SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended December 31, 1995
Commission File Number 33-7693
___________________________________________________________________________
VTX ELECTRONICS CORP.
(Exact name of registrant as specified in its charter)
___________________________________________________________________________
Delaware 11-2816128
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
61 Executive Boulevard, Farmingdale, New York 11735
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (516) 293-1610
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No _______
On February 1, 1996, 12,652,000 shares of common stock, $.10 par value and
12,375 shares of redeemable, cumulative, convertible preferred stock, $100
stated value were outstanding.
Please Note: this is page 1 of 17 pages, not including exhibits
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VTX ELECTRONICS CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
PART I: FINANCIAL INFORMATION
ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheets - December 31, 1995 and June 30, 1995............... 3
Statements of Operations - Six Months Ended
December 31, 1995 and 1994....................................... 4
Statements of Operations - Three Months Ended
December 31, 1995 and 1994....................................... 5
Statements of Cash Flows - Six Months Ended
December 31, 1995 and 1994....................................... 6
Notes to Consolidated Financial Statements........................... 7-11
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 12-13
PART II- OTHER INFORMATION............................................. 14
SIGNATURES............................................................. 15
PAGE 2
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VTX ELECTRONICS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
1995 1995
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash....................................... $ 388,956 $ 583,388
Accounts receivable, net of allowance
for doubtful accounts of $142,000 and
$154,000 as of December 31, 1995 and
June 30, 1995, respectively.............. 4,419,820 4,864,443
Inventories, net........................... 2,885,124 3,786,172
Prepaid expenses and other current
assets................................... 393,471 463,518
TOTAL CURRENT ASSETS....................... 8,087,371 9,697,521
PROPERTY, PLANT AND EQUIPMENT, net........... 3,128,405 3,264,975
DEFERRED CHARGES AND OTHER ASSETS............ 253,353 224,451
TOTAL ASSET.................................. $11,469,129 $13,186,947
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt.......... $ 21,908 $ 158,954
Accounts payable and accrued expenses...... 4,793,117 5,062,469
TOTAL CURRENT LIABILITIES.................. 4,815,025 5,221,423
LONG-TERM DEBT............................... 4,545,744 5,966,383
SECURED SUBORDINATED DEBENTURESE, net........ 1,054,969 -
STOCKHOLDERS' EQUITY:
Redeemable, Cumulative, Convertible Preferred
stock, stated value $100 per share,
authorized 5,000,000 shares, 12,375 issued
and outstanding.......................... 1,054,969 -
Common stock, par value $.10 per share;
Authorized 40,000,000 shares; issued
and outstanding 12,652,000 shares........ 1,265,200 1,265,200
Paid-in capital............................ 8,910,726 8,591,476
Accumulated Deficit........................ (10,180,939) (7,705,550)
Deferred compensation...................... - (98,433)
Note receivable from officer............... - (50,000)
Cumulative foreign currency translation
adjustment............................... 3,435 (3,552)
TOTAL STOCKHOLDERS' EQUITY 1,053,391 1,999,141
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,469,129 $13,186,947
The accompanying notes are an integral part of these financial statements.
PAGE 3
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VTX ELECTRONICS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended
December 31,
1995 1994
Net sales.................................... $14,135,614 $18,612,562
Cost of goods sold........................... 12,108,238 14,362,735
Gross profit................................. 2,027,376 4,249,827
Selling, general and administrative expenses. 3,816,931 4,076,758
Interest expense............................. 378,625 402,626
Foreign currency (gains)..................... (2,933) (11,294)
Recapitalization related charge.............. 297,767 -
Net loss..................................... (2,463,014) (218,263)
Dividends on preferred stock................. 12,375 -
Net loss attributable to common stock........ $(2,475,389) $ (218,263)
Share Information
Loss per share............................... $ (.20) $ (.02)
Weighted average number of common shares
outstanding................................. 12,652,000 11,880,408
The accompanying notes are an integral part of these financial statements.
PAGE 4
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VTX ELECTRONICS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
December 31,
1995 1994
Net sales.................................... $ 6,557,570 $ 9,068,658
Cost of goods sold........................... 6,032,242 6,939,847
Gross profit................................. 525,328 2,128,811
Selling, general and administrative expenses. 1,898,508 2,001,496
Interest expense............................. 208,976 211,123
Foreign currency (gains)..................... (396) (10,682)
Recapitalization related charge.............. 297,767 -
Net loss..................................... (1,879,527) (73,126)
Dividends on preferred stock................. 12,375 -
Net loss attributable to common stock........ $(1,891,902) $ (73,126)
Share Information
Loss per share............................... $ (.15) $ (.01)
Weighted average number of common shares
outstanding................................. 12,652,000 11,923,315
The accompanying notes are an integral part of these financial statements.
PAGE 5
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VTX ELECTRONICS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
December 31,
1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................... $(2,475,389) $ (218,263)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization................... 266,158 272,281
Deferred compensation amortization.............. 98,433 28,126
Provision for losses on accounts receivable..... 25,000 35,000
Provision for slow moving and obsolete
inventories.................................... 225,000 65,000
Change in operating assets and liabilities:
Decrease in accounts receivable................. 419,623 (2,019)
(Increase) decrease in inventories............... 676,048 (543,223)
(Increase) decrease in prepaid expenses and other
current assets................................. 70,047 (50,708)
(Increase) decrease in other assets.............. (42,735) (6,993)
(Decrease) in accounts payable and
accrued expenses............................... (269,353) 43,132
Net cash used in operating
activities...................................... (1,007,168) (377,667)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.............................. (59,566) (44,694)
Net cash used in investing activities............ (59,566) (44,694)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under debt agreements.................. 14,643,798 20,732,371
Debt repayments................................... (16,201,483) (20,821,373)
Decrease in note receivable from officer.......... - 50,000
Proceeds from issuance of debentures, net......... 1,025,875 -
Proceeds from issuance of preferred stock, net.... 1,025,875 -
Proceeds from issuance of warrants................ 371,250 -
Net cash provided by (used in) financing
activities...................................... 865,315 (39,002)
Effect of exchange rate changes on cash............ 6,987 16,609
NET DECREASE IN CASH............................... (194,432) (444,754)
CASH at beginning of period........................ 583,388 593,438
CASH at end of period.............................. $ 388,956 $ 148,684
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 356,969 $ 402,626
The accompanying notes are an integral part of these financial statements.
PAGE 6
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VTX ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
a. The accompanying consolidated financial statements include the accounts of
VTX Electronics Corp. and its wholly-owned subsidiaries, Vertex Technologies,
Inc., Vertex Data Systems, Inc. [inactive], and its foreign subsidiary,
Vertex Technologies UK, LTD. All significant intercompany transactions and
balances have been eliminated in consolidation.
The consolidated balance sheet as of December 31, 1995 and the related
consolidated statements of operations and cash flows for the three and six
months ended December 31, 1995 and 1994, have been prepared by the Company
without audit. In the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to present fairly the financial
position, results of operations and changes in cash flows at December 31,
1995 and for all periods presented have been made. Results of operations for
the six months ended December 31, 1995 are not necessarily indicative of
results of operations that may be expected for the year ended June 30, 1996.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted. It is suggested that these consolidated
financial statements be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended June 30, 1995.
2. INVENTORIES
Inventory consists principally for products held for sale. The Company
regularly reviews its inventory for obsolete and slow-moving items which
includes reviews of inventory levels of certain product lines and an
evaluation of the inventory based on changes in technology and markets.
As of December 31, 1995 and June 30, 1995, the reserve was approximately
$520,000 and $535,000, respectively.
December 31, June 30,
1995 1995
Raw Materials $ 46,846 $ 67,267
Work in Process 11,622 31,934
Finished Goods 2,826,656 3,686,971
Inventories, Net $2,885,124 $3,786,172
PAGE 7
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VTX ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. LONG-TERM DEBT
Long-term debt consists of the following:
December 31, June 30,
1995 1995
Revolving asset-based loan (a).............. $ 3,494,081 $4,903,805
First mortgage loan, net of imputed
interest (b)............................... 1,026,457 1,025,741
Subordinated mortgage loan, net of imputed
interest .................................. - 31,649
Machinery and equipment loan (c)............ - 105,250
Capitalized lease obligations (d)........... 47,114 58,892
4,567,652 6,125,337
Less current portion of long-term debt...... 21,908 158,954
$ 4,545,744 $5,966,383
a. On February 10, 1995, the Company entered into an amended and restated
revolving credit agreement with a lending institution. Such agreement
provided for a revolving credit facility with maximum available of
$10,000,000 and expires on December 31, 1997. Under the terms of the credit
facility, the Company is required to pay interest at prime plus 2 3/4% and
a commitment fee of 1/2% per annum on the daily unused portion of the credit.
The agreement also provides for termination fees as a result of default or
early termination of 2%, 1% and .5% of the maximum credit if such termination
occurs before December 31, 1995, 1996 and 1997, respectively. In connection
with this financing amendment, the Company incurred in fiscal 1995 costs
approximating $80,000, which have been accounted for as deferred charges and
are being amortized through December 31, 1997. Under the terms of the
agreement, borrowings are limited to 80% of eligible accounts receivable
(constituting those amounts outstanding 90 days or less) and 50% of eligible
accounts receivable outstanding between 91 and 120 days, and 40% of regular
inventories and 20% of slow moving inventory. As of December 31, 1995 and
June 30, 1995, the Company had $4,336,000 and $5,406,000 availability under
the eligibility terms of the facility, of which $3,494,000 and $4,904,000 was
outstanding on such dates, respectively. This loan is collateralized by
substantially all of the assets of the Company not otherwise collateralized.
In connection with its revolving credit facility, the Company is subject to
restrictive covenants which impose certain limitations with respect to the
Company's incurrence of indebtedness, capital expenditures, creation or
recurrence of liens, declaration or payment of dividends or other
distributions, mergers, consolidations and sales or purchases of substantial
assets. In general, the Company is not allowed to incur further indebtedness
or create additional liens on its assets except for unsecured current
liabilities incurred in the ordinary course of business or liabilities
incurred in the ordinary course of business secured by purchase money
security interest not to exceed an aggregate of $750,000. The Company is not
allowed to make loans or investments or provide guarantees or to prepay
indebtedness. The Company is prohibited from paying dividends on common
stock and may not enter into a merger, consolidation or sale of all or
substantially all of its assets. Additionally, the Company is required to
maintain consolidated net worth of not less than $750,000 and to maintain
consolidated working capital, defined as current assets less current
liabilities and debt outstanding under the credit facility, of not less than
a negative $1.5 million.
PAGE 8
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VTX ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
b. The first mortgage loan is with a group of lenders, and is payable over five
years in monthly installments of $15,980, inclusive of principal and interest
at 14%, commencing May 1, 1994, with a final installment of principal of
$1,033,183 payable on April 1, 1999 and collateralized by a first mortgage
lien on the Company's corporate headquarters. In connection with such loan,
the Company issued to one of the lenders 250,000 common stock purchase
warrants exercisable on or before March 31, 2001 at an exercise price of $.50
per share, which was subsequently reduced to $.25 per share. A portion of
the proceeds of the loan has been allocated to the warrants based on the
Company's Board of Directors' assessment of their fair value at the time of
issuance ($.70 per share). For financial statement purposes, the fair value
ascribed to the warrants of $175,781 has been deducted from the proceeds of
the mortgage loan as additional interest expense and is being amortized over
the term of the mortgage to yield an effective interest rate of approximately
20% per annum. The loans have prepayment penalties which are calculated as
a percentage of the prepayment amount. The percentage is determined based
upon the date of payment as follows:
Prepaid Percentage
Between one and two years 3%
Between two and three years 1%
Thereafter 0%
The loan contains covenants prohibiting certain types of transactions and
limiting capital expenditures to $250,000 per annum without the prior consent
of the lenders.
c. On October 18, 1991, the Company received $500,000 in cash from an
unaffiliated investor group in exchange for a mortgage on certain machinery
and equipment. Concurrently, such investor group acquired a 50.6% interest
in the then outstanding issued common stock of the Company for $1,000,000 (or
$.40 per-share) and was granted a five-year warrant to purchase 1,000,000
shares of the Company's common stock for $.50 per-share. Such warrants were
fully exercised in June 1994. The loan, which bears interest at the rate of
1-1/4% above the prime lending rate (9.00% and 6.75% at September 30, 1995
and June 30 1995, respectively), was originally due on September 30, 1994;
however, on April 25, 1994, such due date was extended to September 30, 1995.
On December 19, 1994, however, the Company extinguished $394,750 of the
$500,000 loan balance in exchange for 789,500 shares of the Company's common
stock. The Company's Board of Directors and management believe based upon
a fairness opinion rendered by an independent investment banking firm and
other analysis, that the fair value of the shares exchanged was equal to the
carrying amount of the converted portion of the loan. The fairness opinion
PAGE 9
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VTX ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
stated that the exchange was fair to the stockholders of the Company from a
financial point of view. The remaining $105,250 principal balance of the
loan has been fully satisfied as of December 31, 1995.
d. The Company leases its telephone system under agreements accounted for as
capital leases. The obligation for the telephone system require the Company
to make monthly payments of $1,963 through December 1997.
The following is a summary of the aggregate annual maturities of long-term
debt and capitalized lease obligations:
Capitalized
Long-term lease
December 31: debt obligations Total
1996 $ - $ 21,908 $ 21,908
1997 3,487,355 25,206 3,512,561
1998 - - -
1999 1,033,183 - 1,033,183
$4,520,538 $ 47,114 $ 4,567,652
4. SECURED SUBORDINATED DEBENTURES, PREFERRED STOCK AND WARRANTS ISSUED
Under a Capitalization Agreement (the "Agreement") signed on December 1,
1995, the Company received $2,475,000 from an unaffiliated investor group
("new investors") in exchange for Secured Subordinated Debentures (the
"bonds") with a principal amount of $1,237,500, 12,375 shares of Senior
Redeemable Cumulative Convertible Preferred Stock ("preferred stock") with
a stated value of $100 per share and warrants to purchase 19,800,000 shares
of common stock of the Company.
The bonds are due on December 1, 2000 and accrue interest at an annual rate
of 2% over the published prime rate of interest(10.5% at December 31, 1995),
payable quarterly over the life of the bonds (10.5% at December 31, 1995).
Such bonds are secured by all of the assets of the Company, however,
subordinate to the secured debt under the revolving asset based loan and the
first mortgage loan described in note 3.
The preferred stock is redeemable on December 1, 2000 for $1,237,500 in cash
or common stock, based upon the lower of 70% of the fair market value of the
underlying common stock on such date or $.25 per common share, at the option
of the Company. The preferred shareholders are entitled to receive
dividends quarterly at an annual fixed rate of 12%, the effect of which is
cumulative to the extent the Company does not make such quarterly payment on
the prescribed basis. On or after June 1, 1996 and through December 1, 2000,
each preferred share may be converted into common stock of the Company at a
conversion rate of $.25 per share (400 common shares for each preferred
share converted). Each share of preferred stock contains 1,500 votes or
voting rights on all matters being voted on by the shareholders of the
Company other than the election of directors. Additionally, the holders of
the preferred stock, voting as a class, shall in each year elect seventy-five
percent of the members of the Board of Directors of the Company.
Effective December 1, 1996 and pursuant to the
PAGE 10
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VTX ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Agreement, the existing Board of Directors ("former directors") resigned in
favor of the a new Board of Directors ("new directors").
The warrants to purchase common stock of the Company issued under the
Agreement to the new investors are exercisable at $.25 per common share (the
fair market value of the underlying stock on the effective date of the
agreement) and have a term commencing June 1, 1996 and expiring December 1,
2000 for 4,950,000 of the warrants and an additional term commencing December
1, 1998 and expiring December 1, 2005 for the remaining 14,850,000 warrants.
In connection with these issuances, the Company recorded a discount on the
bonds payable of $185,625 and a discount on preferred stock of $185,625,
representing the estimated relative fair market value of the warrants on the
date of such issuance as determined by the Company, which will be recognized
as interest expense and preferred stock dividends, respectively, on a
straight line basis over the 60 month term of the Agreement.
Expenses of approximately $104,000 relating to various legal, accounting,
consulting and other fees were incurred in connection with the Agreement,
$52,000 of which has been attributed to the issuance of the bonds, which has
been recorded as a deferred charge and is being amortized over the 60 month
term on a straight line basis, and $52,000 of which has been attributed to
the issuance of the preferred stock, which has been recorded as a direct
reduction to the equity received by the Company.
5. COMMITMENTS AND CONTINGENCIES
a. Employment Agreement
On March 31, 1994, the Company entered into an employment agreement with its
then president which required total annual minimum compensation of $200,000
through March 1997 plus an annual bonus based on a percentage of specified
levels of achieved net profits. Effective December 1, 1995, this agreement
was terminated in connection with his resignation and the obligation was
settled for $134,000, which is payable monthly through March, 1997. Such
amount has been recognized as part of "recapitalization related charge" for
the six months ended December 31, 1995.
On January 1, 1996, the Company entered into employment agreements with two
of its newly appointed executive officers. The terms of these agreements
extend through December 31, 1997 and require monthly compensation payments
of $11,250 each. One of the employment agreements further contains a $25,000
bonus commitment to the executive which will be earned to the extent the
Company does not incur a net loss in the three month period ended June 30,
1996 as defined.
b. Consulting Agreements
Under the terms of a nonexclusive consulting/investment banking agreement,
the Company is obligated to pay an underwriter $4,115 per month for 24
months which commenced in April 1995 for consulting services related to
investment banking and finance services. This agreement was fully
satisfied for an amount less than its full agreement terms as of December
31, 1995.
PAGE 11
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VTX ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Effective April 1, 1994, the Company entered into a three-year consulting
agreement with a director (currently a former director) for
financial/management services. Under the terms of the agreement, the former
director receives $4,000 per-month. Such remaining amount has been
recognized as part of "recapitalization related charge" for the six months
ended December 31, 1995.
c. Leases
The Company's minimum annual lease commitments under noncancellable operating
leases for premises at December 31, 1995 are as follows:
December 31:
1996 $ 344,854
1997 233,793
1998 68,346
1999 51,317
2000 -
$ 698,311
Rent expense, including related real estate taxes and other operating
charges, was approximately $305,488 and $189,515 for the six months ended
December 31, 1995, and 1994, respectively.
d. Management Agreements
On January 1, 1996, the Company entered into a management agreement with a
consulting firm whereas the Company has retained one of the consulting firm's
principals to function as its Chairman of the Board and Chief Executive
Officer. The term of this agreement extends through December 31, 2000 and
requires monthly management fees of $12,000, provided however, that the
Company does not hire a president or chief operating officer during that
period of time. To the extent that a president or chief operating officer is
hired by the Company, the management fee will be reduced to $5,000 per month
for any remaining term of the agreement.
e. Litigation
An action was commenced in the New York State Supreme court, County of
Nassau, by CPI Aerostructures, Inc., alleging that the Company has
wrongfully failed to consummate a proposed merger transaction. The plaintiff
is seeking "break-up" fee damages in the amount of $400,000.00. The Company
has served an answer and counterclaim, denying any wrongdoing and alleging
that CPI misled the Company by failing to adequately disclose material losses
. The case is in its very early stages, however management believes the
Company has a meritorious defense and will vigorously defend the case.
PAGE 12
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Six Months Ended December 31, 1995 and 1994
Net sales decreased $4,477,000 or 24% to $14,136,000 for the six months ended
December 31, 1995 as compared $18,613,000 for the six months ended December 31,
1994. The decrease was primarily the result of significant employee turnover in
addition to the Company's inability to procure materials from vendors on a
timely basis due to a lack of liquidity. On December 1, 1995, as described in
the footnotes to the financial statements, the Company was recapitalized which
has since provided the Company with the resources necessary to procure materials
from vendors for resale. Net sales from value added distribution including
systems integration consulting services and manufacturing were $9,078,000 and
$5,058,000, respectively, for the six months ended December 31, 1995 as compared
to net sales of $11,213,000 and $7,400,000, respectively, for the six months
ended December 31, 1994.
Gross profit decreased $2,223,000 or 52% to $2,027,000 for the six months ended
December 31, 1995 as compared to $4,250,000 for the six months ended
December 31,
1994. Gross profit as percentage of net sales decreased to 14.0% from 22.8% for
the prior year period. The decrease in gross profit dollars was primarily the
result of the aforementioned decrease in net sales coupled with the decrease in
gross profit per sales dollar which is due primarily to the poor absorption of
fixed overhead costs caused by the significant decrease in sales volume, in
addition to an increase in inventory reserves for obsolescence.
Selling, general and administrative expenses decreased approximately $260,000 or
6% to $3,817,000 for the six months ended December 31, 1995 as compared to
$4,077,000 for the six months ended December 31, 1994. The decrease in expense
was primarily the result of the reduced selling expenses caused by the
significant reduction in net sales. As a percent of net sales, selling, general
and administrative expenses were 27% of net sales for the six months ended
December 31, 1995 as compared to 22% for the six months ended December 31, 1994.
Recapitalization related charges of approximately $298,000 recorded in the six
months ended December 31, 1995 represent non-recurring charges recognized by the
Company in connection with the resignation of the president and certain
directors on December 1, 1995. Such charges include the termination and
settlement of employment contracts, acceleration of deferred compensation
charges and other contractual obligations.
Interest expense, including dividends on preferred stock, decreased
approximately $12,000 or 3% to $391,000 for the six months ended December 31,
1995 as compared to $403,000 for the six months ended December 31, 1994. The
slight decrease in interest expense was caused primarily by a reduction in the
average principal borrowings outstanding for the six months ended December 31,
1995 as compared to the six months ended December 31, 1994.
Net loss attributable to common stock increased to $(2,475,000) for the six
months ended December 31, 1995 as compared to $(218,000) for the six months
ended December 31, 1994. The increase in net loss was caused primarily by the
aforementioned decrease in sales and gross margin dollars and the
recapitalization related charge, which were slightly offset by decreases in
selling, general, administrative and interest expenses.
PAGE 13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Quarter Ended December 31, 1995 and 1994
Net sales decreased $2,511,000 or 28% to $6,558,000 for the three months ended
December 31, 1995 as compared $9,069,000 for the three months ended December 31,
1994. The decrease was primarily the Company's inability to procure materials
from vendors on a timely basis due to lack of liquidity. On December 1, 1995,
as described in the footnotes to the financial statements, the Company was
recapitalized which has since provided the Company with the resources necessary
to procure materials from vendors for resale. Net sales from value added
distribution including systems integration consulting services and manufacturing
were $3,980,000 and $2,578,000, respectively, for the three months ended
December 31, 1995 as compared to net sales of $5,465,000 and $3,604,000,
respectively, for the three months ended December 31, 1994.
Gross profit decreased $1,603,000 or 75% to $525,000 for the three months ended
December 31, 1995 as compared to $2,128,000 for the three months ended December
31, 1994. Gross profit as percentage of net sales decreased to 8.0% from 23.5%
for the prior year period. The decrease in gross profit dollars was primarily
the result of the aforementioned decrease in net sales coupled with the decrease
in gross profit per sales dollar which is due primarily to the poor absorption
of fixed overhead costs caused by the significant decrease in sales volume, in
addition to an increase in inventory reserves for obsolescence.
Selling, general and administrative expenses decreased approximately $103,000 or
5% to $1,899,000 for the three months ended December 31, 1995 as compared to
$2,001,000 for the three months ended December 31, 1994. The decrease in
expense was primarily the result of the reduced selling expenses caused by the
significant reduction in net sales. As a percent of net sales, selling, general
and administrative expenses were 29% of net sales for the six months ended
December 31, 1995 as compared to 22% for the three months ended December 31,
1994.
Recapitalization related charges of approximately $298,000 recorded in the three
months ended December 31, 1995 represent non-recurring charges recognized by the
Company in connection with the resignation of the president and certain
directors on December 1, 1995. Such charges include the termination and
settlement of employment contracts, acceleration of deferred compensation
charges and other contractual obligations.
Interest expense, including dividends on preferred stock, increased
approximately $10,000 or 5% to $221,000 for the three months ended December 31,
1995 as compared to $211,000 for the three months ended December 31, 1994. The
slight increase in interest expense was caused primarily by an increase in the
average principal borrowings outstanding for the three months ended December 31,
1995 as compared to the three months ended December 31, 1994.
Net loss attributable to common stock increased to $(1,892,000) for the three
months ended December 31, 1995 as compared to $(73,000) for the three months
ended December 31, 1994. The increase in net loss was caused primarily by the
aforementioned decrease in sales and gross margin dollars and the
recapitalization related charge, which were slightly offset by decreases in
selling, general, administrative expense.
PAGE 14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Financial Condition
As of December 31, 1995 and 1994
Current assets have decreased approximately $1,611,000 to $8,087,000 at June
30, 1995 as compared to $9,698,000 at December 31, 1994. This net decrease
resulted primarily from a reduction in accounts receivable and inventory
balances which was directly correlated to the significant decrease in net sales
during the current period. Cash generated from the reduction of accounts
receivable and inventory was used primarily to fund operating losses during the
current period. As described in the notes to the financial statements, on
December 1, 1995 the Company received a $2,475,000 cash infusion from an
unaffiliated investor group. This cash infusion has been utilized to reduce
vendor payments outstanding and debt outstanding under the Company's revolving
credit arrangement in addition to satisfying certain other debts previously
outstanding. The Company had net working capital of $3,272,000 at December 31,
1995 as compared to $4,476,000 at June 30, 1995. The Company anticipates that
its cash on hand coupled with amounts available under its revolving credit
facility may not be sufficient to meet its cash and working capital
requirements based upon expected sales growth. The Company intends to seek
additional debt and/or equity financing to fund this shortfall. However,
there can be no assurance that the Company will be able to raise such
additional financing to fund such expected growth.
Total borrowings outstanding as of December 31, 1995 were $5,623,000 a decrease
of $502,000 or 8.2% from $6,125,000 at June 30, 1995. This was due primarily to
the reduced borrowing levels and satisfaction of both the subordinated mortgage
loan and the machinery and equipment loan. The Company's asset based revolving
credit facility provides a maximum availability of $10,000,000 based on eligible
accounts receivable and inventory. As of December 31, 1995, $4,336,000 was
available under this facility of which $3,495,000 was outstanding. The
Company's debt to equity ratio was 5.3 at December 31, 1995 as compared to 3.1
at June 30, 1995.
PAGE 15
<PAGE>
PART II- OTHER INFORMATION
Item 1. Legal Proceedings
An action was commenced in the New York State Supreme Court, County
of Nassau, by CPI Aerostructures, Inc., alleging that VTX Electronics
Corp. had wrongfully failed to consummate a proposed merger
transaction. The plaintiff is seeking "break-up" fee damages in the
amount of $400,000.00. VTX has served an answer and counterclaim,
denying any wrongdoing and alleging that CPI misled VTX by failing to
adequately disclose material losses. The case is in its very early
stages, however management believes VTX has a meritorious defense and
will vigorously defend the case.
Item 5. Other Information
Incorporated from Note 4 to the Financial Statements
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.4 Form of Secured Subordinate Note
4.5 Certificate of Designation of Preferred Stock
4.6 Form of Warrants
10.16 Capitalization Agreement
(b) None
PAGE 16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VTX ELECTRONICS CORP.
By: /s/ Albert Roth
Chief Executive Officer
By: /s/ Paul Snead
Chief Financial Officer
Dated: February 14, 1996
PAGE 17
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> DEC-31-1995
<CASH> 389
<SECURITIES> 0
<RECEIVABLES> 4562
<ALLOWANCES> 142
<INVENTORY> 2885
<CURRENT-ASSETS> 8087
<PP&E> 6917
<DEPRECIATION> 3789
<TOTAL-ASSETS> 11469
<CURRENT-LIABILITIES> 4815
<BONDS> 1055
<COMMON> 1265
0
1055
<OTHER-SE> (1267)
<TOTAL-LIABILITY-AND-EQUITY> 11469
<SALES> 14136
<TOTAL-REVENUES> 14136
<CGS> 12108
<TOTAL-COSTS> 12108
<OTHER-EXPENSES> 4124
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 379
<INCOME-PRETAX> (2475)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2475)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2475)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
SECURED SUBORDINATED DEBENTURE
$________ Farmingdale, New York
November 30, 1995
VTX Electronics Corp., a corporation duly organized and
existing under the laws of the State of Delaware (herein called the
"Company"), for value received, hereby promises to pay to the order
of [name of investor] or registered assigns the principal amount of
______________________ ($_______) Dollars on December 1, 2000, in
such coin or currency of the United States of America as at the
time of payment shall be legal tender for public and private debts,
at the principal office of the Company, in Farmingdale, New York
and to pay interest (computed on the basis of a 360-day year of
twelve 30-day months) at said office, in like coin or currency, on
the unpaid portion of said principal amount from the date hereof,
quarterly on the first day of September, December, March and June
in each year, commencing on March 1, 1996, at the rate of interest
from time to time equal to the "prime rate" as publically announced
from time to time in the Wall Street Journal plus two percent (2%)
per annum adjusted monthly on the first business day of each month
until such unpaid portion of such principal amount shall have
become due and payable and thereafter at the greater of such prime
rate plus six percent (6%) or eighteen percent (18%) per annum
thereafter and, so far as may be lawful, on any overdue installment
of interest at the rate of the greater of such prime rate plus six
percent (6%) or eighteen percent (18%) per annum. This Debenture
may be prepaid at any time after one year from original issuance,
in whole or in part, with no penalty, only with the prior written
consent of the Holder of this Debenture.
par 1. The Agreement; Exchanges and Transfers of the
Debenture.
par 1.1. The Agreement. This Debenture (herein called
the "Debenture") is one of several identical Debentures in the
aggregate principal amount of $1,237,500 (collectively called the
"Debentures") issued pursuant to a Capitalization Agreement dated
November 29, 1995 (herein called the "Agreement") between the
Company and the investors named therein.
par 1.2. Register; Transfer or Exchange of Debentures.
The Company shall keep at its office or agency maintained in
Farmingdale, New York a register in which the Company shall provide
for the registration of Debentures and for the registration of
transfer of Debentures. The Holder of any Debenture may, at its
option and either in person or by duly authorized attorney,
surrender the same for registration of transfer or exchange at such
office and, without expense to such Holder (other than transfer
taxes, if any), receive in exchange therefor a new Debenture or
Debentures, dated as of the date to which interest has been paid on
the Debenture or Debentures so surrendered, each in the principal
amount of $10,000 or any integral multiple thereof, for the same
aggregate unpaid principal amount as the Debenture or Debentures so
surrendered for transfer or exchange and each registered in such
name or names as may be designated by such Holder. Every Debenture
so made and delivered in exchange for any Debenture shall in all
other respects be in the same form and have the same terms as the
Debenture so surrendered for transfer or exchange.
par 1.3. Loss, Theft, Destruction or Mutilation of
Debentures. Upon receipt of evidence reasonably satisfactory to
the Company of the loss, theft, destruction or mutilation of any
Debenture and, in the case of any such loss, theft or destruction,
upon receipt of an indemnity bond in such reasonable amount as the
Company may determine (or if such Debenture is held by the original
Holder, of an unsecured indemnity agreement reasonably satisfactory
to the Company) or, in the case of any such mutilation, upon
surrender and cancellation of such Debenture, the Company will make
and deliver, in lieu of such lost, stolen, destroyed or mutilated
Debenture, a new Debenture of like tenor and unpaid principal
amount and dated as of the date to which interest has been paid on
the Debenture so lost, stolen, destroyed or mutilated.
par 1.4. Registered Holders. The Company may deem and
treat the person in whose name any Debenture is registered as the
absolute owner and holder of such Debenture for the purpose of
receiving payment of the principal of and interest on such
Debenture and for the purpose of any notices, waivers or consents
thereunder, whether or not such Debenture shall be overdue, and the
Company shall not be affected by notice to the contrary. Payments
with respect to any Debenture shall be made only to the registered
Holder thereof.
par 2. Surrender of the Debenture.
par 2.1. Surrender of Debentures. (a) The Company may,
as a condition of payment of all or any of the principal of, and
interest on, this Debenture, in whole or in part, require the
holder to present this Debenture for notation of such payment and,
if this Debenture be paid in full, require the surrender hereof.
(b) Anything herein to the contrary
notwithstanding, the entire principal plus accrued interest amount
of this Debenture, or any part hereof, may be surrendered to the
Company by the Holder for redemption and cancellation as payment of
the exercise price of any warrant to acquire common stock of the
Company. If less than the entire principal amount of this
Debenture is so surrendered and redeemed, a new Debenture in the
remaining outstanding principal amount shall be redelivered to the
Holder.
par 3. Covenants.
par 3.1. To Pay Principal and Interest. The Company
covenants and agrees to pay principal and interest on this
Debenture in accordance with the terms hereof.
par 3.2. Maintenance of Company Office. The Company
will maintain an office in Farmingdale, New York in its current
facility where notices, presentations and demands to or upon the
Company in respect of the Debenture may be given or made or such
other place as a majority in principal amount of the Debentures
shall consent to in writing.
par 3.3. To Keep Books. The Company will, and will
cause all subsidiaries, to keep proper books of record and account
in which full, true and correct entries will be made of its
transactions in accordance with generally accepted accounting
principles.
par 3.4. Payment of Taxes; Corporate Existence;
Maintenance of Properties. The Company will, and will cause each
of its subsidiaries to,
A. pay and discharge promptly or cause to be paid and
discharged promptly all taxes, assessments and governmental charges
or levies imposed upon it or upon its income or profits or upon any
of its property, real, personal or mixed, or upon any part thereof,
before the same shall become in default, as well as all lawful
claims for labor, materials and supplies which, if unpaid, might by
law become a lien or change upon its property; provided, however,
that neither the Company nor any subsidiary shall be required to
pay any such tax, assessment, charge, levy or claim if the amount,
applicability or validity thereof shall currently be contested in
good faith by appropriate proceedings and if the Company or such
subsidiary, as the case may be, shall have set aside on its books
reserves (provided for and segregated to the extent required by
generally accepted accounting principles) deemed by it adequate
with respect thereto;
B. maintain and keep or cause to be maintained and kept its
properties in good repair, working order and condition, and from
time to time make or cause to be made all needful and proper
repairs, renewals, replacements and improvements so that the
business carried on in connection therewith may be properly and
advantageously conducted at all times.
par 3.5. To Insure. The Company will, and will cause
each of its subsidiaries to maintain insurance in such extent and
against such hazards and liabilities as is commonly maintained by
companies similarly situated.
par 3.6. Sale, Merger or Consolidation by Company. The
Company will not sell, lease, transfer or otherwise dispose of any
substantial part of its properties and assets or consolidate with
or merge into any person or permit any person to merge into it.
par 3.7. Additional Debt. The Company shall not
issue or incur any debt senior to, or parri passu with, the
Debentures.
par 4. [Intentionally omitted].
par 5. Subordination. (a) "Senior Debt" means (i)
all indebtedness for principal and interest, including interest
accruing during the period of any bankruptcy and other amounts
payable under the terms of such Senior Debt, of the Company to
Congress Financial Corporation ("Congress") under that certain
Accounts Financing Agreement (Security Agreement) dated December
31, 1992 and the Covenant Supplement to Accounts Financing
Agreement (Security Agreement) dated December 31, 1992 and all
amounts owing to Sterling Commercial Capital, Inc., First Well
Street SBIC, L.P., Fundex Capital Corp. and Tappan Zee Capital
Corp. under that certain Loan Agreement dated March 31, 1994,
Mortgage dated March 31, 1994 and Security Agreement dated March
31, 1994.
(b) The Company covenants and agrees, and each
Holder of this Debenture, by his acceptance hereof likewise
covenants and agrees that the payment of the principal of, interest
and all other amounts payable on this Debenture shall be
subordinated in accordance with the provisions of this paragraph 5 and each
holder of any of the Debenture, whether upon original issue or upon
transfer or assignment thereof, accepts and agrees to be bound by
such provisions. This Debenture, shall, to the extent and in the
manner hereinafter in this paragraph 5 set forth, be subordinated and
subject in right of payment to the prior payment in full of all
Senior Debt of the Company.
(c) Upon any payment or distribution of assets or
securities of the Company of any kind or character, whether in
cash, property or securities, upon any dissolution or winding up or
total or partial liquidation or reorganization of the Company
whether voluntary or involuntary or in bankruptcy, insolvency,
receivership or other proceedings, all Senior Debt of the Company
shall first be paid in cash or cash equivalents, before the holder
of this Debenture shall be entitled to receive any assets or
securities (other than shares of stock of the Company, as
reorganized or readjusted or securities of the Company, or of any
other corporation provided for by a plan of reorganization or
readjustment, junior to, or the payment of which is subordinated at
least to the extent provided in this paragraph 5 to the payment of, all
Senior Debt of the Company, which may at the time be outstanding or
any securities issued in respect thereof under any such plan of
reorganization or readjustment) in respect of the Debentures (for
principal, interest or other amounts); and upon any such
dissolution or winding up or liquidation or reorganization, any
payment or distribution of assets or securities of the Company, of
any kind or character, whether in cash, property or securities
(other than as aforesaid), to which the Holders of the Debentures
would be entitled, except for the provisions of this paragraph 5, shall be
made by the Company, or by any receiver, trustee in bankruptcy,
liquidating trustee, agent or other person making such payment or
distribution, directly to the holders of Senior Debt of the
Company, or their representatives to the extent necessary to pay
all such Senior Debt of the Company, after giving effect to any
concurrent payment or distribution to or for the holders of such
Senior Debt.
(d) No demand, declaration, acceleration or direct
or indirect payment, prepayment or enforcement of principal of this
Debenture may be made or done until the Senior Debt is finally paid
in full, provided, however, demand for payment and acceleration may
be made after 180 days following an Event of Default. Also, no
direct or indirect payment of or on account of this Debenture
(including without limitation principal, interest and premiums)
shall be made if, at the time of such payment or immediately after
giving effect thereto, (i) there shall exist a default in the
payment of any amount (including without limitation principal,
interest and premiums) payable by the Company in respect of any
Senior Debt (any default referred to in this clause (i) herein
called a "Monetary Default"), or (ii) the Company receives a notice
from a holder of any Senior Debt that there exists a default or an
Event of Default other than a Monetary Default in respect of any
Senior Debt (any default or Event of Default specified in this
clause (ii) herein called a "Non-Monetary Default"). If the
Company receives any notice of a Non-Monetary Default, a subsequent
notice given within 360 days from the date of the giving of the
first notice relating to the same Non-Monetary Default on the same
issue of Senior Debt shall not be effective for the purposes of
this paragraph. Notwithstanding the occurrence of a Non-Monetary
Default (but subject to the provisions of Section 5(c) above and
clause (i) of the second sentence of this Section 5(d)), the
Company shall resume payments on and distribution in respect of
interest and other amounts (but not principal) on this Debenture
when: (1) the Non-Monetary Default is cured or waived, or (2) 180
days after the giving of the aforementioned notice of the
occurrence of such Non-Monetary Default (unless during such 180 day
period the maturity of the Senior Debt is accelerated, or such
indebtedness otherwise comes due, and is not paid in full), but in
any event only if this paragraph 5 otherwise permits the payments or
acquisition at the time of such payment.
(e) In the event that, notwithstanding the
foregoing, the holder of any Debenture shall have received any
payment or distribution of assets or securities of the Company of
any kind or character, whether in cash, property or securities
(other than as expressly permitted by this paragraph 5) in contravention of
the terms of the subordination contained herein before all Senior
Debt of the Company is paid in full, then and in such event, such
payment or distribution of assets or securities of the Company
shall be held in trust for and paid over or delivered to the holder
of Senior Debt of the Company, for application to the payment of
all Senior Debt of the Company, remaining unpaid to the extent
necessary to pay in full in cash the principal of and the premium
(if any) and interest and such other amounts on such Senior Debt of
the Company, in accordance with its terms, after giving effect to
any concurrent payment or distribution to holders of such Senior
Debt of the Company.
(f) If any Event of Default occurs (under
circumstances when the provisions of paragraph 5(c) shall not be
applicable) with respect to the Company and as a result this
Debenture is declared due and payable, and such declaration has not
been rescinded or annulled, all principal and premium, if any, of
all Senior Debt of the Company then due, or thereafter declared to
be due, pursuant to the terms of such Senior Debt at such time, and
all interest and such other amounts then due upon such Senior Debt
shall first be paid in full before any payment is made on account
of principal or interest or other amounts on any Debenture.
(g) Subject to the prior payment in full of all
Senior Debt of the Company, the Holder of this Debenture shall be
subrogated to the rights of the holders of such Senior Debt to
receive payments or distributions of assets or securities of the
Company with respect to payments or distributions to the holders of
Senior Debt by or on behalf of the Company to which the Holder of
this Note would be entitled except for the provisions of this paragraph 5,
applicable to Senior Debt until the principal of and interest on
the Debenture shall be paid in full; provided, however, that all
payments of principal and interest on this Debenture which were
permitted under the provisions of this paragraph 5 at the time made shall
remain the property of the Holder of this Debenture and shall not
be subject to recapture by the holders of the Senior Debt. For
purposes of such subrogation, no such payments or distributions to
the holders of Senior Debt by or on behalf of the Company, to which
the Holder of this Debenture would be entitled, except for the
provisions of this paragraph 5, and no such payments or distributions
pursuant to the provisions of this paragraph 5 to or for the benefit of the
holders of Senior Debt of the Company, by the Holder of Debenture,
shall, as between the Company, its creditors other than the holders
of their respective Senior Debt, as the case may be, and the
Holders of this Debenture, be deemed to be a payment by the
Company, to or on account of Senior Debt and no such payments or
distribution to the Holders of Debentures by virtue of the
subrogation herein provided for shall, as between the Company, its
creditors other than the Holders of their respective Senior Debt
and the Holders of the Debentures, be deemed to be a payment by the
Company, on account of such Senior Debt, it being understood that
the provisions of this paragraph 5 are solely for the purpose of defining
the relative rights of the Holders of the Debentures, on the one
hand, and the holders of Senior Debt of the Company, on the other
hand. Nothing contained in this is intended to or shall impair,
as between the Company and the Holders of Debentures, the
obligation of the Company, which is unconditional and absolute, to
pay to the Holders of the Debentures the principal of and interest
on the Debentures, as and when the same shall become due and
payable in accordance with their terms, or to affect (except to the
extent specifically provided above in this paragraph) the relative
rights of the Holders of the Debentures and creditors of the
Company, other than the Holders of Senior Debt of the Company, nor
shall anything herein prevent the Holder of any Debentures from
exercising all remedies otherwise permitted by applicable law upon
default under this Debenture, subject to the rights, if any, under
this paragraph 5, of the Holders of Senior Debt of the Company, in respect
of assets or securities of the Company, of any kind or character,
whether cash, property or securities, received upon the exercise of
any such remedy.
(h) Upon any payment or distribution of assets or
securities of the Company referred to in this paragraph 5, the Holders of
this Debenture shall be entitled to rely upon any order or decree
of a court of competent jurisdiction in which such dissolution,
winding up, liquidation or reorganization proceedings are pending,
and upon a certificate of the receiver, trustee in bankruptcy,
liquidating trustee, agent or other person making any such payment
or distribution, delivered to the Holders of the Debentures for
purpose of ascertaining the persons entitled to participate in such
distribution, the holders of Senior Debt and other indebtedness of
the Company, the amount thereof or payable thereon, the amount or
amounts paid or distributed thereon and all other facts pertinent
thereto or to this paragraph 5.
(i) No right of any present or future holder of any
Senior Debt of the Company, to enforce subordination as herein
provided shall at any time in any way be prejudiced or impaired by
any act or failure to act on the part of the Company, or by any act
or failure to act, in good faith, by any Holder, or by any
noncompliance by the Company, with the terms, provisions and
covenants of this Debenture regardless of any knowledge thereof any
such Holder may have or otherwise be charged with.
(j) The provisions of this paragraph 5 are intended to be
for the benefit of, and shall be enforceable directly by, the
holders of Senior Debt of the Company.
par 6. Events of Default.
par 6.1. Events of Default. If one or more of the
following events, herein called Events of Default, shall happen for
any reason whatsoever and whether such happening shall be voluntary
or involuntary or come about or be effected by operation of law or
pursuant to or in compliance with any judgment, decree or order of
any court of any order, rule or regulation of any administrative or
governmental body) and be continuing:
(a) Default shall be made in the payment of the
principal of any Debenture, when and as the same shall become due
and payable,whether at maturity or at a date fixed for prepayment
or by acceleration or otherwise; or
(b) Default shall be made in the payment of any
installment of interest on any Debenture according to its tenor
when and as the same shall become due and payable and such default
shall continue for a period of 10 days; or
(c) Default shall be made in the due observance or
performance of any covenant, condition or agreement on the part of
the Company contained in this Debenture; or
(d) The Company shall be adjudicated a bankrupt or
insolvent, or shall consent to the appointment of a receiver,
trustee or liquidator of itself or of any material part of its
property, or shall admit in writing its inability to pay its debts
generally as they come due, or shall make a general assignment for
the benefit of creditors, or shall file a voluntary petition or an
answer seeking reorganization or arrangement in a proceeding under
any bankruptcy law (as now or hereafter in effect) or an answer
admitting the material allegations of a petition filed against the
Company in any such proceeding, or shall, by voluntary petition,
answer or consent, seek relief under the provisions of any other
now existing or future bankruptcy or other similar law providing
for the reorganization or winding up of corporations, or the
Company or its directors or majority stockholders shall take action
looking to the dissolution or liquidation of the Company; or
(e) An order, judgment or decree shall be entered
by any court of competent jurisdiction appointing, without the
consent of the Company, a receiver, trustee or liquidator of the
Company or of any material part of its property, and such receiver,
trustee or liquidator shall not have been removed or discharged
within 90 days thereafter, or any material part of the property of
the Company shall, in any judicial proceeding, be sequestered and
shall not be returned to the possession of the Company within 90
days thereafter; or
(f) A petition against the Company in a proceeding
under any bankruptcy law (as now or hereinafter in effect) shall be
filed and shall not be dismissed within 30 days after such filing,
or, in case the approval of such petition by a court of competent
jurisdiction is required, shall be filed and approved by such a
court as properly filed and such approval shall not be withdrawn or
the proceeding dismissed within 30 days thereafter, or if, under
the provisions of any other similar law providing for
reorganization or winding up of corporations and which may apply to
the Company, any court of competent jurisdiction, custody or
control of the Company or of any material part of its property and
such jurisdiction, custody or control shall not be relinquished or
terminated within 30 days thereafter; or
(h) The Company shall (x) be declared in default in
the payment of principal or interest on any evidence of
indebtedness for money borrowed (other than the Debentures) or
other material obligations and such default shall continue for more
than the period of grace, if any, therein specified, unless such
default shall have been cured or waived prior to such indebtedness
becoming or being declared to be due and payable prior to its
stated maturity, or (y) default shall continue for more than the
period of grace, if any, therein specified, or (z) default in the
performance or observance of any other term, condition or agreement
contained in any such evidence of indebtedness for money borrowed
or in any agreement relating thereto if as a result of such default
such evidence of indebtedness is declared to be due and payable
prior to its stated maturity;
then, in any such event, any registered Holder or Holders of the
Debentures may declare the Debenture or Debentures held by it or
them to be immediately due and payable and upon such declaration
the same shall become and be immediately due and payable, together
with accrued interest thereon, anything in the Debentures to the
contrary notwithstanding.
par 6.2. Suits for Enforcement. In case any one or more
of the Events of Default specified in paragraph 6.1 shall happen and be
continuing, each Holder of a Debenture which may, pursuant to the
provisions of paragraph 6.1, declare the Debenture or Debentures held by it
to be immediately due and payable, may proceed to protect and
enforce its rights by suit in equity, action at law and/or by other
appropriate proceeding, whether for the specific performance (to
the extent permitted by law) of any covenant or agreement contained
in this Debenture, such Debenture or in aid of the exercise of any
power granted in this Debenture, such Debenture, or may proceed to
enforce the payment of such Debenture or to enforce any other legal
or equitable right of holder of such Debenture. If, pursuant to
the provisions of par 6.1 or of this paragraph 6.2, the holder of any Debenture
shall demand payment thereof or take any action in respect of a
default or an Event of Default, the Company will forthwith give
written notice, addressed as provided in paragraph 6.4, to the other Holders
of Debentures, specifying such action and the nature of the default
or Event of Default. Nothing contained in this paragraph 6.2 or in paragraph
6.1 shall in any manner impair that absolute and unconditional right of
each holder of a Debenture to receive payment of the principal of
and interest, on such Debenture when the same shall become due and
payable in accordance with the terms thereof, and to institute suit
for the enforcement of such payment.
par 6.3. Remedies Cumulative. No remedy herein
conferred upon the Holder of any Debenture is intended to be
exclusive of any other remedy, and each and every such remedy shall
be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law or in equity or by
statute or otherwise.
par 6.4. Remedies Not Waived. No course of dealing
between the Company and any Holder of a Debenture shall operate as
a waiver of any right of such Holder hereunder or under such
Debenture, and no delay on the part of such Holder in exercising
any right hereunder or thereunder shall so operate.
par 7. [Intentionally omitted]
par 8. Security. This Debenture is secured by, and
entitled to the benefits of, that certain Mortgage dated as of
November 28, 1995 and Security Agreement dated as of November 28,
1995 made by the Company for the benefit of the holders of the
Debentures.
par 9. Costs of Collection. In case of a default in
the payment of any principal of or interest on this Debenture, the
Company will pay to the Holder hereof such further amount as shall
be sufficient to cover the costs and expenses of collection,
including (without limitation) reasonable attorneys' fees.
par 10. Legend. Each Debenture shall bear the
following legend:
The Securities represented by this certificate have
not been registered under the Securities Act of 1933, as amended,
or registered or qualified under the "blue sky" laws of any State.
The securities may not be pledged, hypothecated, assigned, sold or
transferred unless registered under that Act and registered or
qualified under the blue sky laws as may be applicable or unless,
in the opinion of counsel reasonably satisfactory to the Company,
exemptions from such laws are available.
par 11. Covenants Bind Successors and Assigns. All the
covenants, stipulations, promises and agreements in this Debenture
contained by or on behalf of the Company shall bind its successors
and assigns, whether so expressed or not.
par 12. Governing Law. This Debenture shall be
governed by and construed in accordance with the laws of the State
of New York.
par 13. Notice. Any notice pursuant to this Debenture
shall be effected on the day delivered by hand and receipted, the
second business day after delivery to a recognized overnight
courier service or seven days after delivery to the United States
Post Office, proper postage prepaid sent registered or certified
mail, return receipt requested, addressed as follows:
If to the holder at the address shown on the register
maintained by the Company pursuant to par 1.2 of this Debenture.
If to the Company:
61 Executive Boulevard
Farmingdale, New York 11735
par 14. Waiver of Jury Trial. THE COMPANY HEREBY
WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY OF ANY DISPUTE
ARISING UNDER OR RELATING TO THIS DEBENTURE AND AGREES THAT ANY
SUCH DISPUTE SHALL BE TRIED BEFORE A JUDGE SITTING WITHOUT A JURY.
par 15. Headings. The headings of the sections and
subsections of this Debenture are inserted for convenience only and
do not constitute a part of this Debenture.
IN WITNESS WHEREOF, VTX Electronics Corp. has caused this
Debenture to be signed in its corporate name by one of its officers
thereunto duly authorized and this Debenture to be dated as of the
day and year first above written.
VTX ELECTRONICS CORP.
By:________________________
CERTIFICATE OF DESIGNATION, PREFERENCES
AND RIGHTS OF SENIOR CUMULATIVE
CONVERTIBLE PREFERRED STOCK
OF
VTX Electronics Corp.
Pursuant to Section 151 of the General
Corporation Law of the State of Delaware
VTX Electronics Corp. a Delaware corporation (the
"Corporation"), certifies that pursuant to the authority contained
in Article FOURTH of its Certificate of Incorporation and in
accordance with the provisions of Section 151 of the General
Corporation Law of the State of Delaware, its Board of Directors
has adopted the following resolution creating a series of its
Preferred Stock, par value $.01 per share, designated as Senior
Cumulative Convertible Preferred Stock:
RESOLVED, that a series of the class of authorized
Preferred Stock of the Corporation be hereby created and that the
designation and amount thereof and the voting powers, preferences
and relative, participating, optional and other special rights of
the shares of such series, and the qualifications, limitations or
restrictions thereof are as follows:
SECTION 1. Designation and Amount. The shares of such
series shall be designated as Senior Cumulative Convertible
Preferred Stock (the "Senior Preferred Stock") and the number of
shares constituting such series shall be 15,000 and the stated
value of the Senior Preferred Stock shall be $100 per share.
SECTION 2. VOTING The Senior Preferred Stock shall
have the following voting rights:
(A) On all matters, other than the election of
directors, the holders of Senior Preferred Stock shall vote
together with the Common Stock as one class, but shall have 1,500
of votes per share of Senior Preferred Stock.
(B) The holders of Senior Preferred Stock, voting as a
class, shall in each year elect seventy-five (75%) percent of the
members of the Board of Directors of the Corporation.
(C) The Corporation shall not, without the affirmative
consent of the holders of a majority of the Senior Preferred Stock,
in any manner alter or change the designations, or the powers,
preferences, rights, qualifications, limitations, or restrictions
or increase the number of authorized shares of the Senior Preferred
Stock in any manner.
(D) The Corporation shall not, without the affirmative
consent of the holders of a majority of the Senior Preferred Stock,
issue any preferred stock or other equity securities senior to, or
pari passu with, the Senior Preferred Stock whether as to
dividends, distribution or liquidation, or otherwise.
SECTION 3. Dividends. In each year the holders of the
Senior Preferred Stock shall be entitled to receive, when and as
declared by the Board of Directors of the Corporation, out of funds
legally available for that purpose, quarterly dividends payable in
cash on December 1, March 1, June 1 and September 1 in each year
(each such date being referred to herein as "Quarterly Dividend
Payment Date"), commencing March 1, 1996, in an amount equal to $3
per share (that is, $12 per share on an annual basis).
In the case of the original issuance of shares of Senior
Preferred Stock, dividends shall begin to accrue and be cumulative
from the date of issue. In the case of shares of Senior Preferred
Stock issued in exchange for issued Senior Preferred Stock,
dividends shall begin to accrue and be cumulative from the
Quarterly Dividend Payment Date next preceding the date of issue of
such shares to which such dividends have been paid, unless the date
of issue is a Quarterly Dividend Payment Date or is a date after
the record date for the determination of holders of shares of
Senior Preferred Stock entitled to receive a quarterly dividend and
before such Quarterly Dividend Payment Date, in either of which
events such dividends shall be cumulative from such Quarterly
Dividend Payment Date; provided , however, that if dividends shall
not be paid on such Quarterly Dividend Payment Date, then dividends
shall accrue and be cumulative from the Quarterly Dividend Payment
Date to which such dividends have been paid. Accrued but unpaid
dividends shall compound at 12% per annum compounded annually.
Dividends paid on shares of Senior Preferred Stock in an amount
less than the total amount of such dividends at the time accrued
and payable on such shares shall be allocated pro-rata on a share-
by-share basis among all such shares at the time outstanding. The
Board of Directors may fix a record date for the determination of
holders of Senior Preferred Stock entitled to receive payment of a
dividend declared thereon, which record date shall be no more than
sixty days prior to the date fixed for the payment thereof.
Whenever quarterly dividends payable on the Senior
Preferred Stock as provided in this Section 3 are in arrears,
thereafter and until dividends, including all accrued dividends, on
shares of the Senior Preferred Stock outstanding shall have been
paid in full or declared and set apart for payment, the Corporation
shall not (A) pay dividends on, make any other distributions on, or
redeem or purchase or otherwise acquire for consideration any stock
ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Senior Preferred Stock, (B) pay
dividends on or make any other distributions on any stock ranking
on a parity (either as to dividends or upon liquidation,
dissolution, or winding up) with the Senior Preferred Stock, except
dividends paid ratably on the Senior Preferred Stock and all such
parity stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of all such
shares are then entitled, (C) redeem or purchase or otherwise
acquire for consideration any stock ranking on a parity (either as
to dividends or upon liquidation, dissolution or winding up) with
the Senior Preferred Stock, provided that the Corporation may at
any time redeem, purchase or otherwise acquire shares of any such
parity stock in exchange for shares of any stock of the Corporation
ranking on a parity or junior to the Senior Preferred Stock, (D)
purchase or otherwise acquire for consideration any shares of the
Senior Preferred Stock, unless required or as provided in Section
5, or any shares of stock ranking on a parity with the Senior
Preferred Stock, except with respect to the exchange of any Stock
ranking below the Senior Preferred Stock as to liquidation or
dividends for debt of the Corporation. The Corporation shall not
permit any subsidiary of the Corporation to purchase or otherwise
acquire for consideration any shares of stock of the Corporation
unless the Corporation could purchase such shares at such time and
in such manner.
SECTION 4. [Intentionally Omitted]
SECTION 5. Redemption by Corporation. The Corporation
shall redeem shares of Senior Preferred Stock pursuant to the
following provisions:
(A) The Corporation shall, on December 1, 2000 redeem
all the then outstanding shares of Senior Preferred Stock at the
stated value thereof (namely $100 per share); provided, however,
that at the Corporation's option it may pay such redemption price
in cash or in Common Stock to be valued for this purpose at the
lower of (i) seventy (70%) percent of the then current market price
or (ii) the then current Conversion Price (as herein provided). If
contrary to the provisions hereof any shares of Senior Preferred
Stock are not redeemed, such shares as have not been so redeemed
shall accrue a dividend at a rate equal to eighteen percent (18%)
time compounded annually and for each month such Senior Preferred
Stock is not redeemed the Conversion Price (as hereinafter defined)
shall be lowered to the lower of the Conversion Price in effect at
the date of scheduled redemption or the market price. For purposes
of this Section, "market price" of the Common Stock shall be the
lower of (i) the market price on the record date for the
redemption, or in the case of a reduction in the conversion price,
on the last trading day of each month, or (ii) average of the daily
closing prices for 30 consecutive business days commencing 45
business prior to the redemption date. The closing price for each
day shall be the last reported sales price regular way or, in case
no such reported sale takes place on such day, the average of the
reported closing bid and asked prices regular way, in either case
on the American Stock Exchange or, if the Common Stock is not
listed or admitted to trading on such exchange, on the principal
national securities exchange on which the Common Stock is listed or
admitted for trading or, if not listed or admitted to trading on
any national securities exchange the average of the closing bid and
asked prices on reported by the National Association of Securities
Dealers Automated Quotation System or if not so reported, by the
average of the closing bid and asked prices furnished by a firm
acting at that time as a market maker in the Common Stock selected
by the Company for this purpose.
(B) Notice of any redemption of the Senior Preferred
Stock shall be mailed at least thirty, but no more than sixty, days
prior to the date fixed for redemption to each holder of Senior
Preferred Stock to be redeemed, at such holder's address as it
appears on the books of the Corporation. In accordance to
facilitate the redemption of the Senior Preferred Stock, the Board
of Directors may fix a record date for the determination of holders
of Senior Preferred Stock to be redeemed, or may cause the transfer
book of the Corporation to be closed for the transfer of the Senior
Preferred Stock, not more than sixty days prior to the date fixed
for such redemption;
(C) Upon any notice of redemption being sent to the
holders of Senior Preferred Stock, notwithstanding that any
certificates for such shares shall not have been surrendered for
cancellation, the shares represented thereby shall no longer be
deemed outstanding, the rights to receive dividends thereon shall
cease to accrue from and after the date of redemption designated in
the notice of redemption and all rights of the holders of the
shares of the Senior Preferred Stock called for redemption shall
cease and terminate, excepting only the right to receive the
redemption price therefor.
SECTION 6. Reacquired Shares. Any shares of the Senior
Preferred Stock redeemed or purchased otherwise acquired by the
Corporation in any manner whatsoever shall be retired and canceled
promptly after the acquisition thereof. All such shares shall upon
their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of
Preferred Stock to be created by resolution or resolutions of the
Board of Directors, subject to the conditions or restrictions on
issuance set forth in the Corporation's Certificate of
Incorporation.
SECTION 7. Liquidation, Dissolution or Winding Up. (a)
Upon any liquidation, dissolution or winding up of the Corporation,
no distribution shall be made (A) to the holders of Common Stock of
the Corporation and other stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the
Senior Preferred Stock unless, prior thereto, the holders of Senior
Preferred Stock shall have received $100 per share, plus an amount
equal to cumulative unpaid dividends thereon, including accrued
dividends, whether or not declared, to the date of such payment or
(B) to the holders of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Senior Preferred Stock, except distributions made ratably on the
Senior Preferred Stock and all other such parity stock in
proportion to the total amounts to which the holders of all such
shares are entitled upon such liquidation, dissolution or winding
up.
SECTION 8. Conversion.
(a) Conversions. Subject to and upon compliance with
the provisions of this Section, at the option of any holder of
Senior Preferred Stock such holder may convert his or her Senior
Preferred Stock and cumulative but unpaid dividends including the
interest thereon, at any time subsequent to June 1, 1996 into that
number of duly paid and nonassessable whole shares of common stock
obtained by dividing the stated value of the Senior Preferred Stock
so converted, plus the cumulative but unpaid dividends (and the
interest thereon) on such shares, by the Conversion Price,
determined as hereinafter provided, in effect at the time of
conversion. Upon conversion of any shares of Senior Preferred
Stock that portion so converted shall result in satisfaction and
redemption of such Senior Preferred Stock so converted.
The price at which shares of Common Stock shall be
delivered upon conversion (herein called the "Conversion Price")
shall initially be $.25 per share of Common Stock. The Conversion
Price shall be adjusted in certain instances as provided in Section
9(d).
(b) Manner of Exercising Conversion Privilege. In order
to exercise the conversion privilege, the holder of any shares of
Senior Preferred Stock to be converted shall surrender the
certificates representing such Senior Preferred Stock at the
principal office of the Corporation, accompanied by written notice
to the Corporation, at said office that the holder elects to
convert such Senior Preferred Stock or, if less than the entire
amount of shares represented by such certificate the amount thereof
is to be converted, the portion thereof to be converted. Such
notice shall also state the name or names in which the certificate
or certificates for shares of Common Stock issuable on such
conversion are to be issued, otherwise they shall be issuable in
the same name as the registration of such Senior Preferred Stock,
be accompanied by instruments of transfer, in form satisfactory to
the Corporation and to any person authorized by the Corporation to
deliver Common Stock on conversion of Senior Preferred Stock
(herein referred to as the "conversion agent"), duly executed by
the holder or his duly authorized attorney. Except as otherwise
provided in this Section 9(b), no payment or adjustment shall be
made on account of any dividends on the Common Stock issued upon
conversion but accrued dividends shall be payable upon conversion.
Senior Preferred Stock shall be deemed to have been
converted immediately prior to the close of business on the day of
acceptance of such Senior Preferred Stock for conversion in
accordance with the foregoing provisions, and at such time the
rights of the holders of the converted portion shall cease and the
persons entitled to receive the Common Stock issuable upon
conversion shall be treated for all purposes as the record holders
of such Common Stock at such times; provided, however, that any
such surrender on any date when the stock transfer books of the
Corporation shall be closed shall constitute the person or persons
in whose name or names the certificate or certificates for such
shares are to be issued as the record holder or holders thereof for
all purposes at the opening of business on the next succeeding day
on which such stock transfer books are open and the Senior
Preferred Stock surrendered shall not be deemed to have been
converted, in whole or in part as the case may be, until such date
for the purpose of determining whether any dividends is payable
thereon, and such conversion date, the Corporation shall issue and
shall deliver at said office or agency a certificate or
certificates for the number of full shares of Common Stock issuable
upon conversion, together with payment in lieu of any fraction of
a share, as provided in Section 9(c).
In the case of any certificates of Senior Preferred Stock
which is converted in part only, upon such conversion the
Corporation shall execute and deliver to or upon the written order
of the holder thereof, at the expense of the Corporation, a new
certificate of certificates of Senior Preferred Stock in an amount
equal to the unconverted portion of such certificates of Senior
Preferred Stock.
(c) Fractional Shares. No fractional shares of Common
Stock shall be issued upon conversion of any Senior Preferred
Stock. Instead of any fractional share of Common Stock which would
otherwise be issuable upon conversion of any Senior Preferred Stock
(or specified portions thereof), the Corporation shall pay a cash
adjustment in respect of such fraction.
(d) Adjustments. The initial conversion price specified
in Section 9(a) and any adjusted conversion price shall be subject
to adjustment from time to time as follows:
(A) In case the Corporation shall (i) pay a dividend
or make a distribution in shares of its capital stock (whether
shares of Common Stock or of capital stock of any other class) or
distribute evidences of its indebtedness or assets, (ii) sub-divide
its outstanding shares of Common Stock, (iii) combine its
outstanding shares of Common Stock into a smaller number of shares,
or (iv) issue by reclassification of its shares of Common Stock any
shares of capital stock of the Corporation, the conversion
privilege and the conversion price in effect immediately prior to
such action shall be adjusted so that the holders of any Senior
Preferred Stock thereafter surrendered for conversion shall be
entitled to receive the number of shares of capital stock of the
Corporation which he would have owned immediately following such
action had such Senior Preferred Stock been converted immediately
prior thereto. An adjustment made pursuant to this subsection (A)
shall become effective retroactively immediately after the record
date in the case of a dividend or distribution and shall become
effective immediately after the effective date in the case of a
subdivision, combination or reclassification. If, as a result of
an adjustment made pursuant to this subsection (A), the holder of
any shares of Senior Preferred Stock thereafter surrendered for
conversion shall become entitled to receive shares of two or more
classes of capital stock of the Corporation, the Board of Directors
(whose determination shall be made in good faith) shall determine
the allocation of the adjusted conversion price between or among
shares of such classes of capital stock.
(B) In case the Corporation shall issue or sell
subsequent to December 1, 1997 Common Stock, rights, warrants or
securities entitling the holder thereof to subscribe for, purchase
or convert into shares of Common Stock then, on the record date
mentioned below, the conversion price of the Common Stock shall be
adjusted so that such price shall equal the lowest of (i) the per
share consideration received by the Corporation on account of such
issuance or sale (ii) the lowest then current exercise or
conversion price on any warrants or convertible securities, or
(iii) the price determined by multiplying the conversion price in
effect immediately prior to the date of issuance of such Common
Stock, rights, warrants or securities by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding
immediately prior to issuance of such Common Stock rights, warrants
or securities and the denominator of which shall be the number of
shares of Common Stock outstanding immediately prior to issuance of
such Common Stock rights, warrants or securities plus the number of
additional shares of Common Stock issued, offered for subscription
or purchase (or into which the convertible securities so offered
are convertible). Such adjustment shall become effective
retroactively immediately after the record date for the
determination of stockholders entitled to receive such rights or
warrants.
(C) In case the Corporation, subsequent to December 1,
1997, shall issue or sell shares of its capital stock (other than
Common Stock), or rights to subscribe to the foregoing (excluding
those referred to in subsection (B) above), then in each such case
the conversion price shall be adjusted so that the same shall equal
the lowest of (i) the per share consideration receivable by the
Corporation on account of such issuance or sale, (ii) the lowest
then current exercise or conversion price on any Warrants or
convertible securities or (iii) the price determined by multiplying
the conversion price in effect immediately prior to the date of
such distribution by a fraction of which the numerator shall be the
current market price per share (determined as provided in
subsection (D) below) of the Common Stock on the record date
mentioned below multiplied by the number of shares of Common Stock
then outstanding, less the then fair market value (as reasonably
determined by the Board of Directors, of the Corporation in good
faith) of the capital stock, subscription rights, assets or
evidences of indebtedness so issued or distributed and the
denominator shall be such current market price per share of the
Common Stock multiplied by the number of shares of Common Stock
then outstanding. Such adjustment shall become effective
retroactively immediately after the record date for the
determination of stockholders entitled to receive such
distribution.
(D) For the purpose of any computation under subsection
(C) above, the current market price per share of Common Stock on
any date shall be deemed to be the average of the daily closing
prices for 30 consecutive business days commencing 45 business days
before the day in question. The closing price for each day shall
be the last reported sales price regular way or, in case no such
reported sale takes place on such day, the average of the reported
closing bid and asked prices regular way, in either case on the
American Stock Exchange or, if the common Stock is not listed or
admitted to trading on such exchange, on the principal national
securities exchange on which the Common Stock is listed or admitted
to trading or, if not listed or admitted to trading on any national
securities and exchange, the average of the closing bid and asked
prices as reported by the National Association of Securities
Dealers Automated Quotation System, or if not so reported, the
average of the closing bid and asked prices as furnished by any
firm acting at that time as a market maker in the Common Stock
selected from time to time by the Corporation for this purpose.
(E) No adjustment in the conversion price shall operate
to increase the conversion price and no adjustment shall be made
unless it results in a decrease of at least $.0001 in such price;
provided, however, that any adjustments which by reason of this
subsection (E) are not required to be made shall be carried forward
and taken into account in any subsequent adjustment.
(F) In the event that at any time as a result of an
adjustment made pursuant to subsection (A) above, the holder of any
shares of Senior Preferred Stock thereafter surrendered for
conversion shall become entitled to receive any share of the
Corporation other than share of its Common Stock, thereafter the
conversion price of such other shares so receivable upon conversion
of any shares of Senior Preferred Stock shall be subject to
adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to Common
Stock contained subsections (A) through (E) above, and the
provisions of this Section 9 with respect to the Common Stock shall
apply on like terms to any such other shares.
(G) In case of any consolidation of the Corporation
with, or merger of the Corporation into, any other corporation
(other than a consolidation or merger in which the Corporation is
the continuing corporation), or in the case of any sale or transfer
of all or substantially all of the assets of the Corporation, the
corporation formed by such consolidation or the corporation into
which the Corporation shall have been merged or the corporation
which shall have acquired such assets, as the case may be, shall
execute and deliver to holders of all outstanding shares of Senior
Preferred Stock written evidence providing that the holder of all
outstanding shares of Senior Preferred Stock shall have the right
thereafter to convert such shares of Senior Preferred Stock into
the kind and amount of share of stock and other securities and
property which are receivable or which, but for the failure to
distribute to the holders of Common Stock all or substantially all
of the consideration receivable upon such sale or transfer of
assets, would be receivable upon such consolidation, merger, sale
or transfer by a holder of the number of shares of Common Stock
into which such shares of Senior Preferred Stock might have been
converted immediately prior to such sale or transfer. Such written
evidence shall provide for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in
this Section 9. The provisions of this Section 9(D) shall
similarly apply to successive consolidations, mergers, sales or
transfers.
(e) Notice of Adjusted Conversion Price. Whenever the
Conversion Price is adjusted as herein provided, the Corporation
shall compute the adjusted Conversion Price in accordance with
Section 9(d) and shall prepare a certificate signed by the Chief
Financial Officer or President of the Corporation setting forth the
adjusted Conversion Price and showing in reasonable detail the fact
upon which such adjustment is based, and such certificate shall
forthwith be delivered to the registered Holders of all Senior
Preferred Stock.
(f) Notice of Certain Corporate Action. In case
(a) the Corporation shall declare a dividend (or
any other distribution) on its Common Stock payable otherwise than
in cash; or
(b) the Corporation shall authorize the granting to
the holders of its Common Stock of its rights to subscribe for or
purchase any shares of capital stock of any class or of any rights;
or
(c) of any capital reorganization or of any
reclassification of the Common Stock of the Corporation (other than
a subdivision or combination of its outstanding shares of Common
Stock), or of any consolidation or merger to which the Corporation
is a party and for which approval of any stockholders of the
Corporation is required, or of the sale or transfer of all or
substantially all of the assets of the Corporation; or
(d) of the voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then the Corporation shall cause to be delivered to the Holders of
all Senior Preferred Stock at least 20 days (or 10 days in any case
specified in clause (a) or (b) above) prior to the applicable date
hereinafter specified, a notice stating (x) the date on which a
record is to be taken for the purpose of such dividend,
distribution or rights, or, if a record is not to be taken, the
date as of which the holder of Common Stock of record to be
entitled to such dividend, distribution or rights are to be
determined, or (y) the date on which such reorganization,
reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding up as expected to become
effective, and the date as of which it is expected that holders of
Common Stock of record shall be entitled to exchange their shares
of Common Stock for securities or other property deliverable upon
such reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding up.
(g) Corporation to Provide Stock. The Corporation shall
at all times reserve and keep available, free from pre-emptive
rights, out of its authorized but unissued Common Stock or out of
Common Stock held in its treasury for the purpose of effecting the
conversion of Senior Preferred Stock, the full number of shares of
Common Stock then issuable upon the conversion of all outstanding
Senior Preferred Stock.
Before taking any action that would cause an adjustment
reducing the Conversion Price below the then par value (if any) of
the shares of Common Stock issuable upon conversion of the Senior
Preferred Stock the Corporation shall take any corporate action
which may, in the opinion of its counsel, be necessary in order
that the Corporation may validly and legally issue fully paid and
nonassessable shares of such Common Stock at such Conversion Price.
If any shares of Common Stock reserved for conversions of
Senior Preferred Stock requires listing upon any national
securities exchange before such shares may be delivered upon
conversion, the Corporation shall in good faith, and as
expeditiously as possible, endeavor to cause such shares to be duly
listed.
(h) Taxes on Conversion. The Corporation shall pay any
and all taxes that may be payable in respect of the issue or
delivery of shares of Common Stock on conversion of Senior
Preferred Stock. The Corporation shall not, however, be required to
pay any tax which may be payable in respect of any transfer
involved in the issue and delivery of shares of Common Stock in a
name other than that of the holders of Senior Preferred Stock to be
converted, and no such issuance or delivery shall be made unless
and until the person requesting such issuance has paid to the
Corporation the amount of any such tax, or has established, to the
satisfaction of the Corporation, that such tax has been paid.
(i) Covenant as to Stock. The Corporation covenants
that all shares of Common Stock which shall be issued upon
conversion of Senior Preferred Stock will upon issuance be fully
paid and nonassessable and, except as provided in Section 9(h), the
Corporation will pay all taxes, liens and charges, including any
legal or accounting fees and expenses with respect to the issuance
thereof.
SECTION 8. Notices of Corporate Action. In the event
of:
(A) any taking by the Corporation of a record of the
holders of its Common Stock for the purpose of determining the
holders thereof who are entitled to receive any dividend (other
than a dividend payable solely in cash or shares of Common Stock)
or other distribution, or any right or warrant to subscribe for,
purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right;
(B) any capital reorganization, reclassification or
recapitalization of the Corporation (other than a subdivision or
combination of the outstanding shares of its Common Stock), any
consolidation or merger involving the Corporation and any other
person (other than a consolidation or merger with a wholly-owned
subsidiary of the Corporation, provided that the Corporation is the
surviving or the continuing Corporation and no change occurs in the
Common Stock), or any transfer of all or substantially all the
assets of the Corporation to any other person; or
(C) any voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then, and in each such case, the Corporation shall cause to be
mailed to the holders of record of the outstanding shares of the
Senior Preferred Stock, at least 20 days (or 10 days in case of any
event specified in clause (A) above) prior to the applicable record
or effective date hereinafter specified, a notice stating (i) the
date or expected date on which any such record is to be taken for
the purpose of such dividend, distribution or right or (ii) the
date or expected date on which any such reorganization,
reclassification, recapitalization, consolidation, merger,
transfer, dissolution, liquidation or winding up is to take place
and the time, if any such time is to be fixed, as of which the
holders of record of Common Stock shall be entitled to exchange
their shares of Common Stock for the securities or other property
deliverable upon such reorganization, reclassification,
recapitalization, consolidation, merger, transfer, dissolution,
liquidation or winding up.
SECTION 9. Registration Rights; Etc.
(A) Certain Definitions. As used in this Section 9, the
following terms shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange
Commission or any other federal agency at the time administering
the Securities Act.
"Registrable Securities" shall mean the shares of
Common Stock issuable or issued upon conversion of any Senior
Preferred Stock.
The terms "registered," "registered" and
"registration" shall refer to a registration effected by preparing
and filing a registration statement in compliance with the
Securities Act and applicable rules and regulations thereunder, and
the effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses
incurred by the Corporation in compliance with (B) hereof other
than Selling Expenses, including, without limitation, all
registration and filing fees, printing expenses, fees and
disbursements of counsel for the Corporation, blue sky fees and
expenses, and the expense of any special audits incident to or
required by any such registration (but excluding the compensation
of regular employees of the Corporation, which shall be paid in any
event by the Corporation).
"Selling Expenses" shall mean all underwriting
discounts and selling commissions applicable to the sale of
Registrable Securities, all fees and disbursements of counsel for
any Holder and any blue sky fees and expenses excluded from the
definition of "Registration Expenses."
"Holder" shall mean any holder of any Senior
Preferred Stock or outstanding Registrable Securities who received
such Registrable Securities directly from the Corporation upon
conversion of any Senior Preferred Stock.
"Other Shareholders" shall mean holders of
securities of the Corporation who are entitled by contract with the
Corporation to have securities included in a registration of the
Corporation's securities.
(B) Corporation Registration; Demand Registration.
(i) Notice of Registration. If the
Corporation shall determine to register any of its securities
either for its own account or the account of a security holder or
holders exercising their respective demand registration rights,
other than a registration relating solely to employee benefit
plans, or a registration relating solely to a Commission Rule 145
transaction, or a registration on any registration form which does
not permit secondary sales, the Corporation will:
(x) promptly give to the Holder written notice thereof (which
shall include a list of the jurisdictions in which the Corporation
intends to attempt to qualify such securities under the applicable
blue sky or other state securities laws); and
(y) include in such registration (and any related
qualification under blue sky laws or other compliance), and in any
underwriting involved therein, all the Registrable Securities
specified in a written request or requests, made by any Holder
within fifteen (15) days after receipt of the written notice from
the Corporation described in clause (x) above, except as set forth
below.
(ii) Underwriting. If the registration of which
the Corporation gives notice is for a registered public offering
involving an underwriting, the Corporation shall so advise the
Holder as part of the written notice given pursuant to (B) above.
In such event, the right of any Holder to registration pursuant to
(B) above shall be conditioned upon such Holder's participation in
such underwriting and the inclusion of such Holder's Registrable
Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such
underwriting shall (together with the Corporation, directors and
officers and the Other Shareholders distributing their securities
through such underwriting) enter into an underwriting agreement in
customary form with the underwriter or underwriters selected for
underwriting by the Corporation.
Notwithstanding any other provision of this (B), if the
underwriter determines that marketing factors require a limitation
on the number of shares to be underwritten, the underwriter may
(subject to the allocation priority set forth below) exclude from
such registration and underwriting some or all of the Registrable
Securities which would otherwise be underwritten pursuant hereto
provided, however, that in no event shall the Registrable
Securities underwritten pursuant hereto constitute less than one-
third of such offering. The Corporation shall so advise all
holders of securities requesting registration, and the number of
shares of securities that are entitled to be included in the
following registration and underwriting shall be allocated in the
following manner. The number of shares that may be included in the
registration and underwriting on behalf of such Holders, directors
and officers and Other Shareholder shall be allocated among such
Holder, directors and officers and Other Shareholders in
proportion, as nearly as practicable, to the respective amounts of
Registrable Securities and other securities which they had
requested to be included in such registration at the time of filing
the registration statement.
If any Holder of Registrable Securities or any officer,
director or Other Shareholder disapproves of the terms of any such
underwriting, he may elect to withdraw therefrom by written notice
to the Corporation and the underwriter. Any Registrable Securities
excluded or withdrawn from such underwriting shall be withdrawn
from such registration.
(iii) Notwithstanding anything to the contrary set forth
above, each Holder shall also have the unqualified and
unconditional right at any time and from time to time subsequent to
December 1, 1997 to demand the registration of Registrable
Securities, in which case the Corporation shall proceed with such
registration as provided in this Section 9.
(C) Expenses of Registration. The Corporation shall
bear all Registration Expenses incurred in connection with any
registration, qualification and compliance by the Corporation
pursuant to (B) hereof. All Selling Expenses shall be borne by the
holders of the securities so registered pro rata on the basis of
the number of their shares so registered.
(D) Registration Procedures. In the case of each
registration effected by the Corporation pursuant to this Section
9, the Corporation will advise each Holder in writing as to the
initiation of each registration and as to the completion thereof.
The Corporation will, at its expense:
(i) keep such registration effective for a period
of one hundred twenty (120) days or until the Holder or Holders
have completed the distribution described in the registration
statement relating thereto, whichever first occurs:
(ii) furnish such number of prospectuses and other
documents incident thereto as a Holder from time to time may
reasonably request; and
(iii) use its best efforts to register or qualify
the Registrable Securities under the securities laws or blue-sky
laws of such jurisdictions as any Holder may reasonably request
under the circumstances; provided, however, that the Corporation
shall not be obligated to register or qualify such Registrable
Securities in any particular jurisdiction in which the Corporation
would be required to execute a general consent to service of
process in order to effect such registration, qualification or
compliance, unless the Corporation is already subject to service in
such jurisdiction and except as may be required by the Securities
Act or applicable rules or regulations thereunder.
(E) Indemnification.
(i) The Corporation, with respect to each
registration, qualification and compliance effected pursuant to
this Section 9, will indemnify and hold harmless each Holder, each
of its officers, directors and partners, and each party controlling
such Holder, and each underwriter, if any, and each party who
controls any underwriter, against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based
on any untrue statement (or alleged untrue statement) of a material
fact contained in any prospectus, offering circular or other
document (including any related registration statement,
notification or the like) incident to any such registration,
qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading,
or any violation by the Corporation of the Securities Act or any
rule or regulation thereunder applicable to the Corporation and
relating to action or inaction required of the Corporation in
connection with any such registration, qualification or compliance,
and will reimburse each such Holder, each of its officers,
directors and partners, and each party controlling such Holder,
each such underwriter and each party who controls any such
underwriter, for any legal and any other expenses incurred in
connection with investigating or defending any such claim, loss
damage, liability or action; provided that the Corporation will not
be liable in any such case to the extent that any such claim, loss,
damage, liability or expense arises out of or is based on any
untrue statement or omission based solely upon written information
furnished to the Corporation by such Holder or underwriter, as the
case may be, and stated to be specifically for use therein.
(ii) Each Holder and Other Shareholder will, if
Registrable Securities held by him or her are included in the
securities offering as to which such registration, qualification or
compliance is being effected, indemnify and hold harmless the
Corporation, each of its directors and officers and each
underwriter, if any, of the Corporation's securities covered by
such a registration statement, each party who controls the
Corporation or such underwriter, each other such Holder and Other
Shareholder and each of their respective officers, directors and
partners, and each party controlling such Holder or Other
Shareholder, against all claims, losses, damages and liabilities
(or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of material fact
contained in any such registration statement, prospectus, offering
circular or other document, or any omission (or alleged omission)
to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will
reimburse the Corporation and such Holders, Other Shareholders,
directors, officers, partners, parties, underwriters or control
persons for any legal or any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss,
damage, liability or action, in each case to the extent, that such
untrue statement (or alleged untrue statement) or omission (or
alleged omission) is made in such registration statement,
prospectus, offering circular or other document solely in reliance
upon and in conformity with written information furnished to the
Corporation by such Holder or Other Shareholder and stated to be
specifically for use therein; provided, however, that the
obligations of such Holders and Other Shareholders hereunder shall
be limited to an amount equal to the proceeds to each such Holder
or Other Shareholder of securities sold as contemplated herein.
(iii) Each party entitled to indemnification under
this (E) (the "Indemnified Party") shall give notice to the party
required to provide indemnification (the "Indemnifying Party")
promptly after such Indemnification Party has actual knowledge of
any claim as to which indemnity may be sought, and shall permit the
Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or
any litigation resulting therefrom, shall be approved by the
Indemnifying Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such
defense at such party's expense (unless the Indemnified Party shall
have been advised by counsel that actual or potential differing
interest or defenses exist or may exist between the Indemnifying
Party and the Indemnified Party, in which case such expense shall
be paid by the Indemnifying Party), and provided further that the
failure of any Indemnified Party to give notice as provided herein
shall not relieve the Indemnifying Party of its obligations under
this Section 9. No Indemnifying Party, in the defense of any such
claim or litigation, shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into
any settlement which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such Indemnified
Party of a release from all liability in respect to such claim or
litigation.
(F) Information by Holder. Each Holder of Registrable
Securities, and each Other Shareholder holding securities included
in any registration statement, shall furnish to the Corporation
such information regarding such Holder or Other Shareholder as the
Corporation may reasonably request in writing and as shall be
reasonably required in connection with any registration,
qualification or compliance referred to in this Section 9.
(G) Rule 144 Reporting. With a view to making available
the benefits of certain rules and regulations of the Commission
which may permit the sale of the Registrable Securities to the
public without registration, the Corporation agrees to:
(i) Make and keep public information available, as
those terms are understood an defined in Rule 144 under the
Securities Act, at all times from and after ninety (90) days
following the effective date of the first registration under the
Securities Act filed by the Corporation for an offering of its
securities to the general public;
(ii) Use its best efforts to file with the
Commission in a timely manner all reports and other documents
required of the Corporation under the Securities Act and the
Securities Exchange Act of 1934, as amended, at any time after it
has become subject to such reporting requirements; and
(iii) So long as the Holder owns any Registrable
Securities, furnish to the Holder forthwith upon request a written
statement by the Corporation as to its compliance with the
reporting requirements of Rule 144 (at any time from and after
ninety (90) days following the effective date of the first
registration statement in connection with an offering of its
Securities to the general public), and of the Securities Act and
the Securities Exchange Act of 1934, as amended (at any time after
it has become subject to such reporting requirements), a copy of
the most recent annual or quarterly report of the Corporation, and
such other reports and documents so filed as the Holder may
reasonably request in availing itself of any rule or regulation of
the Commission allowing the Holder to sell any such securities
without registration.
IN WITNESS WHEREOF, said VTX Electronics Corp. has caused
this Certificate of Designation, Preferences and Rights of Senior
Preferred Stock to be duly executed by its President and attested
to by its Secretary and caused its corporate seal to be affixed
thereto on November , 1995.
Attest: VTX Electronics Corp.
By:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE
SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAWS OR THE AVAILABILITY OF AN
EXEMPTION FROM REGISTRATION UNDER SAID ACT AND ANY APPLICABLE STATE
SECURITIES LAWS.
STOCK SUBSCRIPTION WARRANT
To Purchase [Number] Shares of Common Stock of
VTX Electronics Corp, a Delaware Corporation
(the "Company")
DATE OF INITIAL ISSUANCE: November 30, 1995
THIS CERTIFIES THAT, for value received, [NAME] or registered
assigns (hereinafter called the "Holder") is entitled to purchase
from the Company during the Term of this Warrant at the times
provided for herein, the number of shares of Common Stock, par
value $.10 per share, of the Company (the "Common Stock") as
specified herein, at the Warrant Price (as hereinafter defined),
payable in the manner specified herein. The exercise of this
Warrant shall be subject to the provisions, limitations and
restrictions herein contained.
SECTION 1. Definitions.
For all purposes of this Warrant, the following terms shall
have the meanings indicated and capitalized terms used herein but
not defined shall have the meanings ascribed thereto in the
Capitalization Agreement dated as of November 29, 1995 by and among
the Company and the Investors named therein (the "Capitalization
Agreement"):
Common Stock - shall mean and include the Company's authorized
Common Stock, par value $.10 per share, as constituted at the date
hereof, and shall also include any capital stock of any class of
the Company hereafter authorized which has the right to
participate in the distribution of earnings and assets of the
Company without limit to amount or percentage.
Securities Act - the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder.<PAGE>
Term of this Warrant - shall mean the period beginning on
[June 1, 1996] [December 1, 1998] and ending on December 1, 2005
[December 1, 2000].
Warrant Price - is defined in Section 2.1 hereof.
Warrant Rights - the rights of the Holder to purchase shares
of Common Stock upon exercise of this Warrant, which rights shall
not relate to shares of Common Stock already purchased pursuant to
this Warrant.
Warrant Shares - shares of Common Stock purchased or
purchasable by the Holder of this Warrant upon the exercise hereof.
SECTION 2. Exercise of Warrant.
2.1. Right to Exercise. At any time and from time to time
during the Term of this Warrant, the Holder may exercise this
Warrant, in whole or part(s) to purchase the number of shares of
Common Stock set forth on the cover page hereof, subject to
adjustment as provided in Section 5. The Warrant Price shall be
$.25 per share subject to adjustment as provided in Section 5 and
may be paid either in cash or by presentation for surrender,
cancellation and redemption of a principal and accrued interest
amount of Secured Subordinated Debenture of the Company equal to
the aggregate Warrant Price.
2.3. Procedure for Exercise of Warrant. To exercise this
Warrant the Holder shall deliver to the Company at its office
referred to in Section 9 hereof at any time and from time to time
during the Term of this Warrant: the Notice of Exercise in the
form attached hereto and the payment of the aggregate Warrant Price
with respect to the Warrants exercised. In the event of any
exercise of these rights represented by this Warrant, a certificate
or certificates for the shares of Common Stock so purchased,
registered in the name of the Holder or such other name or names as
may be designated by the Holder, shall be delivered to the Holder
hereof within a reasonable time, not exceeding fifteen (15) days,
after the rights represented by this Warrant shall have been so
exercised. The person in whose name any certificate for shares of
Common Stock is issued upon exercise of this Warrant shall for all
purposes be deemed to have become the holder of record of such
shares on the date on which the Notice of Exercise was delivered
and payment of the Warrant Price and any applicable taxes was made,
irrespective of the date of delivery of such certificate, except
that, if the date of such delivery and payment is a date when the
stock transfer books of the Company are closed, such person shall
be deemed to have become the holder of such shares at the close of
business on the next succeeding date on which the stock transfer
books are open.
2.4. Transfer Restriction Legend. Each certificate for
Warrant Shares shall bear the following legend (and any additional
legend required by (i) any applicable state securities laws and
(ii) any securities exchange upon which such Warrant Shares may, at
the time of such exercise, be listed) on the face thereof unless at
the time of exercise such Warrant Shares shall be registered under
the Securities Act:
"THESE SECURITIES HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE
SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THE
SECURITIES UNDER SAID ACT AND ANY APPLICABLE
STATE SECURITIES LAWS OR THE AVAILABILITY OF
AN EXEMPTION FROM REGISTRATION UNDER SAID ACT
AND ANY APPLICABLE STATE SECURITIES LAWS."
Any certificate issued at any time in exchange or substitution for
any certificate bearing such legend (except a new certificate
issued upon completion of a public distribution under a
registration statement of the securities represented thereby) shall
also bear such legend unless, in the opinion of counsel for the
holder thereof (which counsel shall be reasonably satisfactory to
counsel for the Company) the securities represented thereby are
not, at such time, required by law to bear such legend.
SECTION 3. Covenants as to Common Stock. The Company
covenants and agrees that all shares of Common Stock that may be
issued upon the exercise of the rights represented by this Warrant
will, upon issuance and receipt by the Company of the Warrant
Price, be validly issued, fully paid and nonassessable, and free
from all taxes, liens and charges with respect to the issue
thereof. The Company further covenants and agrees that it will pay
when due and payable any and all federal and state taxes which may
be payable in respect of the issue of this Warrant, or any Common
Stock or certificates therefor issuable upon the exercise of this
Warrant. The Company further covenants and agrees that the Company
will at all times have authorized and reserved, free from
preemptive rights, a sufficient number of shares of Common Stock to
provide for the exercise of the rights represented by this Warrant.
The Company further covenants and agrees that if any shares of
capital stock to be reserved for the purpose of the issuance of
shares upon the exercise of this Warrant require registration with
or approval of any governmental authority under any federal or
state law before such shares may be validly issued or delivered
upon exercise, then the Company will in good faith and as
expeditiously as possible endeavor to secure such registration or
approval, as the case may be. If and so long as the Common Stock
issuable upon the exercise of this Warrant is listed on any
national securities exchange, the Company will, if permitted by the
rules of such exchange, list and keep listed on such exchange, upon
official notice of issuance, all shares of such Common Stock
issuable upon exercise of this Warrant.
SECTION 4. Ownership.
4.1 Register; Transfer or Exchange of Warrants. The Company
shall keep at its office maintained in Farmingdale, New York a
register in which the Company shall provide for the registration of
Warrants and for the registration of transfer of Warrants. The
Holder of any Warrant may, at its option and either in person or by
duly authorized attorney, surrender the same for registration of
transfer or exchange at such office and, without expense to such
Holder (other than transfer taxes, if any), receive in exchange
therefor a new Warrant or Warrants, dated as of the date to which
transfer is effectuated, for the same aggregate amount of shares as
the Warrant or Warrants so surrendered for transfer or exchange and
each registered in such name or names as may be designated by such
Holder. Every Warrant so made and delivered in exchange for any
Warrant shall in all other respects be in the same form and have
the same terms as the Warrant so surrendered for transfer or
exchange.
4.2. Ownership of This Warrant. The Company may deem and
treat the person in whose name this Warrant is registered as the
holder and owner hereof (notwithstanding any notations of ownership
or writing hereon made by anyone other than the Company) for all
purposes and shall not be affected by any notice to the contrary
until presentation of this Warrant for registration of transfer as
provided in this Section 4.
4.3. Transfer and Replacement. This Warrant and all rights
hereunder are subject to applicable federal and state securities
laws, transferable in whole or in part upon the books of the
Company by the Holder hereof in person or by duly authorized
attorney, and a new Warrant or Warrants, of the same tenor as this
Warrant but registered in the name of the transferee or transferees
shall be made and delivered by the Company upon surrender of this
Warrant duly endorsed. Upon receipt by the Company of evidence
reasonably satisfactory to it of the loss, theft or destruction,
and, in such case, of indemnity or security reasonably satisfactory
to it, and upon surrender of this Warrant if mutilated, the Company
will make and deliver a new Warrant of like tenor, in lieu of this
Warrant; provided that if the Holder hereof is an instrumentality
of a state or local government or an institutional holder or a
nominee for such an instrumentality or institutional holder, an
irrevocable agreement of indemnity by such Holder shall be
sufficient for all purposes of this Section 4, and no evidence of
loss or theft or destruction shall be necessary. This Warrant
shall be promptly canceled by the Company upon the surrender hereof
in connection with any transfer or replacement. Except as
otherwise provided above, in the case of the loss, theft or
destruction of a Warrant, the Company shall pay all expenses, taxes
and other charges payable in connection with any transfer or
replacement of this Warrant, other than stock transfer taxes (if
any) payable in connection with a transfer of this Warrant, which
shall be payable by the Holder.
SECTION 5 Adjustment of Exercise Price and Number of Shares
of Common Stock or Warrants.
(a) In case the Company shall (i) pay a dividend or make
a distribution in shares of its capital stock (whether shares of
Common Stock or of capital stock of any other class) or distribute
evidences of indebtedness or assets, (ii) sub-divide its
outstanding shares of Common Stock (iii) combine its outstanding
shares of Common Stock into a smaller number of shares, or (iv)
issue by reclassification of its shares of Common Stock any shares
of capital stock of the Company, the conversion privilege and
Warrant Price in effect immediately prior to such action shall be
adjusted so that the holders of any Warrants thereafter surrendered
for exercise shall be entitled to receive the number of shares of
capital stock of the Company which he or she would have owned
immediately following such action had such Warrant been exercised
immediately prior thereto. An adjustment made pursuant to this
subsection (a) shall become effective retroactively immediately
after the record date in the case of a dividend or distribution and
shall become effective immediately after the effective date in the
case of a subdivision, combination or reclassification. If, as a
result of an adjustment made pursuant to this subsection (a), the
holder of any shares of this Warrant thereafter surrendered for
exercise shall become entitled to receive shares of two or more
classes of capital stock of the Company, the Board of Directors
(whose reasonable determination shall be made in good faith) shall
determine the allocation of the adjusted conversion price between
or among shares of such classes of capital stock.
In the event the Company shall, at any time or from time
to time after December 1, 1997, issue or sell any shares of Common
Stock or rights, warrants or securities convertible into Common
Stock (any such sale or issuance, being herein called a "Change of
Shares"), then, and thereafter upon each further Change of Shares,
the Warrant Price in effect immediately prior to such Change of
Shares shall be changed to a price (including any applicable
fraction of a cent) equal to the lowest of (i) the per share
consideration receivable by the Company on account of such Change
of Shares, (ii) the lowest then current exercise or conversion
price on any Warrants or convertible securities, or (iii) the
Warrant Price determined by multiplying the Warrant Price in effect
immediately prior thereto by a fraction, the numerator of which
shall be the sum of the number of shares of Common Stock
outstanding immediately prior to the issuance of such additional
shares and the denominator of which shall be the sum of the number
of shares of Common Stock outstanding immediately after the
issuance of such additional shares (assuming full exercise,
conversion or subscription of all rights, warrants or securities
convertible into Common Stock). Such adjustment shall be made
successively whenever such and issuance is made.
In case the Corporation shall at any time or from time to time
after December 1, 1997 issue or sell shares of capital stock (other
than Common Stock), or warrants, rights to subscribe or securities
convertible into capital stock (excluding those referred to above),
then in each such case the Warrant Price shall be adjusted so the
same shall equal the lowest of (i) the per share consideration
receivable by the Company on account of such issuance or sale, (ii)
the lowest then current exercise or conversion price on any
Warrants or convertible securities, or (iii) the price determined
by multiplying the Warrant Price in effect immediately prior to the
date of such distribution by a fraction the numerator of which
shall be the current market price per share (determined pursuant to
Section 5(g) below) of the Common Stock on the record date
mentioned below multiplied by the total number of shares of Common
Stock then outstanding, less than the fair market value (as
determined by the Board of Directors of the Company in good faith)
of the capital stock, subscription rights, assets or evidence of
indebtedness so distributed and the denominator shall be such
current market price per share of Common Stock multiplied by the
total number of shares of Common Stock then outstanding. Such
adjustment shall become effective retroactively immediately after
the record date for the determination of stockholders entitled to
receive such distribution.
The provisions of this Section 5 shall not operate to increase
the Warrant Price or reduce the number of shares of Common Stock
purchasable upon the exercise of any Warrant.
(b) The Company may elect, upon any adjustment of the
Warrant Price hereunder, to adjust the number of Warrants
outstanding, in lieu of the adjustment in the number of shares of
Common Stock purchasable upon the exercise of each Warrant as
hereinabove provided, so that each Warrant outstanding after such
adjustment shall represent the right to purchase one share of
Common Stock. Each Warrant held of record prior to such adjustment
of the number of Warrants shall become that number of Warrants
(calculated to the nearest tenth) determined by multiplying the
number one by a fraction, the numerator of which shall be the
Warrant Price in effect immediately prior to such adjustment and
the denominator of which shall be the Warrant Price in effect
immediately after such adjustment.
(c) In case of any reclassification, capital
reorganization or other change of outstanding shares of Common
Stock, or in case of any consolidation or merger of the Company
with or into another corporation (other than a consolidation or
merger in which the Company is the continuing corporation and which
does not result in any reclassification, capital reorganization or
other change of outstanding shares of Common Stock), or in case of
any sale or conveyance to another corporation of the property of
the Company as, or substantially as, an entirety (other than a
sale/leaseback, mortgage or other financing transaction), the
Company shall cause effective provision to be made so that each
holder of a Warrant then outstanding shall have the right
thereafter, by exercising such Warrant, to purchase the kind and
number of shares of stock or other securities or property
(including cash) receivable upon such reclassification, capital
reorganization or other change, consolidation, merger, sale or
conveyance by a holder of the number of shares of Common Stock that
might have been purchased upon exercise of such Warrant immediately
prior to such reclassification, capital reorganization or other
change, consolidation, merger, sale or conveyance. Any such
provision shall include provision for adjustments that shall be as
nearly equivalent as may be practicable to the adjustments provided
for in this Section 5. The Company shall not effect any such
consolidation, merger or sale unless prior to or simultaneously
with the consummation thereof the successor (if other than the
Company) resulting from such consolidation or merger of the
corporation purchasing assets or other appropriate corporation or
entity shall assume, by written instrument executed and delivered
to the Company, the obligation to deliver to the holder of each
Warrant such shares of stock, securities or assets as, in
accordance with the foregoing provisions, such holders may be
entitled to purchase and the other obligations under this Warrant.
The foregoing provisions shall similarly apply to successive
reclassification, capital reorganizations and other changes of
outstanding shares of Common Stock and to successive
consolidations, mergers, sales or conveyances.
(d) After each adjustment of the Warrant Price pursuant
to this Section 5, the Company will promptly prepare a certificate
signed by the President, and by the Treasurer or an Assistant
Treasurer or the Secretary or any Assistant Secretary, of the
Company setting forth: (i) the Warrant Price as so adjusted, (ii)
the number of shares of Common Stock purchasable upon exercise of
each Warrant after such adjustment, and, if the Company shall have
elected to adjust the number of Warrants, the number of Warrants to
which the registered holder of each Warrant shall then be entitled.
(e) For purposes of Section 5(a) and 5(b) hereof, the
following shall also be applicable:
(A) The number of shares of Common Stock
outstanding at any given time shall include shares of Common
Stock owned or held by or for the account of the Company and
the sale or issuance of such treasury shares or the
distribution of any such treasury shares shall not be
considered a Change of Shares for purposes of said sections.
(B) No adjustment of the Warrant Price shall be
made unless such adjustment would require a decrease of a
least $.0001 in such price; provided that any adjustments
which by reason of this clause (B) are not required to be made
at the time of and together with the next subsequent
adjustment which, together with any adjustment(s) so carried
forward, shall require an increase or decrease of at least
$.0001 in the Warrant Price then in effect hereunder.
(f) If and whenever the Company shall grant to all
holders of Common Stock, as such, rights or warrants to subscribe
for or to purchase, or any options for the purchase of, Common
Stock or securities convertible into or exchangeable for carrying
a right, warrant or option to purchase Common Stock, the Company
shall concurrently therewith grant to each Registered Holder as of
the record date for such transaction of the Warrants then
outstanding, the rights, warrants or options to which each
Registered Holder would have been entitled if, on the record date
used to determine the stockholders entitled to the rights, warrants
or options being granted by the Company, the Registered Holder were
the holder of record of the number or whole shares of Common Stock
then issuable upon exercise (assuming, for purposes of this section
5 (f), that exercise of Warrants is permissible during periods
prior to the Warrant Exercise Date) of his Warrants. Such grant by
the Company to the holders of the Warrants shall be in lieu of any
adjustment which otherwise might be called for pursuant to this
Section 5.
(g) For the purpose of any computation under this
Section 5 the current market price per share of Common Stock on any
date shall be deemed to be the lower of (i) the closing price on
the record date for determining the holders of Warrants entitled to
receive any adjustment or any computation or (ii) average of the
daily closing prices for 30 consecutive business days commencing 45
business days before the day in question. The closing price for
each day shall be the last reported sales price regular way or, in
case no such reported sale takes place on such day, the average of
the reported closing bid and asked prices regular way, in either
case on the American Stock Exchange or, if the Common Stock is not
listed or admitted to trading on such exchange, on the principal
national securities exchange on which the Common Stock is listed or
admitted to trading or, if not listed or admitted to trading on any
national securities and exchange, the average of the closing bid
and asked prices as reported by the National Association of
Securities Dealers Automated Quotation System, or if not so
reported, the average of the closing bid and asked prices as
furnished by any firm acting at that time as a market maker in the
Common Stock selected from time to time by the Company for this
purpose.
SECTION 6. Notice of Extraordinary Dividends. If the Board
of Directors of the Company shall declare any dividend or other
distribution on its Common Stock except out of earned surplus or by
way of a stock dividend payable in shares of its Common Stock, the
Company shall mail notice thereof to the Holder hereof not less
than fifteen (15) days prior to the record date fixed for
determining shareholders entitled to participate in such dividend
or other distribution, and the Holder hereof shall not participate
in such dividend or other distribution unless this Warrant may be
exercised, in whole or in part, pursuant to Section 2.1 of this
Warrant, and is exercised prior to such record date. The
provisions of this Section 6 shall not apply to distributions made
in connection with transactions covered by Section 5.
SECTION 7. Fractional Shares. Fractional shares shall not be
issued upon the exercise of this Warrant but in any case where the
Holder would, except for the provisions of this Section 7, be
entitled under the terms hereof to receive a fractional share upon
the exercise of this Warrant, the Company shall, upon the exercise
of this Warrant, pay a sum in cash equal to the excess of the value
of such fractional share (determined in such reasonable manner as
may be prescribed in good faith by the Board of Directors of the
Company).
SECTION 8. Registration Rights; Etc.
8.1. Certain Definitions. As used in this Section 8, the
following terms shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission
or any other federal agency at the time administering the
Securities Act.
"Registrable Securities" shall mean this Warrant or the
Warrant Shares issued or issuable upon exercise of this Warrant.
The terms "register", "registered" and "registration" shall
refer to a registration effected by preparing and filing a
registration statement in compliance with the Securities Act and
applicable rules and regulations thereunder, and the effectiveness
of such registration statement.
"Registration Expenses" shall mean all expenses incurred by
the Company in compliance with Section 8.2 hereof other than
Selling Expenses, including, without limitation, all registration
and filing fees, printing expenses, fees and disbursements of
counsel for the Company, blue sky fees and expenses, and the
expense of any special audits incident to or required by any such
registration (but excluding the compensation of regular employees
of the Company, which shall be paid in any event by the Company).
"Selling Expenses" shall mean all underwriting discounts and
selling commissions applicable to the sale of Registrable
Securities, all fees and disbursements of counsel for any Holder
and any blue sky fees and expenses excluded from the definition of
"Registration Expenses".
"Holder" shall mean any holder of outstanding Warrant Shares
or Registrable Securities which (except for purposes of determining
"Holders" under Section 8.6 hereof) have not been sold to the
public.
"Other Shareholders" shall mean holders of securities of the
Company who are entitled by contract with the Company to have
securities included in a registration of the Company's securities.
8.2. Company Registration; Demand Registration.
(a) Notice of Registration. If the Company shall determine
to register any of its securities either for its own account or the
account of a security holder or holders exercising their respective
demand registration rights, other than a registration relating
solely to employee benefit plans, or a registration relating solely
to a Commission Rule 145 transaction, or a registration on any
registration form which does not permit secondary sales, the
Company will:
(i) promptly give to each Holder written notice thereof
(which shall include a list of the jurisdictions in which the
Company intends to attempt to qualify such securities under
the applicable blue sky or other state securities laws); and
(ii) include in such registration (and any related
qualification under blue sky laws or other compliance), and in
any underwriting involved therein, all the Registrable
Securities specified in a written request or requests, made by
any Holder within fifteen (15) days after receipt of the
written notice from the Company described in clause (i) above,
except as set forth in Section 8.2(b) below.
(b) Underwriting. If the registration of which the Company
gives notice is for a registered public offering involving an
underwriting, the Company shall so advise the Holders as part of
the written notice given pursuant to Section 8.2(a)(i). In such
event, the right of any Holder to registration pursuant to Section
8.2 shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable
Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such
underwriting shall (together with the Company, directors and
officers and the Other Shareholders distributing their securities
through such underwriting) enter into an underwriting agreement in
customary form with the underwriter or underwriters selected for
underwriting by the Company.
Notwithstanding any other provision of this Section 8.2, if
the underwriter determines that marketing factors require a
limitation on the number of shares to be underwritten, the
underwriter may (subject to the allocation priority set forth
below) exclude from such registration and underwriting some of the
Registrable Securities which would otherwise be underwritten
pursuant hereto provided, however, that in no event shall the
Registrable Securities underwritten pursuant hereto constitute less
than one-third of such offering. The Company shall so advise all
holders of securities requesting registration, and the number of
shares of securities that are entitled to be included in the
registration and underwriting shall be allocated in the following
manner. The number of shares that may be included in the
registration and underwriting on behalf of such Holders, directors
and officers and Other Shareholders shall be allocated among such
Holders, directors and officers and other Shareholders in
proportion, as nearly as practicable, to the respective amounts of
Registrable Securities and other securities which they had
requested to be included in such registration at the time of filing
the registration statement.
If any Holder of Registrable Securities or any officer,
director or Other Shareholder disapproves of the terms of any such
underwriting, such person may elect to withdraw therefrom by
written notice to the Company and the underwriter. Any Registrable
Securities or other securities excluded or withdrawn from such
underwriting shall be withdrawn from such registration.
(c) Notwithstanding anything to the contrary set forth above,
each Holder shall also have the unqualified and unconditional right
at any time and from time to time subsequent to December 1, 1997 to
demand the registration of Registrable Securities, in which case
the Company shall proceed with such registration as provided in
this Section 8.
8.3 Expenses of Registration. The Company shall bear all
Registration Expenses incurred in connection with any registration,
qualification and compliance by the Company pursuant to Section 8.2
hereof. All Selling Expenses shall be borne by the holders of the
securities so registered pro rata on the basis of the number of
their shares so registered.
8.4 Registration Procedures. In the case of each
registration effected by the Company pursuant to this Section 8,
the Company will keep each Holder advised in writing as to the
initiation of each registration and as to the completion thereof.
The Company will, at its expense:
(a) keep such registration effective for a period of one
hundred twenty (120) days or until the Holder or Holders have
completed the distribution described in the registration statement
relating thereto, whichever first occurs;
(b) furnish such number of prospectuses and other documents
incident thereto as a Holder from time to time may reasonably
request; and
(c) use its best efforts to register or qualify the
Registrable Securities under the securities laws or blue-sky laws
of such jurisdictions as any Holder may request; provided, however,
that the Company shall not be obligated to register or qualify such
Registrable Securities in any particular jurisdiction in which the
Company would be required to execute a general consent to service
of process in order to effect such registration, qualification or
compliance unless the Company is already subject to service in such
jurisdiction and except as may be required by the Securities Act or
applicable rules or regulations thereunder.
8.5 Indemnification.
(a) The Company, with respect to each registration,
qualification and compliance effected pursuant to this Section 8,
will indemnify and hold harmless each Holder, each of its officers,
directors and partners, and each party controlling such Holder, and
each underwriter, if any, and each party who controls any
underwriter, against all claims, losses, damages and liabilities
(or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact
contained in any prospectus, offering circular or other document
(including any related registration statement, notification or the
like) incident to any such registration, qualification or
compliance, or based on any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, or any violation by
the Company of the Securities Act or any rule or regulation
thereunder applicable to the Company and relating to action or
inaction required of the Company in connection with any such
registration, qualification or compliance, and will reimburse each
such Holder, each of its officers, directors and partners, and each
party controlling such Holder, each such underwriter and each party
who controls any such underwriter, for any legal and any other
expenses incurred in connection with investigating or defending any
such claim, loss, damage, liability or action, provided that the
Company will not be liable in any such case to the extent that any
such claim, loss, damage, liability or expense arises out of or is
based on any untrue statement or omission based solely upon written
information furnished to the Company by such Holder or underwriter,
as the case may be, and stated to be specifically for use therein.
(b) Each Holder and Other Shareholder will, if Registrable
Securities held by such person are included in the securities as to
which such registration, qualification or compliance is being
effected, indemnify and hold harmless the Company, each of its
directors and officers and each underwriter, if any, of the
Company's securities covered by such a registration statement, each
party who controls the Company or such underwriter, each other such
Holder and Other Shareholder and each of their respective officers,
directors and partners, and each party controlling such Holder or
Other Shareholder, against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based
on any untrue statement (or alleged untrue statement) of a material
fact contained in any such registration statement, prospectus,
offering circular or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading,
and will reimburse the Company and such Holders, Other
Shareholders, directors, officers, partners, parties, underwriters
or control persons for any legal or any other expenses reasonably
incurred in connection with investigating or defending any such
claim, loss, damage, liability or action, in each case to the
extent, but only to the extent, that such untrue statement (or
alleged untrue statement) or omission (or alleged omission) is made
in such registration statement, prospectus, offering circular or
other document solely in reliance upon and in conformity with
written information furnished to the Company by such Holder or
Other Shareholder and stated to be specifically for use therein;
provided, however, that the obligations of such Holders and Other
Shareholders hereunder shall be limited to an amount equal to the
proceeds to each such Holder or Other Shareholder of securities
sold as contemplated herein.
(c) Each party entitled to indemnification under this Section
8.5 (the "Indemnified Party") shall give notice to the party
required to provide indemnification (the "Indemnifying Party")
promptly after such Indemnified Party has actual knowledge of any
claim as to which indemnity may be sought, and shall permit the
Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or
any litigation resulting therefrom, shall be approved by the
Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such
defense at such party's expense (unless the Indemnified Party shall
have been advised by counsel that actual or potential differing
interests or defenses exist or may exist between the Indemnifying
Party and the Indemnified Party, in which case such expense shall
be paid by the Indemnifying Party), and provided further that the
failure of any Indemnified Party to give notice as provided herein
shall not relieve the Indemnifying Party of its obligations under
this Section 8. No Indemnifying Party, in the defense of any such
claim or litigation, shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into
any settlement which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such Indemnified
Party of a release from all liability in respect to such claim or
litigation.
8.6 Information by Holder. Each Holder of Registrable
Securities, and each Other Shareholder holding securities included
in any registration, shall furnish to the Company such information
regarding such Holder or Other Shareholder as the Company may
reasonably request in writing and as shall be reasonably required
in connection with any registration, qualification or compliance
referred to in this Section 8.
8.7 Rule 144 Reporting. With a view to making available the
benefits of certain rules and regulations of the Commission which
may permit the sale of the Registrable Securities to the public
without registration, the Company agrees to:
(a) Make and keep public information available, as those
terms are understood and defined in Rule 144 under the Securities
Act, at all times from and after ninety (90) days following the
effective date of the first registration under the Securities Act
filed by the Company for an offering of its securities to the
general public;
(b) Use its best efforts to file with the Commission in a
timely manner all reports and other documents required of the
Company under the Securities Act and the Securities Exchange Act of
1934, as amended, at any time after it has become subject to such
reporting requirements; and
(c) So long as the Holder owns any Registrable Securities,
furnish to the Holder forthwith upon request a written statement by
the Company as to its compliance with the reporting requirements of
Rule 144 (at any time from and after ninety (90) days following the
effective date of the first registration statement in connection
with an offering of its Securities to the general public), and of
the Securities Act and the Securities Exchange Act of 1934, as
amended (at any time after it has become subject to such reporting
requirements), a copy of the most recent annual or quarterly report
of the Company, and such other reports and documents so filed as
the Holder may reasonably request in availing itself of any rule or
regulation of the Commission allowing the Holder to sell any such
securities without registration.
SECTION 9. Notices. Any notice or other document required or
permitted to be given or delivered to the Holder or the Company
shall be effected on the seventh day following delivery to the
United States Post Office, proper postage prepaid, sent by
certified or registered mail return receipt requested, or on the
day delivered by hand and receipted, or on the second business day
after delivery to a recognized overnight courier service, addressed
to the Holder at the address thereof specified in the
Capitalization Agreement or to such other address as shall have
been furnished to the Company in writing by the Holder or the
Company at 61 Executive Boulevard, Farmingdale, New York 11735 or
to such other address as shall have been furnished in writing to
the Holder by the Company.
SECTION 10. No Rights as Stockholder; Limitation of
Liability. This Warrant shall not entitle the Holder to any of the
rights of a shareholder of the Company. No provision hereof, in
the absence of affirmative action by the Holder to purchase shares
of Common Stock, and no mere enumeration herein of the rights or
privileges of the Holder, shall give rise to any liability of the
Holder for the Warrant Price hereunder or as a shareholder of the
Company, whether such liability is asserted by the Company or by
creditors of the Company.
SECTION 11. Law Governing. This Warrant shall be governed
by, and construed and enforced in accordance with, the laws of the
State of New York.
SECTION 12. Miscellaneous. This Warrant and any provision
hereof may be changed, waived, discharged or terminated only by an
instrument in writing signed by the party (or any predecessor in
interest thereof) against which enforcement of the same is sought.
The headings in this Warrant are for purposes of reference only and
shall not affect the meaning or construction of any of the
provisions hereof. The provisions of this Warrant shall not be
deemed to restrict or amend in any respect the covenants of the
Company contained in the Capitalization Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
signed by its duly authorized officer this 29th day of November
1995.
VTX ELECTRONICS CORP.
By:___________________________
Donald W. Rowley
President
<PAGE>
[FORM OF ELECTION TO EXERCISE]
To be executed by the registered holder if
such holder desires to exercise the Warrant
To____________:
The undersigned hereby irrevocably elects to exercise the
Warrant to purchase _______ shares of Common Stock issuable upon
the exercise of such Warrant and requests that Certificate for such
shares be issued in the name of:
___________________________________________________________________
(Please print name and address)
___________________________________________________________________
(Please insert social security or other identifying number)
___________________________________________________________________
(Please insert number of shares exercised)
___________________________________________________________________
Please insert Warrant Price Paid
___________________________________________________________________
(Please specify whether payment is in cash or Debentures)
If such number of Warrant shall not be all the Warrant evidenced by
the accompanying Warrant, a new Warrant for the balance remaining
of such Warrant shall be registered in the name of and delivered
to:
__________________________________________________________________
(Please print name and address)
____________________________________________________________
(Please insert social security or other identifying number)
Dated:________________, ____.
[HOLDER]
By___________________________
CAPITALIZATION AGREEMENT
This Capitalization Agreement (the "Agreement") dated as
of November , 1995 by and among VTX Electronics Corp., a Delaware
corporation (the "Company") and the Investors set forth on the
signature page hereto (collectively, the "Investors" and
individually, an "Investor")
WHEREAS, the Investors desire to make a capital
investment in the Company on the terms and conditions set forth in
this Agreement; and
WHEREAS, the Company is desirous of Investors making such
capital investment on the terms and conditions set forth in this
Agreement
NOW, THEREFORE, in consideration of the premises and
other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the parties agree as follows:
1. Representations and Warranties. The Company
represents and warrants to each Investor as follows:
a. Due Organization and Qualification; Business.
The Company is a duly organized and validly existing corporation in
good standing under the laws of the State of Delaware, has the
power and authority to own or hold under lease the properties it
purports to own or so hold and to carry on its business as now
being conducted and presently proposed to be conducted, and has the
power and authority to enter into this Agreement and to carry out
the transactions contemplated hereby. The Company is duly
qualified as a foreign corporation in each jurisdiction where the
nature of the business transacted by it or the properties owned or
leased by it requires the Company to be so qualified except for
jurisdictions wherein the failure to be so qualified will not have
a material adverse effect on the business, operations, properties
or assets or on the condition, financial or other, of the Company.
The Company has paid all corporation taxes and franchise taxes
payable to the State of Delaware and in each other jurisdiction
where it is qualified.
b. Litigation; Compliance with Rules, Regulations,
Decrees, etc. Except as set forth on Schedule 1(b) attached
hereto, there are no actions, suits or proceedings (whether or not
purportedly on behalf of the Company) pending or, to the knowledge
of the Company, threatened against the Company or any of its
subsidiaries, properties or assets at law, in equity or before or
by any federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality, domestic or
foreign, or before any arbitrator of any kind; and neither the
Company nor any of its subsidiaries is in default with respect to
any judgment, order, writ, injunction, decree or award of any
court, arbitrator or federal, state, municipal or other
governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, or in violation of any rule
or regulation of any thereof, or in violation of any law, which
violation would have a material adverse effect on the business or
properties of the Company. The Company has all permits, licenses
and franchises necessary or desirable in order to conduct its
business and to own and operate its property and assets.
c. Compliance with Other Instruments. Neither the
execution and delivery of this Agreement, the consummation of the
transactions herein contemplated, nor compliance with the terms,
conditions and provisions hereof and of the Preferred Stock, the
Warrants and the Debentures (all as hereinafter defined), will
conflict with or result in a breach or violation of the certificate
of incorporation or by-laws of the Company or of any material term,
condition or provision of any agreement or instrument to which the
Company is now a party or by which it or any of its properties or
assets may be bound, or constitute a default thereunder, or result
in the creation or imposition of any lien upon any of the
properties or assets of the Company or any subsidiary.
d. Financial Statements. The consolidated balance
sheet of the Company as at June 30 in each of the years 1990 to
1995, inclusive, and the related consolidated statements of
operations, stockholder' equity and cash flows for the fiscal years
then ended, accompanied in each case by the opinion of independent
public accountants previously delivered to the Investors, as well
as the unaudited financial statements as of September 30, 1995 and
1994 (as set forth in the Form 10Q set forth below) previously
delivered to the Investors are complete and correct in all material
respects and fairly present the financial condition of the Company
and its subsidiaries and the results of the operations and changes
in financial position of the Company and its subsidiaries for the
respective fiscal periods ended on said dates, all in conformity
with generally accepted accounting principles applied on a
consistent basis (except as otherwise therein or in the notes
thereto stated) throughout the fiscal periods involved.
e. Business and Properties; No Misleading Statement
or Omissions. The annual report of the Company on Form 10-K for
the fiscal year ended June 30, 1995 including all exhibits and
material incorporated by reference (the "Form 10-K") and the Report
on Form 10-Q relating to the three-month period ended September 30,
1995 (collectively with the Form 10-K, the "Reports"), as filed
with the Securities and Exchange Commission and a copy of which has
heretofore been furnished to the Investors, correctly describes the
general nature of the business conducted by the Company during the
fiscal year ended June 30, 1995 and the three-month period ended
September 30, 1995, respectively, and the information therein with
respect to the principal properties then owned or leased by the
Company is correct in all material respects. Since September 30,
1995, there has been no material change in the general nature of
the business conducted, or in the principal properties owned or
leased, by the Company. The Reports are accurate as of their
respective dates in all material respects and do not contain any
untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading. There is
no fact or circumstance now in existence and currently known by the
Company which does now, or with the passage of time, would be
reasonably anticipated to have a material adverse affect on the
Company, its business, prospects, financial condition or
operations.
f. Subsidiaries; Due Organization and
Qualification. The Form 10-K correctly and completely sets forth
the name and jurisdiction of the incorporation of each subsidiary
of the Company. All outstanding shares of stock of all classes of
each subsidiary listed in the Form 10-K are owned by the Company
and have been validly issued, are fully paid and non-assessable,
and are owned free and clear of any lien, option, contractual
restriction on transfer or contractual right of any other person.
Each subsidiary listed in the Form 10-K is a duly organized and
validly existing corporation in good standing under the laws of the
jurisdiction of its incorporation, and has the corporate power and
authority to own or hold under lease the properties it purports to
own or so hold and to carry on its business as now being conducted
and presently proposed to be conducted; each subsidiary listed in
the Form 10-K is duly qualified and is in good standing as a
foreign corporation in each jurisdiction wherein, in the judgment
of the Company, the nature of the business transacted by it or the
properties owned or leased by it makes such qualification
necessary, except for jurisdictions wherein the failure to be so
qualified will not have a material adverse effect on the business,
operations, properties or assets or on the condition, financial or
other, of the Company.
g. Title to Properties. The Company and its
subsidiaries have good and marketable title to, or valid and
enforceable leasehold estates in, their respective real properties
and assets (including leasehold improvements) reflected in the
consolidated balance sheet as at September 30, 1995 referred to in
Section 1(b) above, subject only to such defects or irregularities
of title which do not in the aggregate interfere with the
operation, value or use of such properties and assets considered as
a whole and subject to liens in favor of Congress Financial
Corporation ("Congress") and Sterling Commercial Capital, Inc.,
First Wall Street SBIC, L.P., Fundex Capital Corp. and Tappan Zee
Capital (collectively, the "Sterling Group") and notice liens in
favor of equipment lessors, except for properties and assets sold
or otherwise disposed of subsequent to said date in the ordinary
course of business. The Company owns, or has a valid leasehold in,
all properties or assets reasonably necessary to operate and
conduct its business.
h. Trademarks, Patents, etc. The Company and its
subsidiaries possess such trademarks, trade names, copyrights,
patents, licenses, or rights in any thereof as are adequate in the
opinion of the Company for the conduct of their respective
businesses as now conducted, without known conflict with the rights
of others except for conflicts which if adversely determined would
not, singly or in the aggregate, result in any material adverse
change in the business, operations, properties or assets or in the
condition, financial or other, of the Company.
i. Tax Liability. The Company and its subsidiaries
have, to the knowledge of their respective officers, properly
prepared and filed all tax returns required to be filed with taxing
authorities prior to the date hereof or has duly obtained
extensions of time for the filing thereof and have paid all taxes
shown as due on such returns that were filed. The Company has
properly withheld all taxes required to be withheld, including,
without limitation all federal, state and local withholding taxes
and FICA payments, and, to the Company's knowledge, there are no
pending audits or investigations relating to tax matters affecting
the Company or any subsidiary. The Company has been notified of 1)
a final assessment by City of Dayton, Ohio in the amount of
approximately $3,400 and, 2) an amount due to the Illinois
Department of Revenue upon audit and resolution thereof in the
amount, as of September 27, 1995, of approximately $15,400.
j. Governmental Action. Except as otherwise
contemplated by this Agreement and blue sky laws, no action,
authorization or approval of, or registration, declaration or
filing with, any governmental or public body or authority is
required to authorize, or is otherwise required in connection with,
the execution, delivery and performance by the Company of this
Agreement or the Debentures, other than any post event
informational filing.
k. ERISA.
(i) The Company is in compliance in all
material respects with the applicable provisions of the Employee
Retirement Income Security Act of 1974 ("ERISA").
(ii) No "employee benefit plan" as defined in
ERISA, maintained by the Company or any subsidiary, as from time to
time in effect (herein called "Benefit Plans" or, individually, a
"Benefit Plan") nor any trusts created thereunder, nor any trustee
or administrator thereof, has engaged in a "prohibited
transaction," as defined in ERISA, which could subject the Company
or any subsidiary, or any Benefit Plan or any such trust, or any
trustee or administrator thereof, or any party dealing with any
Benefit Plan, or any such trust to any tax or penalty on prohibited
transactions. Neither any of the Benefit Plans nor any such trusts
have been terminated, or are liable for the tax or penalty on
prohibited transactions, nor has there been any "reportable event"
as defined in ERISA or any "accumulated funding deficiency."
Neither the Company nor any of its subsidiaries has incurred any
liability to the Pension Benefit Guaranty Corporation.
l. Environmental Issues.
(i) The property owned or leased by the
Company or any of its subsidiaries ("Premises") and the present and
contemplated use and occupancy thereof are in full compliance in
all material respects with all applicable federal, state and local
laws, ordinances, building codes, rules and regulations pertaining
to zoning, parking, construction, building, land use and
environmental matters, including, without limitation, the
provisions of the Federal Occupation Safety and Health Act and the
Environmental Protection Act, and all applicable rules and
regulations thereunder and all similar state and local laws, rules
and regulations; there are no current citations, notices or orders
of non-compliance issued to the Company or any of its subsidiaries
or relating to its business, assets, property (leased or owned),
leaseholds or equipment under any such laws, rules and regulations.
The Company and each of its subsidiaries has been issued all
required federal, state and local licenses, certificates and
permits relating to the business, assets, property (leased or
owned) leaseholds and equipment, and are in compliance in all
material respects with all applicable federal, state and local
laws, rules and regulations relating to air emissions, water
discharge, noise emissions, solid or liquid disposal, hazardous
waste or materials, or other environmental, health or safety
matters.
(ii) (a) No hazardous or toxic substance or material or
other waste ("Hazardous Substance") as defined in or regulated
under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended (42 U.S.C. paragraph 9601, et. seq.), the
Resource Conservation and Recovery Act (42 U.S.C. paragraph 6901, et. seq.),
The Oil Pollution Act of 1990 (33 U.S.C. paragraph 2701 et. seq.) or any
other federal, state or local law, order or regulation pertaining
to health, safety, or the environment (the "Environmental Laws")
has ever been unlawfully disposed, released, discharged or spilled
on or under any part of the Premises, (b) the Premises has never
been used as a dump or landfill, (c) no litigation or
administrative action or proceeding has been commenced or, to the
Company's knowledge, threatened against the Company or any of its
subsidiaries alleging a violation of any Environmental Laws, and
(d) no underground storage tank (other than fuel oil storage
tanks), equipment containing polycholorinated biophenyle, asbestos,
or urea formaldehyde is located on or under the Premises; the
Premises are free from any contamination by any Hazardous Substance
and the Company is in compliance in all material respects with all
Environmental Laws affecting the Company or the Premises.
(iii) There is not present in the Premises any
friable asbestos or any substance containing asbestos and deemed
hazardous by federal, state or local laws, rules, regulations or
orders respecting such material.
m. Due Authorization of Agreement, Preferred Stock,
Debentures and Warrants.
(i) This Agreement and the transactions herein
contemplated, have been duly authorized by the Company. This
Agreement has been duly executed and delivered by the Company, no
shareholder approval is required in connection therewith, and is a
valid and binding instrument, enforceable against the Company in
accordance with its terms, except as such enforceability may be
limited by bankruptcy, insolvency, moratorium or similar laws
affecting the enforcement of creditors' rights generally and that
the availability of equitable remedies is subject to the discretion
of the court before which any proceeding therefor may be brought;
and
(ii) The Secured Subordinated Debentures in
the aggregate principal amount of $1,237,500 in the form attached
hereto as Exhibit A (the "Debentures"), and the Warrants in the
forms attached hereto as Exhibits B-1 and B-2 (the "Warrants"),
have been duly authorized by the Company, and when each is duly
executed and delivered by the Company and paid for as provided in
this Agreement, will be valid and legally binding obligations of
the Company enforceable in accordance with their respective terms,
except as such enforceability may be limited by bankruptcy,
insolvency, moratorium or similar laws affecting the enforcement of
creditors' rights generally and that the availability of equitable
remedies is subject to the discretion of the court before which any
proceeding therefor may be brought. The Preferred Stock is
convertible into, and the Warrants are exercisable for shares of
Common Stock in accordance with their terms.
o. Validity of Preferred Stock. The Certificate
of Designation, Preferences and Rights of Senior Cumulative
Convertible Preferred Stock of the Company (the "Preferred Stock")
in the form attached hereto as Exhibit C has been duly authorized
by the Board of Directors of the Company and has been duly filed
with the Secretary of the State of Delaware. When the Preferred
Stock is issued by the Company to the Investors and paid for by
them as provided in this Agreement, such Preferred Stock will be
duly and validly authorized and issued, fully paid and non-
assessable Preferred Stock of the Company entitled to the rights
and preferences of the Certificate of Designation referenced above.
p. Validity of Common Stock Issuable Upon
Conversion of Preferred Stock and Exercise of Warrants. The shares
of Common Stock initially to be reserved for issuance upon
conversion of the Preferred Stock and upon exercise of the Warrants
hereof have been duly and validly authorized and, when so issued
upon conversion in accordance with the terms of the Preferred Stock
or exercise of the Warrants, will be duly and validly issued, fully
paid and nonassessable. Schedule 1(p) hereto sets forth the
Company's outstanding stock options, exercise price, expiration
date and option holders.
q. No Defaults. The Company is presently, and at all
time in the past twelve (12) months has been, in compliance and not
in any violation or default under its lending agreements with its
lenders, including, without limitation, Congress and the Sterling
Group and has been in compliance with, and not it default under,
any material contract, leases, mortgages or agreement. No event,
fact or circumstance exists which, with the passage of time or the
giving of the notice, would create an event of default under any of
the above instruments. The Company is in compliance with its
certificate of incorporation and its by-laws.
r. Capitalization. The authorized and outstanding
shares of capital stock, warrants or rights to convert into or
receive capital stock of the Company (other than options which are
set forth on Schedule 1(p)), are stated on Schedule 1(r) attached
hereto. All of the issued and outstanding shares of capital stock
of the Company are duly and validly issued and outstanding, are
fully paid and non-assessable. Except as stated on such Schedule
1(r), there are no outstanding, options, warrants, or rights to
convert into or receive capital stock of the Company or securities
exchangeable for, or convertible into, capital stock of the
Company. No person or entity has demand or "piggy-back"
registration rights as to any security issued or issuable by the
Company, except to the Investors as set forth in the Warrants and
the Preferred Stock. The Company has agreed to use its best
efforts to register up to 400,000 shares of Common Stock issuable
upon the exercise of certain options granted to Donald Rowley.
s. Undisclosed Liabilities; Material Changes. Except
for such claims, debts and liabilities as are reflected in the
financial statements referred to in Section 1(d) hereto and
borrowings under the Company's revolving credit agreement with
Congress, the Company does not have any outstanding indebtedness
for money borrowed and is not subject to any claims or liabilities
(whether matured or unmatured, liquidated or unliquidated, accrued,
fixed, contingent or otherwise), other than trade or business
obligations incurred in the ordinary course of business since the
date of such financial statements, in amounts usual and normal,
both individually and in the aggregate, for the Company, all
accounting procedures and methods have been maintained in a manner
consistent with prior periods, there has been no lease, sale (other
than inventory in the ordinary course of business), or abandonment
of any property or assets of the Company, nor has there been any
labor strife, strike or lock-out. Since the date of such financial
statements, there has not been any material increase in the
compensation payable or to become payable by the Company to any of
its officers, employees or agents, or any bonus payment or
arrangement made to or with any of them, other than in the ordinary
course and consistent with past practices. Since the date of such
financial statements, there has not been any payment by the Company
of any dividends or any distribution by the Company to any of its
shareholders in redemption or as a purchase price of any
indebtedness (whether in payment of principle, interest or
otherwise) owing to any of them nor has there been any mortgage,
pledge or subjection to a lien, charge or encumbrance of any
material kind of any of the Company's assets, tangible or
intangible.
(t) Insurance. The Company maintains insurance adequate
and reasonable for its needs and consistent with industry
standards. All such insurance is in full force and effect and the
Company has received no notices of cancellation or indication of
any intention on the part of any insurance company not to renew.
(u) Employment Contracts. Except as set forth on
Schedule 1(u) attached hereto, the Company is not a party to, or
otherwise subject to, any oral or written (i) collective bargaining
agreement, (ii) contract or other agreement for the employment of
any officer or employee, (iii) profit-sharing, bonus, deferred
compensation, stock option, severance pay, pension, retirement or
similar plan or agreement (including individual agreements)
providing employee benefits.
(v) Future Agreements. The Company is not a party to or
otherwise subject to any oral or written (i) guarantee of any
obligations for the borrowing of money or otherwise, or any other
agreement or guarantee of the obligations of another person or
entity, (ii) agreement or arrangement for the purchase or sale of
any assets of the Company other than in the ordinary course of
business or for the grant of any preferential rights to purchase
any of the Company's assets, properties or rights, (iii) agreement,
contract or commitment containing any covenant limiting the freedom
of the Company to engage in any line of business in any area of the
world or to compete with any person or entity, (iv) agreement,
contract or commitment relating to the acquisition of assets or
capital stock of any business enterprise, (v) contract, agreement
or other instrument not entered at arms length and in the ordinary
course of business.
(w) Market Price of Common Stock. Schedule 1 (w) sets
forth the high, low and closing prices for the Common Stock of the
Company for the trading days November 20, to November 27, 1995 as
prepared from information provided to the Company by Troster
Singer.
2. Representation and Warranty of Each Investor. Each
Investor hereby represents and warrants to the Company, as to
itself, as of the date hereof, as follows:
a. Investment. Each Investor is acquiring the
Debentures, the Preferred Stock and the Warrants and if it converts
any Preferred Stock or exercises any Warrants, the underlying
Common Stock, for its own account for investment purposes only, and
not with a view to, or for resale in connection with, any offering
or distribution thereof; provided, however, it may transfer any of
the foregoing to any affiliate of itself.
b. Experience. Each Investor has such knowledge
and experience in financial and business matters that he or she is
capable of evaluating the merits and risks of an investment in the
Debentures, Preferred Stock and Warrants and of making an informed
decision.
c. Financial Resources. Each Investor is able to
bear the economic risk of such investment hereof and, at the
present time, is able to afford a complete loss of such investment.
d. Restrictions on Transfer. Each Investor
understands that the Debentures, Preferred Stock and Warrants, and
the shares of Common Stock issuable upon conversion or exercise
thereof, have not been registered under the Act by reason of a
specific exemption from the registration provisions of the Act
which depends upon, among other things, the bona fide nature of
such Investor's investment intent as expressed herein.
e. Litigation. There are no legal, administrative,
arbitral or other proceedings or governmental investigations
pending or, to the knowledge of such Investor, threatened against
such Investor which would give any third party the right to enjoin
or rescind the transactions contemplated by this Agreement or
otherwise prevent such Investor from complying with the terms and
provisions of this Agreement.
f. Limitations and Dispositions. Each Investor
acknowledges that the securities purchased hereby must be held
indefinitely unless they are subsequently registered under the Act
or an exemption from such registration is available. Each Investor
has been advised or is aware of the provisions of Rule 144
promulgated under the Act. Each Investor consents to the affixing
on certificates representing the Debentures, Preferred Stock,
Warrants and Common Stock issuable upon conversion or exercise
thereof of a legend regarding transfer restrictions.
g. Required Filings and Consents. The Investors
are not required to submit any notice, report or other filing with
any governmental authority in connection with the execution,
delivery or performance of this Agreement.
h. Due Authorization of Agreement. This Agreement
has been duly authorized, executed and delivered by each Investor,
no shareholder approval is required, and is a valid and binding
instrument enforceable in accordance with its terms.
i. SEC Reports; Recent Losses. Each Investor
acknowledges receipt of the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1995 and the Company's Form 10-Q
for the Quarter ended September 30, 1995. Each Investor
acknowledges that it is aware that the Company expects to have a
significant net loss for the quarter ended December 31, 1995.
3. Purchase of Preferred Stock. Contemporaneously with
the execution and delivery of this Agreement, each Investor shall
purchase, and the Company shall issue and sell, the number of
shares of Preferred Stock set forth opposite such Investor's name
on the signature page hereof (an aggregate of 12,500 shares of
Preferred Stock) for a purchase price also set forth opposite such
Investor's name on the signatures page hereof.
4. Purchase of Debentures. Contemporaneously with the
execution and delivery of this Agreement, each Investor shall
purchase and the Company shall issue and sell, the principal amount
of Debentures set forth opposite such Investor's name on the
signature page hereof.
5. Issuance of Warrants. Contemporaneously with the
execution and delivery of this Agreement, the Company shall issue
to each Investor Warrants to purchase the number of shares of
Common Stock set forth opposite each Investor's name on the
signature page hereof.
6. Appointment of Directors; Visitation Rights. (a)
The Company represents and warrants that the entire Board of
Directors of the Company is comprised of Robert J. Eide, Donald
Rowley, Steven J. Bayern, Robert L. Frome, Paul L. McDermott,
Jeffrey S. Podell and Mark Bloom. Concurrently with the execution
and delivery of this Agreement, all the directors, except Mr. Eide
shall resign, Mr. Eide shall then elect Messrs. Kenneth Rind,
Marshall Butler, Al Roth, Hiro Hiranandani, Paul Lowell and Deborah
Nabavian to fill all vacancies on the Board, and then Mr. Eide
shall resign. The Company represents and warrants that such action
is consistent with the Company's Certificate of Incorporation and
By-laws and when such action is taken by the Board of Directors,
the above named individuals shall be duly elected and acting
directors of the Company.
(b) So long as an Investor whose initial purchase
of Securities under this Capitalization Agreement exceeds a
purchase price of $400,000 holds at least 33% of the aggregate of
the Debentures, Preferred Stock and Warrants issued to such
Investor pursuant to this Capitalization Agreement, or Common Stock
issued pursuant to exercise or conversion of the foregoing, as
applicable, the Company will give to such Investor adequate notice
(which shall not be less than two weeks for regularly scheduled
meetings) of, and permit a nominee designated by such Investor,
whose nominee is not serving on the Board of Directors, to attend
as an observer (who shall be considered an advisory director), all
meetings, whether in person or by telephone of the Company's Board
of Directors and all committee meetings thereof. Such Investor
will be entitled to receive all written materials and other
information given to directors in connection with such meeting at
the same time such materials or information are given to directors.
If the Company proposes to take any action by written consent in
lieu of a meeting of its Board of Directors or of any committee
thereof, the Company will give actual notice, prior to the
effective date of such consent, to such Investor describing in
reasonable detail the nature and substance of such action. Any
such Investor whose nominee is serving on the Board of Directors
may select a representative to attend as an observer in said
nominee's absence. Board meetings will be held at the discretion
of the Board, but not less than quarterly. Advisory directors will
receive the same compensation payable to outside directors per
meeting plus out-of-pocket costs related to such attendance.
7. Voting Proxy; Escrow Agreement.
(a) Contemporaneously with the execution and
delivery of this Agreement, the Company shall cause the Voting
Proxy in the form attached hereto as Exhibit D to be executed and
delivered by the parties therein listed.
(b) By their signature below, the Investors hereby
agree to the terms and conditions of that certain Escrow Agreement
dated the date hereof among the Investors, the Company and Olshan
Grundman Frome & Rosenzweig, LLP, as Escrow Agent, a copy of which
is attached hereto as Exhibit E, and covenant to promptly deliver
to the Escrow Agent original signed copies of such Escrow
Agreement.
8. Opinion of Counsel. Contemporaneously with the
execution and delivery of this Agreement, the Company shall provide
the Investors with an opinion of counsel in form set substantially
forth as Exhibit F hereto.
9. Use of Proceeds. The Company shall use the proceeds
from sale of the Debentures, Preferred Stock and Warrants within
the United States and for working capital and other general
corporate purposes. The Company shall not use such proceeds to
repurchase, redeem, or otherwise acquire outstanding securities,
for any purpose prohibited by the regulations promulgated by the
U.S. Small Business Administration under the Small Business
Investment Act of 1958, as amended, or for any other purpose
prohibited by law. The Company understands that LEG Partners SBIC,
L.P. (the "SBIC Investor") is required under such regulations to
conduct a reasonable review within 90 days after the Closing to
assure that proceeds from sale of the Debentures, the Preferred
Stock and Warrants are used for the intended purposes, and the
Company agrees to cooperate with the SBIC Investor in such review,
including permitting access to the Company's records by a
representative of the SBIC Licensee. Any use of such proceeds
other than as contemplated herein shall constitute a violation of
a covenant with the SBIC Investor for which the SBIC Investor may,
at its option, demand that the Company repurchase the Debentures
and/or Preferred Stock issued to the SBIC Investor pursuant to this
Agreement at a price equal to the purchase price paid for such
Debentures and/or Preferred Stock. The parties hereto agree and
understand that but for the issuance of the Warrants to the
Investors, the interest on the Debentures would have been one (1%)
percent greater than as set forth in the Debentures.
10. Survival of Representations, Warranties and
Agreements. All representations, warranties, covenants and
agreements made by any party hereto in this Agreement or in any
document or certificate delivered pursuant hereto shall survive the
purchase and sale of the Debentures, Preferred Stock and the
issuance of the Warrants, the conversion or exercise, as the case
may be, of the foregoing and shall be unaffected by any
investigation made by or on behalf of any party hereto.
11. Miscellaneous.
(a) This Agreement shall be construed under the
laws of the State of New York without giving effect to conflict of
laws rules of such State.
(b) This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective
successors and assigns.
(c) If any provision of this Agreement is held to
be invalid or unenforceable by a court of competent jurisdiction,
this Agreement shall be interpreted and enforceable as if such
provision were severed or limited but only to the extent necessary
to render such provision and this Agreement enforceable.
(d) Notices shall be effective on the day delivered
by hand and receipted, the second business day after delivery to a
recognized overnight courier service or seven days after delivery
to the United States Post Office proper postage prepaid sent
registered or certified mail, return receipt requested, addressed
in each case as follows:
If to the Company: 61 Executive Boulevard
Farmingdale, New York 11735
If to any Investor: At the address set forth on the
signature page hereof
(e) The headings contained herein are for the sole
purpose of convenience of reference, and shall not in any way limit
or affect the meaning or interpretation of any of the terms or
provisions of this Agreement.
(f) This Agreement may only be amended by a written
instrument executed by each of the parties hereto.
(g) This Agreement (together with the other
agreements and documents delivered pursuant to or in connection
with this Agreement) constitute the entire agreement of the parties
hereto with respect to the subject matter hereof; and supersede all
prior agreements and understandings of the parties, oral and
written, with respect to the subject matter hereof.
(h) This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate
counterparts, each of which shall be deemed to be an original, but
all of which taken shall constitute one and the same agreement.
IN WITNESS WHEREOF, the undersigned have executed and
delivered the Agreement as of the date first above written.
VTX ELECTRONICS CORP.
BY:
Name:
Title:
Agreement as to the provisions of
Section 6
Robert J. Eide
Donald Rowley
Steven J. Bayern
Robert L. Frome
Paul L. McDermott
Jeffrey S. Podell
Mark Bloom
INVESTORS
Name:
By:
Signature: _______________________________________
Address: _______________________________________
_______________________________________
_______________________________________
Number of Shares
of Preferred Stock: _______________________________________
Principal Amount
of Debentures _______________________________________
Warrants (Form B-1)
To Purchase Number
of Shares of Common
Stock _______________________________________
Warrants (Form B-2)
To Purchase Number
of Shares of Common
Stock _______________________________________
Total Consideration: _______________________________________
