which such adjustment
was calculated and the number of Conversion Shares and the Conversion Price
after giving effect to such adjustment, and shall promptly cause copies of such
certificates to be mailed (by first class mail postage prepaid) to the Holder of
this Note.
VIII. Registration, Exchange and Transfer. The Company will keep a register
in which, subject to such reasonable regulations as it may prescribe, it will
register all Notes. No transfer of this Note shall be valid as against the
Company unless made upon the register. This Note is subject to the restrictions
on transfer of this Note and compliance with said restrictions on transfer, the
Company shall execute and deliver in the name of the transferee or transferees a
new Note or Notes for a like principal amount.
This Note may be exchanged for a like aggregate principal amount in other
denominations. To be exchanged, this Note shall be surrendered for that purpose
at the principal office of the Company, and the Company shall execute and
deliver in exchange therefor the Note or Notes which the holder making the
exchange shall be entitled to receive, bearing serial numbers not
contemporaneously outstanding.
This Note, if presented for transfer, exchange, redemption or payment,
shall (if so required by the Company) be duly endorsed by, or be accompanied by
instruments of transfer in form satisfactory to the Company duly executed by,
the registered Holder or by his duly authorized attorney.
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The Company may deem and treat the registered Holder hereof as the absolute
owner hereof (whether or not this Note shall be overdue and notwithstanding any
notation of ownership or other writing hereon by anyone other than the Company),
for the purpose of receiving payment of or on account of the principal hereof
and interest hereon, for the conversion hereof and for all other purposes, and
the Company shall not be affected by any notice to the contrary.
IX. Covenants. The Company covenants, so long as this Note shall be
outstanding and unless the Holders of more than seventy-five percent (75%) of
the aggregate principal amount of all Notes then outstanding shall otherwise
approve, that:
(1) Financial Statements, Reports, etc. So long as this Note shall
remain outstanding and the Company is subject to the filing requirements of
Section 13(a), 13(c) or 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), the Company will transmit or cause to be transmitted to
the Holder, promptly after the same are sent or become publicly available,
copies of any and all financial statements and reports which are made available
to its shareholders and all periodic and other reports, proxy statements,
registration statements and other materials filed by it with the Securities and
Exchange Commission, or any other governmental authority succeeding to any or
all of the functions of said commission, or any national securities exchange or
stock market, as the case may be. If the Company is not subject to filing
requirements, the Company will transmit or cause to be transmitted to the Holder
annual and quarterly reports containing audited annual financial statements and
related notes thereto and unaudited quarterly financial statements,
respectively.
(2) Registration of Shares. The Company shall file a registration
statement with the Securities and Exchange Commission under the Securities Act
of 1933, as amended (the "Act"), with respect to the Notes, the shares of Common
Stock issuable pursuant hereto, the Warrant referred to in Section 16(a) and the
shares of Common Stock issuable upon the exercise of the Warrant on or prior to
the later of (i) ninety (90) days after the Company's receipt of the net
proceeds from the initial sale of the minimum principal amount of the Notes or
(ii) March 31, 1996, pursuant to a registration rights agreement of even date
herewith between the Holder and the Company.
(3) Corporate Existence. The Company shall, and shall cause its
Subsidiaries to, do or cause to be done all things necessary to preserve, renew
and keep in full force and effect its corporate existence, material rights,
licenses, permits and franchises and comply in all material respects with all
laws and regulations applicable to it.
(4) Taxes and Assessments. The Company shall, and shall cause its
Subsidiaries to, pay and discharge all taxes, assessments and governmental
charges or levies imposed upon it or upon its income or profits or in respect of
its property, before the same shall become in default (which, for purposes of
this Note, shall mean the earlier of ninety (90) days from its due date or
invoice date, as the case may be, or the date upon which such obligee commences
an action or proceeding to recover such amount), provided, however, that the
Company shall not be required to pay and discharge or to cause to be paid and
discharged any such tax, assessment, charge, levy or claim so long as the
validity or amount thereof shall be
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contested in good faith by appropriate proceedings (if the Company shall have
set aside on its books adequate reserves therefor).
(5) Liens. The Company shall not, and shall not permit any of its
Subsidiaries to, incur, create, assume or suffer to exist any Lien on any
property or assets, income or profits of the Company, now owned or hereafter
acquired, other than Permitted Liens.
(6) Indebtedness. The Company shall not, and shall not permit any of
its Subsidiaries to, contract, create, incur, assume or suffer to exist any
Indebtedness, except for (i) Senior Indebtedness; (ii) Indebtedness under this
Note and the other Notes in an aggregate principal amount not to exceed
$9,500,000; (iii) Indebtedness between Subsidiaries and between any Subsidiary
and the Company; (iv) Indebtedness existing on the date hereof; (v) Indebtedness
of Lynwood Scientific Developments Limited, a corporation organized under the
laws of the United Kingdom, to Midland Bank plc. in an aggregate amount not to
exceed $2,000,000 or the U.S. dollar equivalent in English pounds; (vi)
Indebtedness of Codar Technology, Inc., a Colorado corporation, to MetLife
Capital Corp. and Colorado National Leasing, Inc. in an aggregate amount not to
exceed $1,200,000; and (vii) all extensions, renewals and refundings of any of
the foregoing.
(7) Investments. The Company shall not, and shall not permit any of
its Subsidiaries to, purchase, hold or acquire any capital stock, evidence of
indebtedness or other securities of, make or permit to exist any loans or
advances to, or make or permit to exist any investment (by way of transfers of
property, contributions to capital, acquisitions of businesses or acquisitions
of assets other than in the ordinary course of business, or otherwise) or any
other interest in, any other Person, except for Permitted Investments.
(8) Payments. The Company shall not, and shall not permit any of its
Subsidiaries to, declare or pay, directly or indirectly, any dividends or make
any other distribution or payment, whether in cash, property, securities or a
combination thereof, with respect to (whether by reduction of capital or
otherwise) any shares of capital stock (or any options, warrants, rights or
other equity securities or agreements relating to any capital stock) now or
hereafter outstanding, or purchase, redeem, retire or otherwise acquire for
value any shares of its capital stock or warrants or options therefor now or
hereafter outstanding, or set apart any sum for the aforesaid purposes, in any
fiscal year, provided that the Company may declare stock splits and pay
dividends payable solely in shares of any class of its capital stock and the
Subsidiaries may make cash distributions or payments to the Company.
(9) Disposition of Assets. The Company shall not, and shall not permit
any of its Subsidiaries to, sell or otherwise dispose of any assets, including
the capital stock of any of its Subsidiaries, except for (i) sales of inventory,
fixtures and equipment in the ordinary course of business, (ii) sales of assets
having a book value not exceeding $100,000 in the aggregate, and (iii) the sale
of certain vacant property owned by the Company located in Hauppauge, New York.
(10) Affiliate Transactions. Subsequent to the date hereof, the
Company shall not, and shall not permit any Subsidiary to, directly or
indirectly, enter into or permit to
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exist any transaction or series of related transactions (including, but not
limited to, the purchase, sale or exchange of property, the making of any
investment, the giving of any guarantee or the rendering of any service) with
any Affiliate of the Company (other than transactions among the Company and any
wholly-owned Subsidiary) unless (i) such transaction or series of related
transactions is on terms no less favorable to the Company or such Subsidiary
than those that could be obtained in a comparable arm's length transaction with
a Person that is not an Affiliate, and (ii) such transaction or series of
related transactions is approved by a majority of the Board of Directors of the
Company (including a majority of the disinterested directors), which approval is
set forth in a board resolution of the Company certifying that such transaction
or series of transactions complies with the immediately preceding clause (i).
(11) Merger, Consolidation, etc. Neither the Company nor any
Subsidiary shall consolidate or merge with, or convey, transfer or lease
substantially all of its assets in a single transaction or series of
transactions to, any other Person unless (i) the successor formed by such
consolidation or the survivor of such merger or the Person that acquires by
conveyance, transfer or lease substantially all of the assets of the Company as
an entirety, as the case may be (the "Successor"), shall have executed and
delivered to Holder its assumption of the due and punctual performance of all
the obligations under this Note, (ii) such Successor shall be a corporation
organized and existing under the laws of the United States of America, any state
thereof or the District of Columbia, and (iii) no event referred to in Section 8
shall have occurred and be continuing.
(12) Maintenance of Properties. The Company shall, and shall cause
each of its Subsidiaries to, keep all properties useful in the business of the
Company in good working order and condition except to the extent that
discontinuing the operation or maintenance of any such properties is, in the
judgment of the Company, desirable in the conduct of its business.
X. Events of Default. (1) In the event that:
(i) the Company defaults in the payment of any installment of interest
required to be made on this Note and such default shall continue for a
period of ten (10) days;
(ii) the Company defaults in making any payment of principal on this
Note required to be made on this Note;
(iii) any obligation of the Company or any Subsidiary for the payment
of borrowed money in excess of $500,000 becomes or is declared to be due
and payable prior to its expressed maturity, unless the validity of any
such indebtedness or obligation is being contested in good faith by
appropriate proceedings;
(iv) any warrant of attachment, execution or other writ is levied upon
any property or assets of the Company or any Subsidiary in excess of
$500,000
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and is not discharged or stayed (including stays resulting from the filing
of an appeal) within thirty (30) days;
(v) all or any substantial part of the assets or properties of the
Company or any Subsidiary are condemned, seized or appropriated by any
government or governmental authority; or any order is entered in any
proceeding directing the winding-up, dissolution or split-up of the
Company;
(vi) the Company or any Subsidiary hereafter makes an assignment for
the benefit of creditors, or files a petition in bankruptcy as to itself,
is adjudicated insolvent or bankrupt, petitions any receiver of or any
trustee for the Company or any substantial part of the property of the
Company under any bankruptcy, reorganization, arrangement, readjustment of
debt, dissolution or liquidation law or statute of any jurisdiction,
whether or not hereafter in effect; or if there is hereafter commenced
against the Company any such proceeding and an order approving the petition
is entered or such proceeding remains undismissed for a period of sixty
(60) days, or the Company by any act or omission to act indicates its
consent to or approval of or acquiescence in any such proceeding or the
appointment of any receiver of, or trustee for, the Company or any
substantial part of its properties, or suffers any such receivership or
trusteeship to continue undischarged for a period of sixty (60) days; or
(vii) the Company defaults in the due observance or performance, in
any material respect, of any covenant, condition or agreement to be
observed or performed pursuant to the terms of this Note (other than a
default which is specifically provided for in this Section 10) and such
default continues unremedied for more than thirty (30) days after notice
thereof to the Company;
then, and in each and every such case, the holders of not less than one-fourth
(1/4) in aggregate principal amount of outstanding Notes may declare the
principal and accrued but unpaid interest of all the Notes to be due and payable
immediately, by written notice to the Company, and upon any such declaration the
same shall become and shall be immediately due and payable, subject to the
subordination provisions of Section 4 hereof. At any time after such declaration
of acceleration has been made, and before a judgment or decree for payment of
money due has been obtained, the holders of a majority in aggregate principal
amount of the outstanding Notes may, by written notice to the Company, rescind
and annul such declaration.
(2) At any time before the date of any declaration accelerating the
maturity of this Note: (a) the holders of at least sixty-six and two-thirds
percent (66.67%) in aggregate principal amount of outstanding Notes may waive
any past Event of Default and its consequences pertaining to the payment of
interest on, or the principal of, any of the Notes; and (b) the holders of a
majority in aggregate principal amount of Notes may waive any other Event of
Default hereunder. Such waivers shall be evidenced by written notice or other
document
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specifying the Event or Events of Default being waived and shall be binding on
all existing or subsequent holders of outstanding Notes.
XI. Certain Consequences Upon Default.
(1) Defaulted Interest. Subject to the provisions of Section 4 and 5
hereof, if the Company shall default in the payment of the principal of or
interest on this Note, whether upon maturity, by acceleration, or otherwise,
including, without limitation, as a result of a Chapter 11 or Chapter 7
bankruptcy case commenced by or against the Company in which it is the debtor,
the Company shall on demand from time to time pay interest, to the extent
permitted by law, on such defaulted amount up to (but not including) the date of
actual payment (whether before or after judgment) at the rate per annum
(computed on the basis of the actual number of days elapsed over a year of 360
days) at the rate set forth in the introduction of this Note, plus six
percentage points (6%). It is the intention of the Company and the holder of
this Note to comply with applicable usury laws (now or hereafter enacted);
accordingly, notwithstanding any provision to the contrary in this Note, and any
other document executed in connection herewith, in no event shall this Note or
any such other document require the payment or permit the collection of interest
in excess of the maximum amount permitted by such laws. If for any circumstances
whatsoever, fulfillment of any provision of this Note or of any such other
document at the time performance of such provision shall be due, shall involve
transcending the limit of validity prescribed by law for the collection or
charging of interest, then, ipso facto, the obligation to be fulfilled shall be
reduced to the limit of such validity, and if for any such circumstances the
holder of this Note shall ever receive anything of value as interest or deemed
interest by applicable law under this Note or any such other document or
otherwise an amount that would exceed the highest lawful rate, such amount that
would be excessive interest shall be applied to the reduction of the principal
amount owing under this Note or on account of any other indebtedness of the
Company to such holder, and not to the payment of interest, or if such excessive
interest exceeds the unpaid balance of principal of such indebtedness, such
excess shall be refunded to the Company. In determining whether or not the
interest paid or payable with respect to any indebtedness of the Company to the
Holder, under any specific contingency, exceeds the highest lawful rate, the
Company and such holder shall, to the maximum extent permitted by applicable
law, (i) characterize any non-principal payment as an expense, fee or premium
rather than as interest, (ii) exclude voluntary prepayments and the effects
thereof, (iii) amortize, prorate, allocate and spread the total amount of
interest throughout the full term of such indebtedness so that the actual rate
of such interest does not exceed the maximum amount permitted by applicable law,
and/or (iv) allocate interest between portions of such indebtedness, to the end
that no such portion shall bear interest at a rate greater than that permitted
by applicable law.
(2) Additional Director Nominee. If and whenever interest payable on
this Note shall be in arrears in whole or in part, or if the Company shall fail
to pay the principal of this Note (whether or not prevented from doing so by
restrictions contained in its Restated Certificate of Incorporation, as amended
from time to time, or any other agreement or instrument), the existing members
of the Board of Directors shall cause one Director then
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serving on the Board of Directors (who has not been designated by the holders of
Notes, Charles S. Holmes or C. Shelton James) to resign as a director, and the
holders of the Notes shall be entitled to immediately appoint one Director to
fill such vacancy, provided, that if such Director appointed by the holders,
together with the other directors designated by the holders of Notes and Messrs.
Holmes and James, would not exceed 50% of the total Board of Directors, then in
such event the holders of Notes shall be entitled to appoint additional
Directors (upon the resignation of other non-designated existing Directors) so
as its and Messrs. Holmes' and James' designees constitute a majority of the
total Board of Directors. Whenever all arrears in interest on the Notes then
outstanding shall have been paid and all principal amounts required to be made
with respect to any Notes shall have been made or funds therefor set apart for
payment, then the right of the holders of Notes to designate one Director (or
two or more Directors, as the case may be) shall cease (but subject always to
the same provisions for the vesting of such rights in the case of any similar
future arrearages in interest or failures to satisfy principal obligations), and
the terms of office of all persons elected as Directors by the holders of Notes
shall forthwith terminate and the number of members on the Board of Directors
appointed by the holders of the Notes shall be reduced accordingly. At any time
after such power shall have been so vested in the Notes, the Secretary of the
Corporation may, and upon the written request of any holder of Notes (addressed
to the Secretary at the principal office of the Company) shall, call a special
meeting of the holders of Notes for the election of the Director (or two or more
Directors, as the case may be) to be designated by them as herein provided, such
call to be made by notice similar to that provided in the By-laws for a special
meeting of the shareholders or as required by law. If any such special meeting
required to be called as above provided shall not be called by the Secretary
within fifteen (15) days after receipt of any such request, then any holder of
Notes may call such meeting, upon the notice above provided, and for that
purpose shall have access to the register of holders of the Notes of the
Company. The Director(s) designated at any such special meeting shall hold
office until the next annual meeting of the shareholders or special meeting held
in place thereof and be re-elected successively thereafter, if such office shall
not have previously terminated as above provided. In case any vacancy shall
occur among the Directors designated by the holders of Notes, a successor shall
be elected by the Board of Directors to serve until the next annual meeting of
the shareholders or special meeting held in place thereof upon the nomination of
the then remaining Directors designated by the holders of Notes and Messrs.
Holmes and James.
(3) Additional Warrants. In the event there occurs an Event of Default
pertaining to the payment of interest on, or the principal of, any of the Notes,
the Company shall issue to the holders of the Notes additional warrants to
purchase 2,000,000 shares of Common Stock, each holder to receive his pro rata
share.
XII. Investment Representations.
(1) The Holder hereby acknowledges that this Note and the Conversion
Shares are not being registered (i) under the Act on the ground that the
issuance of the Note is exempt from registration under Section 4(2) of the Act
as not involving any public offering or (ii) under any applicable state
securities law because the issuance of this Note does not involve
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any public offering; and that the Company's reliance on the Section 4(2)
exemption of the Act and under applicable state securities laws is predicated in
part on the representations hereby made to the Company by the Holder that it is
acquiring this Note for investment for its own account, with no present
intention of dividing its participation with others or reselling or otherwise
distributing the same, provided, nevertheless, subject to any requirement of law
that the disposition of its property shall at all time be within its control.
(2) The Holder hereby agrees that it will not sell or transfer all or
any part of this Note and/or Conversion Shares unless and until, and so long as
such securities are not covered by an effective registration statement under the
Act, it shall first have given notice to the Company describing such sale or
transfer and furnished to the Company either (i) an opinion, reasonably
satisfactory to counsel for the Company, of counsel (skilled in securities
matters, selected by the Holder and reasonably satisfactory to the Company) to
the effect that the proposed sale or transfer may be made without registration
under the Act and without registration or qualification under any state law, or
(ii) an interpretive letter from the Securities and Exchange Commission to the
effect that no enforcement action will be recommended if the proposed sale or
transfer is made without registration under the Act.
(3) If, at the time of issuance of the Conversion Shares, no
registration statement is in effect with respect to such shares under applicable
provisions of the Act, the Company may at its election require that Holder
provide the Company with written reconfirmation of the Holder's investment
intent and that any stock certificate delivered to the Holder upon conversion of
this Note shall bear legends reading substantially as follows:
"TRANSFER OF THE SHARES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO
CERTAIN RESTRICTIONS SET FORTH IN THE NOTE PURSUANT TO WHICH THESE
SHARES WERE ISSUED BY THE COMPANY. COPIES OF THOSE RESTRICTIONS ARE ON
FILE AT THE PRINCIPAL OFFICES OF THE COMPANY, AND NO TRANSFER OF SUCH
SHARES OR OF THIS CERTIFICATE, OR OF ANY SHARES OR OTHER SECURITIES
(OR CERTIFICATES THEREFOR) ISSUED IN EXCHANGE FOR OR IN RESPECT OF
SUCH SHARES, SHALL BE EFFECTIVE UNLESS AND UNTIL THE TERMS AND
CONDITIONS THEREIN SET FORTH SHALL HAVE BEEN COMPLIED WITH."
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AND MAY NOT BE SOLD, TRANSFERRED,
PLEDGED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 OR AN OPINION
OF COUNSEL SATISFACTORY TO THE ISSUER OF THIS
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CERTIFICATE THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT."
In addition, so long as the foregoing legend may remain on any stock certificate
delivered to the Holder, the Company may maintain appropriate "stop transfer"
orders with respect to such certificates and the shares represented thereby on
its books and records and with those to whom it may delegate registrar and
transfer functions.
(4) The Company may refuse to recognize a transfer of this Note or any
Conversion Shares on its books should a holder attempt to transfer this Note or
any Conversion Shares otherwise than in compliance with this Section 12.
XIII. Definitions. As used herein, unless the context otherwise requires,
the following terms have the respective meanings:
(1) "Affiliate": with respect to any Person, the following: (i) any
other Person that at such time directly or indirectly through one or more
intermediaries controls, or is controlled by or is under common control with
such first Person or (ii) any Person beneficially owning or holding, directly or
indirectly, 10% or more of any class of voting or equity interests of the
Company or any Subsidiary or any corporation of which the Company and its
Subsidiaries beneficially own or hold, in the aggregate, directly or indirectly,
10% of more of any class of voting or equity interests. As used in such
definition, "controls", "controlled by" and "under common control", as used with
respect to an Person, shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management policies of such
Person, whether through the ownership of voting securities, by agreement or
otherwise.
(2) "Change in Control": any of the following events or circumstances:
(i) individuals who, at the beginning of any period of twenty-four (24)
consecutive months, constitute the Company's board of directors (together with
any new director whose election by the Company's board of directors or whose
nomination for election by the Company's shareholders was approved by a vote of
at least two-thirds of the directors then still in office who either were
directors at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason (other than death or
disability) to constitute a majority of the Company's board of directors then in
office; (ii) any person or related persons constituting a group (as such terms
are used the Exchange Act) become the "beneficial owners" (as such term is used
under the Exchange Act), directly or indirectly of more than fifty percent (50%)
of the total voting power of all classes then outstanding of the Company's
voting stock; or (iii) the acquisition after the date hereof by any person or
related persons constituting a group of the power to elect, appoint or cause the
election or appointment of at least a majority of the members of the board of
directors of the Company, or (iv) the acquisition after the date hereof by any
person or related persons constituting a group of all or substantially all of
the properties and assets of the Company and its Subsidiaries, on a consolidated
basis; provided, however, that no Change in Control shall be deemed to have
occurred in connection with, or pursuant to, the initial issuance and sale of
the Notes.
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(3) "Closing Price": the closing price per share of the Company's
Common Stock on the principal national securities exchange on which the Common
Stock is listed or admitted to trading or, if not listed or traded on any such
exchange, on the National Market System of the National Association of
Securities Dealers Automated Quotations System ("Nasdaq"), or if not listed or
traded on any such exchange or system, the average of the bid and asked price
per share on Nasdaq or, if such quotations are not available, the fair market
value per share of Common Stock as reasonably determined by the Board of
Directors of the Company.
(4) "Consolidated Net Income": the net income (or deficit) of the
Company and its Subsidiaries for any period (taken as a cumulative whole) after
deducting, without duplication, all operating expenses, provisions for all taxes
and reserves (including reserves for deferred income taxes) and all other proper
deductions, all determined in accordance with GAAP on a consolidated basis,
after eliminating all intercompany items and after deducting portions of income
properly attributable to outside minority interests, if any, in any
Subsidiaries; provided, however, that there shall be excluded (a) any income or
deficit of any other Person accrued prior to the date it becomes a Subsidiary or
merges into or consolidates with the Company or another Subsidiary of the
Company, (b) the income (or deficit) of any other Person (other than a
Subsidiary of the Company) in which the Company or any Subsidiary has any
ownership interest, except to the extent that any such income has been actually
received by the Company or such Subsidiary in the form of cash dividends or
similar distributions, (c) any deferred credit or amortization thereof from the
acquisition of any properties of assets of any other Person, (d) any aggregate
net income (but not any aggregate net loss) during such period arising from the
sale, exchange or other distribution of capital assets (such term to include all
fixed assets, whether tangible or intangible, all inventory sold in conjunction
with the disposition of fixed assets and all securities), (e) any income
resulting from the write-up of assets after the date hereof, (f) any gains
properly classified as extraordinary in accordance with GAAP, (g) proceeds of
life insurance policies to the extent such proceeds exceed premiums paid to
maintain such life insurance policies, (h) any income of a Subsidiary which is
unavailable for the payment of dividends, and (i) any gain arising from the
acquisition of securities, or the extinguishment of any indebtedness of the
Company or any of its Subsidiaries or the termination of an employee benefit
plan.
(5) "GAAP": United States generally accepted accounting principles,
consistently applied.
(6) "Indebtedness": at any time and with any respect to any Person,
(i) all indebtedness of such Person for borrowed money, (ii) all indebtedness of
such Person for the deferred purchase price of property or services (other than
property, including inventory, and services purchased, and expense accruals and
deferred compensation items arising, in the ordinary course of business,
provided that the same shall not be overdue (i.e., the earlier of ninety (90)
days from the invoice date or the date the obligee commences an action to
recover such amounts), or if overdue, are being contested in good faith and by
appropriate proceedings), (iii) all obligations of such Person evidenced by
notes, bonds, debentures or other similar
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instruments (other than performance, surety and appeal bonds arising in the
ordinary course of business), (iv) all indebtedness of such Person created or
arising under any conditional sale or other title retention agreement with
respect to property acquired by such Person (even though the rights and remedies
of the seller or lender under such agreement in the event of default are limited
to repossession or sale of such property), (v) all obligations of such Person
under leases which have been or should be, in accordance with GAAP, recorded as
capital leases, to the extent required to be so recorded, (vi) all
reimbursement, payment or similar obligations of such Person, contingent or
otherwise, under acceptance, letter of credit or similar facilities (vii) all
Indebtedness referred to in clauses (i) through (vi) above guaranteed directly
or indirectly by such Person including without limitation through any agreement
(A) to pay or purchase such Indebtedness or to advance or supply funds for the
payment or purchase of such Indebtedness, (B) to purchase, sell or lease (as
lessee or lessor) property, or to purchase or sell services, primarily for the
purpose of enabling the debtor to make payment of such Indebtedness or to assure
the holder of such Indebtedness against loss in respect of such Indebtedness,
(C) to supply funds to or in any other manner invest in the debtor (including
any agreement to pay for property or services irrespective of whether such
property is received or such services are rendered) or (D) otherwise to assure a
creditor against loss in respect of such Indebtedness, and (viii) all
Indebtedness referred to in clauses (i) through (vii) above secured by (or for
which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any Lien upon property (including, without
limitation, accounts and contract rights) owned by such Person, even though such
Person has not assumed or become liable for the payment of such Indebtedness.
(7) "Lien": any mortgage, deed of trust, pledge, security interest,
encumbrance, lien or charge of any kind whatsoever.
(8) "1996 EBITDA": Consolidated Net Income for the fiscal year ended
December 31, 1996, plus, to the extent deducted in determining such Consolidated
Net Income and without duplication, (a) the sum for such period, of (a) the
aggregate amount of all interest (including capitalized interest) accrued or to
accrue (whether or not actually paid) during such period in respect of any
Indebtedness of the Company and its Subsidiaries, (b) any amortized discount in
respect of any such Indebtedness issued at discount, and (c) any fees or
commissions payable in connection with any letters of credit; (b) current and
deferred taxes on income and profit; (c) depreciation; and (d) amortization.
(9) "Notes": the meaning specified in the introduction of this Note.
(10) "Permitted Investments": any of the following:
(i) direct obligations of, or obligations the principal of
and interest on which are unconditionally guaranteed by, the United
States of America (of by any agency thereof to the extent such
obligations are backed by the full faith and credit of the United
States of America), in each case maturing within twelve months from
the date of acquisition thereof;
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(ii) without limiting the provisions of clause (iv) below,
investments in commercial paper maturing within one year from the date
of acquisition thereof and having, at such date of acquisition, the
highest credit rating obtainable from Standard & Poor's Corporation
(or a similar rating by any similar organization which rates
commercial papers);
(iii) investments in certificates of deposits or banker's
acceptances and time deposits maturing within twelve months from the
date of acquisition thereof issued or guaranteed by or placed with (a)
any domestic office of the bank with whom the Company maintains its
cash management system or (b) any domestic office of any other
commercial bank of recognized standing organized under the laws of the
United States of America or any state thereof that has a combined
capital and surplus and undivided profits of not less than
$100,000,000 and is the principal banking subsidiary of a bank holding
company having a long-term unsecured debt rating of at least "A" or
the equivalent thereof from the Standard & Poor's Corporation or at
least "A2" or the equivalent thereof from Moody's Investors Service,
Inc.;
(iv) investments in commercial paper maturing within six
months from the date of acquisition and issued by the holding company
of any commercial bank of recognized standing organized under the laws
of the United States of America or any state thereof that has (A) a
combined capital and surplus in excess of $250,000,000 and (B)
commercial paper rated at least "A" or the equivalent thereof from the
Standard & Poor's Corporation or at least "A2" or the equivalent
thereof from Moody's Investors Service, Inc. (or has a similar rating
by any similar organization that rates commercial paper); or
(v) investments in money market funds substantially all the
assets of which are comprised of securities of the types described in
clauses (i) through (vi) above.
(11) "Permitted Lien": means (i) Liens in existence on the date
hereof, (ii) Liens created for the benefit of the holders of Senior
Indebtedness, (iii) Liens imposed by law for taxes, assessments or charges of
any governmental authority for claims not yet due or which are being contested
in good faith by appropriate proceedings and with respect to which adequate
reserves or other appropriate provisions are being maintained in accordance with
GAAP; (iv) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, materialmen and other Liens imposed by law created in the ordinary
course of business for amounts not yet due, which are not overdue by more than
sixty (60) days or which are being contested in good faith by appropriate
proceedings and with respect to which adequate reserves or other appropriate
provisions are being maintained in accordance with GAAP; (v) Liens incurred or
deposits made in the ordinary course of business in connection with workers'
compensation, unemployment insurance and other types of social security benefits
or to secure the performance of tenders, bids, leases, contracts (other than for
the repayment of indebtedness), statutory obligations and other similar
obligations or arising as a result of progress payments under government
contracts; (vi) easements (including, without limitation, reciprocal easement
agreements and utility agreements), rights-of-way, covenants, consents,
reservations, encroachments, variations and zoning and other restrictions,
charges or encumbrances (whether or not recorded), which in the aggregate are
not substantial in amount, and which do not
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interfere materially with the ordinary conduct of the business of the Company
and which do not materially detract from the property to which they attach or
materially impair the use thereof to the Company; (vii) Liens covering real
property or personal property in existence at the time of acquisition thereof by
the Company and purchase money Liens upon or in any property acquired or held in
the ordinary course of business to secure the purchase price of such property or
to secure indebtedness permitted by Section 9(g) hereof solely for the purpose
of financing the acquisition of such property and no such Lien covers, or is
extended to cover, any other property owned by the Company; and (viii)
extensions, renewals or replacements of any Lien referred to in clauses (i)
through (vii) above.
(12) "Person": any natural person, corporation, division of a
corporation, partnership, limited liability company, trust, joint venture,
association, company, estate, unincorporated organization or government or any
agency or political subdivision thereof.
(13) "Senior Indebtedness": the meaning specified in Section 4(a)
hereof.
(14) "Subsidiaries": with respect to any Person, any corporation,
association or other business entity (whether now existing or hereafter
organized) of which at least a majority of the securities or other ownership
interests having ordinary voting power for the election of directors is, at the
time as of which any determination is being made, owned or controlled by such
Person or one or more subsidiaries of such Person.
XIV. Notices.
(1) Notices to Holder of Notes. Any notice required by the provisions
of this Note to be given to the holders of Notes shall be in writing and may be
delivered by personal service or sent by telegraph or cable or sent by
registered or certified mail, return receipt requested, with postage thereon
fully prepaid. All such communications shall be addressed to the Holder of
record at its address appearing on the books of the Company. If sent by
telegraph or cable, a confirmed copy of such telegraphic or cabled notice shall
promptly be sent by mail (in the manner provided above) to the Holder. Service
of any such communication made only by mail shall be deemed complete on the date
of actual delivery as shown by the addressee's registry or certification receipt
or at the expiration of the third (3rd) business day after the date of mailing,
whichever is earlier in time.
(2) Notices to the Company. Whenever any provision of this agreement
requires a notice to be given to the Company by the holder of any Note, the
holder of Common Stock obtained upon the conversion of a Note or the holder of
any other security of the Company obtained in connection with a
recapitalization, merger, dividend or other event affecting a Note, then and in
each case, such notice shall be in writing and shall be sent by registered or
certified mail, return receipt requested with postage thereon fully prepaid to
the Company at its principal place of business.
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No notice under this Section 14 shall be valid unless signed by the holder of
the Note, Common Stock or other security giving the notice or in the case of a
notice by holders of a specified percent in aggregate principal amount of
outstanding Notes unless signed by each holder of a Note whose Note has been
counted in constituting the requisite percentage of Notes required to give such
Notice.
XV. Amendment. With the consent of the holders of a majority in
aggregate principal amount of outstanding Notes, the Company may amend the Notes
to cure any ambiguity, to correct or supplement any provision therein which may
be inconsistent with any other provision therein, or to make any other
provisions with respect to matters or questions arising under the Notes which
shall not be inconsistent with the provisions of the Notes; provided such action
shall not adversely affect the interests of the holders of the Notes.
With the consent of the holders of not less than fifty percent (50%) in
aggregate principal amount of the outstanding Notes, the Company may amend the
Notes for the purpose of adding any provisions to, or changing in any manner or
eliminating any of the provisions of, the Notes; provided, however, that no such
amendment shall, without the consent of the holders of Senior Indebtedness,
change the subordination provisions of Sections 4 and 5 hereof or the provisions
referred to in subsection (a) below; and provided, further, that no amendment
shall, without the consent of the holder of each outstanding Note affected
thereby,
(1) change: (a) the maturity of the principal of, or any installment
of interest on, any Note; or (b) the coin or currency in which the
principal of or interest on any Note is payable;
(2) reduce the principal amount thereof or the interest rate thereon;
(3) increase the Conversion Price thereof; or
(4) reduce the percentage in principal amount of the outstanding Notes
the consent of whose holders is required for any amendment or waiver as
provided for in the Notes.
Prompt written notice that this Note has been amended or interpreted in
accordance with the terms of this Section 15 shall be given to each holder of a
Note. Upon such amendment or interpretation, the Notes shall be deemed modified
in accordance therewith, such amendment or interpretation shall form a part of
this Note for all purposes, and every subsequent holder of Notes shall be bound
thereby
XVI. Miscellaneous.
(1) Contemporaneously with the execution and delivery hereof, the
Company has issued to the Holder a detachable warrant representing the right to
purchase 250
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shares of Common Stock at a exercise price equal to $2.50 per share of Common
Stock, subject to adjustment in certain events.
(2) This Note and the shares of Common Stock or other securities
issuable upon conversion of this Note will be accorded the registration rights
under the Act set forth in that certain Registration Rights Agreement between
the Company and the Holders, a form of which agreement is being furnished
concurrently herewith.
(3) This Note is the obligation of the Company only, and no recourse
shall be had for the payment thereof or interest thereon against any
shareholder, officer or director of the Company, whether by virtue of any
constitution, statute, rule or law or otherwise, all such liability, by the
acceptance hereof, and as part of the consideration hereof, being expressly
waived.
(4) Upon receipt of evidence reasonably satisfactory to the Company of
the loss, theft, destruction or mutilation of this Note and of a letter of
indemnity reasonably satisfactory to the Company, and upon reimbursement to the
Company of all reasonable expenses incident thereto, and upon surrender or
cancellation of this Note, if mutilated, the Company will make and deliver a new
Note of like tenor in lieu of such lost, stolen, destroyed or mutilated Note.
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(5) THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF EACH OF THE COMPANY
AND THE HOLDER HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED
BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS AND INSTRUMENTS
MADE AND TO BE PERFORMED IN NEW YORK AND CANNOT BE MODIFIED OR CHANGED ORALLY.
IN WITNESS WHEREOF, the Company has duly caused this Note to be signed on
its behalf, in its corporate name and by its duly authorized officer, as of this
15th day of February 1996.
NAI TECHNOLOGIES, INC.
By:
--------------------------------
Richard A. Schneider
Executive Vice President,
Treasurer and Secretary
Certificate of Authentication:
This is one of the 12% Convertible
Subordinated Promissory Notes due 2001
referred to in the Indenture dated as
of July 15, 1996 between NAI Technologies,
Inc. and First National Trust Association,
as Trustee.
FIRST NATIONAL TRUST ASSOCIATION, as Trustee
By:
---------------------------
Authorized Officer
Authentication Date
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Schedule A
Section 6(f) Adjusted Amounts
Wilcom, Inc............................................. $ 838,000
Codar Technology, Inc................................... $2,805,000
NAI Technologies - Systems Division Corporation......... $ 607,000
Lynwood Scientific Developments Limited................. $1,833,000
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM T-1
Statement of Eligibility Under the
Trust Indenture Act of 1939 of a Corporation
Designated to Act as Trustee
FIRST TRUST NATIONAL ASSOCIATION
(Exact name of Trustee as specified in its charter)
United States 41-0257700
(State of Incorporation) (I.R.S. Employer
Identification No.)
First Trust Center
180 East Fifth Street
St. Paul, Minnesota 55101
(Address of Principal Executive Offices) (Zip Code)
NAI TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
New York 11-1798773
(State of Incorporation) (I.R.S. Employer
Identification No.)
2405 Trade Centre Avenue
Longmont, CO 80503
(Address of Principal Executive Offices) (Zip Code)
12% Convertible Subordinated Promissory Notes Due 2001
(Title of the Indenture Securities)
<PAGE>
<PAGE>
GENERAL
1. General Information Furnish the following information as to the Trustee.
(a) Name and address of each examining or supervising authority
to which it is subject.
Comptroller of the Currency
Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
Yes
2. AFFILIATIONS WITH OBLIGOR AND UNDERWRITERS If the obligor or any
underwriter for the obligor is an affiliate of the Trustee, describe each
such affiliation.
None
See Note following Item 16.
Items 3-15 are not applicable because to the best of the Trustee's
knowledge the obligor is not in default under any Indenture for which the
Trustee acts as Trustee.
16. LIST OF EXHIBITS List below all exhibits filed as a part of this statement
of eligibility and qualification. Each of the exhibits listed below is
incorporated by reference from registration number 22-27000.
1. Copy of Articles of Association.
2. Copy of Certificate of Authority to Commence Business.
3. Authorization of the Trustee to exercise corporate trust powers
(included in Exhibits 1 and 2; no separate instrument).
4. Copy of existing By-Laws.
5. Copy of each Indenture referred to in Item 4. N/A.
6. The consents of the Trustee required by Section 321(b) of the act.
7. Copy of the latest report of condition of the Trustee published
pursuant to law or the requirements of its supervising or examining
authority.
<PAGE>
<PAGE>
NOTE
The answers to this statement insofar as such answers relate to what
persons have been underwriters for any securities of the obligors within three
years prior to the date of filing this statement, or what persons are owners of
10% or more of the voting securities of the obligors, or affiliates, are based
upon information furnished to the Trustee by the obligors. While the Trustee has
no reason to doubt the accuracy of any such information, it cannot accept any
responsibility therefor.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
Trustee, First Trust National Association, an Association organized and existing
under the laws of the United States, has duly caused this statement of
eligibility and qualification to be signed on its behalf by the undersigned,
thereunto duly authorized, and its seal to be hereunto affixed and attested, all
in the City of Saint Paul and State of Minnesota on the 6th day of August, 1996.
FIRST TRUST NATIONAL ASSOCIATION
[SEAL]
/S/ Christina Hatfield
--------------------------------
Christina Hatfield
Assistant Vice President
/S/ Kathe Barrett
- -------------------------------
Kathe Barrett
Assistant Secretary
<PAGE>
<PAGE>
EXHIBIT 6
CONSENT
In accordance with Section 321(b) of the Trust Indenture Act of 1939,
the undersigned, FIRST TRUST NATIONAL ASSOCIATION hereby consents that reports
of examination of the undersigned by Federal, State, Territorial or District
authorities may be furnished by such authorities to the Securities and Exchange
Commission upon its request therefor.
Dated: August 6, 1996
FIRST TRUST NATIONAL ASSOCIATION
/S/ Christina Hatfield
--------------------------------
Christina Hatfield
Assistant Vice President
<PAGE>
