<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1997.
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to .
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Commission File Number: 016441
CODE - ALARM, INC.
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(Exact name of registrant as specified in its charter)
MICHIGAN
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(State or other jurisdiction of
incorporation or organization)
38-2334698
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(I.R.S. Employer
Identification No.)
950 EAST WHITCOMB, MADISON HEIGHTS, MICHIGAN 48071
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): 248-583-9620
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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
--- ---
The number of shares outstanding of the registrants common stock, without
par value, as of November 17, 1997 is 2,320,861.
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INDEX
Page No.
Part I. - Financial Information --------
Consolidated Condensed Balance Sheets -
As of September 30, 1997 (Unaudited) and December 31, 1996 3
Consolidated Condensed Statements of Operations (Unaudited) -
Three months ended September 30, 1997 and 1996, and nine months
ended September 30, 1997 and 1996 4
Consolidated Condensed Statements of Cash Flows (Unaudited) -
Nine months ended September 30, 1997 and 1996 5
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II. - Other Information 9
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CODE-ALARM, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30,
1997 December 31,
ASSETS (Unaudited) 1996
- ------ ------------- ------------
<S> <C> <C>
Cash and cash equivalents $ 98 $ 45
Accounts receivable (less allowance for 7,130 8,798
doubtful accounts of $515,000 and
$950,000, respectively)
Inventories 5,784 8,734
Refundable income taxes 1,059 1,059
Deferred income taxes 2,040 2,040
Other 269 729
-------- --------
Total current assets 16,380 21,405
Property and equipment, net of accumulated depreciation 2,698 3,750
Excess of cost over net assets acquired, net 323 1,910
Other intangibles, net 386 651
Other assets 1,128 1,711
-------- --------
Total assets $ 20,915 $ 29,427
======== ========
LIABILITIES & SHAREHOLDERS' EQUITY (DEFICIT)
- ----------------------------------
Current portion of long-term debt (Note 4) $ 809 $ 9,308
Accounts payable 6,415 9,874
Accrued expenses 2,133 2,358
Income tax payable 22
Reserve for litigation (Note 6) 1,700 5,934
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Total current liabilities 11,057 27,496
Long-term debt (Note 4) 13,363 879
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Total liabilities 24,420 28,375
Shareholders' equity (deficit):
Common stock 12,213 12,213
Foreign currency translation adjustment (260)
(Accumulated deficit) (15,718) (10,901)
-------- --------
Total shareholders' equity (deficit) (3,505) 1,052
-------- --------
Total liabilities and shareholders' equity (deficit) $ 20,915 $ 29,427
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
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CODE-ALARM, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $12,590 $15,282 $41,004 $47,094
Cost of sales 7,818 9,218 25,381 29,333
------- ------- ------- -------
Gross profit 4,772 6,064 15,623 17,761
Operating expenses:
Sales and marketing 1,851 2,695 5,852 7,782
Engineering 348 629 1,194 2,055
General and administrative 1,579 2,313 5,915 6,625
Impairment of goodwill 373
Restructuring charge (Note 1) 2,786 2,786
------- ------- ------- -------
6,564 5,637 16,120 16,462
------- ------- -------- -------
Income (loss) from operations (1,792) 427 (497) 1,299
Other (income) expense:
Interest expense 440 400 1,152 1,205
Other expense (income) 608 (13) 792 (10)
Litigation expense (Note 6) 2,376 2,376
------- ------- ------- -------
3,424 387 4,320 1,195
------- ------- ------- -------
Income (loss) before taxes (5,216) 40 (4,817) 104
Income tax (benefit) ( 2) 44
------- ------- ------- -------
Net income (loss) $(5,216) $ 42 $(4,817) $ 60
======= ======= ======= =======
Net income (loss) per common share $ (2.25) $ 0.02 $ (2.08) $ 0.03
======= ======= ======= =======
Weighted average number of common
shares outstanding 2,321 2,321 2,321 2,321
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE> 5
CODE-ALARM, INC
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended September 30
--------------------------------
1997 1996
---- ------
<S> <C> <C>
Cash flows from operating activities $ 2,219 $ 1,303
Cash flows from investing activities:
Capital expenditures (216) (158)
Payments for intangible assets (36)
Cash flows from financing activities:
Reduction of long-term debt (231) (2,507)
Proceeds from line of credit 4,336 1,691
Payment of judgment (6,055)
Proceeds from exercise of stock options 2
-------- --------
Net change in cash and cash equivalents 53 295
Cash and cash equivalents, beginning of period 45 416
-------- --------
Cash and cash equivalents, end of period $ 98 $ 711
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the nine month period for:
Interest expense $ 1,693 $ 608
======== ========
Income taxes 25 0
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE> 6
CODE-ALARM, INC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. The consolidated condensed interim financial statements reflect all
adjustments which in the opinion of management are necessary to fairly state
results for the interim periods presented. All adjustments are of a normal
and recurring nature, except for a restructuring charge of $2.8 million
relating to the closure of the Georgetown, Texas facility, litigation
expense of $2.4 million in connection with a patent infringement suit and
other expenses of $300,000 all incurred in the third quarter of 1997, the
impairment of goodwill of $373,000 in the first quarter of 1997, and
$177,000 charge for the accumulated foreign currency translation in the
second quarter of 1997. Results of operations for the interim periods
presented are not necessarily indicative of results to be expected for the
fiscal year.
The Company is involved in various matters of litigation, including those
more fully described in "Legal Proceedings" in Part II of this Form 10Q. Any
substantial damage amount awarded against the Company in the various matters
of litigation may have a material adverse impact on the Company's financial
condition and results of operations.
2. The financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
3. Inventories consist of the following:
September 30, 1997
(Unaudited) December 31, 1996
----------- ----------------
Raw materials $ 4,739 $ 5,811
Work in process 257 324
Finished goods 788 2,599
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$ 5,784 $ 8,734
======= =======
4. On October 24, 1997, the Company entered into a 3 year credit agreement
with a new senior lender, which is more fully described in "Liquidity and
Capital Resources" in Part I Item 2. of the Form 10Q. As a result of the new
financing agreement, the Company has classified a substantial portion of its
debt as long-term in accordance with the terms of the new credit agreement.
5. On April 30, 1997, the Company's French subsidiary, European Automotive
Equipment, filed a voluntary reorganization proceeding as debtor in
possession under the supervision of the Commercial Court of Bobigny, France.
Effective July 20, 1997, the assets of the entity were purchased out of
bankruptcy by an unaffiliated party. No proceeds from this purchase were
received by the Company.
On July 25, 1997, the Company closed the sale of its United Kingdom
("UK") subsidiary, Code Alarm UK Limited, to its former management.
Proceeds from this sale are to be paid $80,000 in cash, with the balance
over a four year period. The sale was effective April 1, 1997.
The Consolidated Condensed Statements of Operations and Cash Flows
include European results only for the period January 1, 1997 to April 30,
1997. The Consolidated Condensed Balance Sheet at September 30, 1997,
includes in Other Assets a receivable reflecting the amount related to the
sale of the UK subsidiary.
6. On April 18, 1997, the Company agreed to settle and make final payment in
satisfaction of a prior year judgment against the Company. The judgment was
paid from proceeds of a bond secured by a bank letter of credit and
satisfied by additional borrowings of the Company, plus cash from the
Company for accrued interest, totaling approximately $6.1 million. The
amount had been charged to operations and accrued for in prior years.
On July 23, 1997, the Court entered a partial judgement on liability against
the Company that two shock sensor designs infringe upon a third party patent.
On October 21, 1997, the Court entered a Memorandum and Order for a partial
judgement for damages and prejudgement interest, plus attorney fees. For the
quarter ended September 30, 1997, the Company accrued a $1.7 million
reserve for the partial judgement as litigation expense.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations
The Company's consolidated net sales decreased $6.1 million , or 12.9%, to
$41.0 million for the nine months ended September 30, 1997, as compared to
$47.1 million for the nine months ended September 30, 1996. Sales declined $7
million during the first nine months of 1997 as compared to the same period of
1996, as result of the Company's devestiture of its European operations.
North American sales were up 2.2% during the first nine months of 1997 as
compared to 1996 on the continuing strength in sales to original equipment
manufacturers ("OEM"), which increased 8.2%, and direct sales to international
dealers, which increased 120%. Domestic retail aftermarket and automotive
expediter sales were down from the prior year.
For the nine months ended September 30, 1997, consolidated gross profit
increased to 38.1% as compared to 37.7% for the comparable nine month period
ended September 30, 1996. North American margins continue to benefit from
process improvement efforts and increased productivity, offset by higher
overhead costs.
Consolidated operating expenses for the first nine months of 1997 was
unchanged from the prior year period. Consolidated operating expenses for the
nine month period ended September 30, 1997, and 1996 included $1.8 million and
$4.6 million, respectively, relating to European operations. Operating
expenses for the three month and nine month period ended September 30, 1997
included $2.8 million of restructuring charges relating to the closure of the
Company's Georgetown, Texas manufacturing facility. These charges resulted
primarily from the writedown of assets. Excluding European operations
and restructuring charges, North American operating expenses for the first nine
months of 1997 were down 3% from the prior year period.
As a result of the foregoing, the Company reported a consolidated
operating loss from continuing operations for the nine months ended September
30, 1997, of $497,000, as compared to consolidated operating income of $1.3
million for the nine months ended September 30, 1996. Excluding the impact of
the European operations and restructuring charges on consolidated operating
income, North American operations reported operating income of $3.3 million for
the nine months ended September 30, 1997, as compared to $2.6 million for the
comparable period in 1996.
Interest expense was down slightly for the nine months ended September 30,
1997, as compared to the nine months ended September 30, 1996. Interest
expense increased during the third quarter ended September 30, 1997 as
compared to 1996, due to the default rate of interest being charged the Company
under its loan agreement with the Bank. The Company has minimized the impact
of the higher interest rate as it continues to accelerate cash flow from
operating activities used to reduce borrowings and other long-term debt.
The Company incurred in the third quarter of 1997 as other expense an
additional charge of $300,000, and $477,000 for the nine months ended September
30, 1997, relating to its European divestiture. Other expenses for the
quarter ended September 30, 1997, also included $308,000 of bank compliance
costs as part of the Amendment and Forbearance Agreement.
During the third quarter ended September 30, 1997, the Company recorded
$2.4 million as litigation expense, which includes a reserve for $1.7 million
as a result of a Memorandum and Order for a partial judgment issued October 21,
1997, and Company defense costs, both in connection with a patent infringement
claim.
The Company has not provided for an income tax benefit for the three month
and nine month periods ended September 30, 1997, as a result of the pretax loss
for these periods. At this time the Company has not determined that
realization of the related deferred tax asset is more likely than not.
As a result of the foregoing, the Company recorded a net loss of
$4,817,000, or $2.08 per share, compared to net income of $60,000, or $.03 per
share, for the nine months ended September 30, 1996. Excluding the effects of
the restructuring charge and litigation expense, results for the nine months
ended September 30, 1997, was net income of $345,000, or $.15 per share.
7
<PAGE> 8
Liquidity and Capital Resources
The Company's consolidated working capital at September 30, 1997, is $5.3
million as compared to a deficit of ($6.1) million at December 31, 1996. The
current ratio (current assets divided by current liabilities) as of September
30, 1997, is 1.48 to 1 compared to .78 to 1 at December 31, 1996. The
improvement in working capital and current ratio as of September 30, 1997, was
due to the refinancing described below as a substantial portion of debt has
been classified as long-term in accordance with the terms of the credit
agreement.
Net cash provided from operating activities for the nine months ended
September 30, 1997, was $2.2 million, which was used to finance capital
expenditures of $216,000 and other obligations.
On June 11, 1997, the Company and the Bank entered into an Amendment and
Forbearance Agreement ("Forbearance Agreement") regarding the Company's
violations of various covenants in the loan agreements. The Forbearance
Agreement set a limit on the amount by which the revolving credit loans to the
Company could exceed the specified percentages of eligible inventory and
receivables, made all advances by the Bank discretionary, and eliminated LIBOR
based loans. As a result of the Company's defaults under the Forbearance
Agreement, the Bank imposed the default rate of interest (13.5%).
On October 24, 1997, the Company entered into a 3 year credit agreement
with a new senior lender, General Electric Capital Corporation ("GECC"),
extending revolving letter of credit and term credit facilities to the Company
of up to $25.5 million for the purpose of (a) refinancing indebtedness of the
Company, (b) provide working capital financing, and (c) provide funds to
satisfy, or letters of credit to secure issuance of a supersedeas or appeal
bond or similar obligation with, an adverse judgment which may be entered
against the Company in patent infringement litigation. As a result, the
Company's previous loan agreement with the Bank has been replaced with this new
credit agreement. Specifically, the new credit agreement provides for a $12
million revolving credit loan, $1.5 million term loan, and a loan up to $3
million to be made upon a final settlement in the patent infringement
litigation against the Company. In addition, the credit agreement provides for
a letter of credit of up to $12 million to secure a bond or similar obligation
issued in the patent infringement litigation against the Company and if drawn
upon or converted, a term loan of up to $12 million to pay or settle the patent
litigation. The revolving credit facility bears interest at prime rate plus
1.5% or LIBOR plus 3.25%. The term loan is payable in twelve (12) equal
quarterly installments and bears interest at prime plus 1.75% or LIBOR plus
3.5%.
The credit agreement is subject to certain covenants requiring minimum
levels of net worth, fixed charge coverage, operating income levels, maximum
capital expenditures, and restrictions on payments of certain dividends, sale
of assets and increased indebtedness. In addition, the credit agreement
requires that mandatory prepayments against outstanding GECC indebtedness be
made with proceeds from the sale of equity or debt securities, sale of assets,
excess operating cash flow and proceeds from litigation involving patents and
intellectual property. Credit availability under the revolving credit loan is
subject to a specified percentage of eligible accounts receivable and
inventory. All assets of the Company and stock of its subsidiaries are pledged
to GECC as security.
On October 27, 1997, the Company entered into an equity private placement
Unit Purchase Agreement with Pegasus Partners, L.P. and Pegasus Related
Partners, L.P. to purchase 55,000 units consisting of preferred stock and
attached warrants, for an aggregate purchase price of $7 million. Dividends
accrue at a rate of 10% per year and are payable, at the option of the Company,
in cash or additional units. In addition, Pegasus may receive additional
warrants in return for guarantying $4 million of the Company's indebtedness to
GECC under the revolving credit facility, and will receive additional warrants
if required to provide the Company with financing for a judgment, appeal bond
or settlement in connection with the patent infringement litigation. Proceeds
from the $7 million equity investment was used to reduce the Company's
outstanding indebtedness.
For a complete discussion of the debt and equity financing see the
Company's Form 8-K filed on November 10, 1997.
The Company's liquidity could be materially adversely impacted if, beyond
the amount of $1.7 million reserved as of September 30, 1997, the damages
awarded against the Company in its trial against Directed Electronics are
substantial. See "Legal Proceedings" in Part II of this Form 10-Q.
8
<PAGE> 9
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Code-Alarm, Inc. v. Electromotive Technology Corporation. Case
No. 87-CV-74022-DT. In November of 1987, the Company filed a
declaratory judgment action against Electromotive Technology
Corporation ("ETC") in the United States District Court for the
Eastern District of Michigan, Southern Division (the "Court") seeking
a declaration that ETC's U.S. Patent No. 4,585,569 (the "'569
Patent"), describing and claiming a shock or motion
sensor system, was invalid or not infringed by the Company.
Subsequently, Directed Electronics ("Directed"), of Vista, California,
acquired an interest in the '569 Patent and was made a party to the
lawsuit. A judgment was entered against the Company on June 16, 1995
in the Court and the Company posted a letter of credit as security for
an appeal bond in the amount of approximately $5.9 million,
representing the amount of the judgment, including interest. On April
8, 1997 the Court granted the Company's motion to pay the bond
proceeds and accrued interest to Plaintiffs, in full satisfaction of
the judgment, without prejudice to the Company's right to proceed to
set aside the judgment on appeal. In April 1997, the Company paid
$6.1 million in satisfaction of the judgment. On June 4, 1997, the
appeal was denied.
In the same proceeding Directed is asserting patent infringement
claims against two of the Company's shock sensor designs. On July 23,
1997, the Court entered a Judgment on liability against the Company
that these two designs infringe the '569 Patent. The Court has
permanently enjoined the Company from the manufacture, use, sale,
offering for sale and importing of these two subsequent designs. The
trial on the issues of willfulness and damages ended on August 27,
1997. On October 21, 1997, the Court entered a Memorandum and Order
for a partial judgment for 1993 compensatory damages and pre-judgment
interest of $1,543,630 plus related attorney fees. The Court has not
issued an order on the remaining issues. The damage amount to be
awarded against the Company could be substantial and could have a
material adverse impact on the Company's financial condition and
results of operations.
No other reportable changes have taken place in regard to the
legal proceedings disclosed in the registrant's report on Form 10-Q
for the quarter ended June 30, 1997.
9
<PAGE> 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
quarter ended September 30, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3.1 Restated Articles of Incorporation of the Company
incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-18, as amended,
Registration No. 33-16991C.
3.1.1 Certificate of Designation, Numbers, Powers, Preferences and
Relative, Participating, Optional and Other Rights of Series
A Preferred Stock of Code-Alarm, Inc., incorporated by
reference to Exhibit 3.1.1 to the Company's Form 8-K dated
October 24, 1997.
3.1.2 Certificate of Designation, Numbers, Powers, Preferences and
Relative, Participating, Optional and Other Rights of Series
B Preferred Stock of Code-Alarm, Inc., incorporated by
reference to Exhibit 3.1.2 to the Company's Form 8-K dated
October 24, 1997.
3.2.1 Bylaws of the Company, as amended, incorporated by reference
to Exhibit 3.2.1 to the Company's Form 8-K dated October 24,
1997.
11 Shares issuable under employee stock options were
excluded from the computation of weighted average number
of shares outstanding since such shares were either
anti-dilutive or their dilutive effect was not material.
19.1 Form 8-K dated October 24, 1997.
27 Financial Data Schedule.
(b) There were no reports on Form 8-K filed during the quarter
ended September 30, 1997. The Company filed on November 10,
1997, a Current Report on Form 8-K dated October 24, 1997,
containing Items 1 and 5 disclosures.
<PAGE> 11
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.
CODE-ALARM, INC.
----------------
(Registrant)
Date: November 19, 1997 /s/ Rand W. Mueller
----------------- ----------------------
Rand W. Mueller
President
Date: November 19, 1997 /s/ Craig S. Camalo
----------------- ----------------------
Craig S. Camalo
Vice President of Finance
(Chief Financial Officer)
(Principal Accounting Officer)
11
<PAGE> 12
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
3.1 Restated Articles of Incorporation of the Company
incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-18, as amended,
Registration No. 33-16991C.
3.1.1 Certificate of Designation, Numbers, Powers, Preferences
and Relative, Participating, Optional and Other Rights of
Series A Preferred Stock of Code-Alarm, Inc., incorporated
by reference to Exhibit 3.1.1 to the Company's Form 8-K
dated October 24, 1997.
3.1.2 Certificate of Designation, Numbers, Powers, Preferences
and Relative, Participating, Optional and Other Rights of
Series B Preferred Stock of Code-Alarm, Inc., incorporated
by reference to Exhibit 3.1.2 to the Company's Form 8-K
dated October 24, 1997.
3.2.1 Bylaws of the Company, as amended incorporated by reference
to Exhibit 3.2.1 to the Company's Form 8-K dated October 24,
1997.
19.1 Form 8-K dated October 24, 1997.
27 Financial Data Schedule.
<PAGE> 1
EXHIBIT 19.1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) October 24, 1997
--------------------
Code-Alarm, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Michigan
- ------------------------------------------------------------------------------
(State of Other Jurisdiction of Incorporation)
016441 38-2334695
- ------------------------------------------------------------------------------
(Commission File Number) (IRS Employer Identification No.)
950 E. Whitcomb, Madison Heights, Michigan 48071
- ------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(248) 583-9620
- ------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
- ------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
Item 1. Changes in Control of Registrant.
(b) A change in control might occur at a later date as a
consequence of the transactions described in Item 5 of this report.
Item 5. Other Events.
On October 27, 1997 Code-Alarm, Inc. ("Company") closed an equity
private placement for $6,999,850 and refinanced its senior secured debt. The
transactions are outlined below. A fuller description of the terms and
conditions of the transactions and related transactions is set forth in the
transaction documents filed herewith.
EQUITY INVESTMENT
On October 27, 1997, Code-Alarm, Inc. ("Company") sold to Pegasus
Partners, L.P. ("PP") and Pegasus Related Partners, L.P. ("PRP"; PP and PRP are
collectively referred to as
<PAGE> 2
"Pegasus") in a private placement under the Securities Act of 1933, as amended
(the "Securities Act"), 55,000 units (the "Units") for $6,999,850 ($127.27 per
Unit). The Units were sold pursuant to a Unit Purchase Agreement (the
"Purchase Agreement") filed herewith. Each Unit consists of one share of
Series A-1 Preferred Stock and warrants ("Attached Warrants") to purchase
Common Stock. PP purchased 15,275 Units, and PRP purchased 39,725 Units. The
rights, preferences and privileges of the Series A Preferred Stock (consisting
of Series A-1 Preferred Stock and Series A-2 Preferred Stock) are set
forth on the Certificate of Designation (the "Series A Certificate") filed
herewith, which Series A Certificate was approved by Company's Board of
Directors at its meeting on October 21, 1997, pursuant to the authority given
to the Board by Company's Articles of Incorporation, and, having been filed
with the State of Michigan, constitutes an amendment to Company's Articles of
Incorporation.
For each Unit, the Attached Warrants (the form of which is filed
herewith) entitle the holder to purchase 67.842746 shares of Common Stock. This
number of shares may increase up to an aggregate of 72.2525247) if, at the time
of exercise of the Attached Warrant, there are accrued and unpaid dividends on
the Series A Preferred Stock forming part of the Unit and those dividends are
payable at the enhanced rate as a consequence of a "Triggering Event" discussed
below. The exercise price per share of each Attached Warrant is $1.8759559. The
exercise price and number of shares into which Attached Warrants are exercisable
are subject to antidilution protection as discussed below. If there is no
repurchase of Units by Company, Pegasus could receive up to 3,731,351 shares of
Common Stock upon exercise of the Attached Warrants (assuming no antidilution
adjustment and there are no accrued and unpaid dividends on the Series A
Preferred Stock at the time of any exercise of the Attached Warrant) or up to
3,973,889 shares of Common Stock upon such exercise (assuming no antidilution
adjustment and exercise on the day before a dividend payment date with dividends
accruing at the enhanced rate due to a "Triggering Event").
SERIES A PREFERRED STOCK
SERIES. The Series A Certificate creates 400,000 shares of Series A
Preferred Stock ("Series A Preferred"), which is divided into two series,
Series A-1 Preferred Stock ("Series A-1 Preferred") and Series A-2 Preferred
Stock ("Series A-2 Preferred"), with each such series consisting of 200,000
shares. The rights, preferences and privileges of the Series A-1 Preferred and
the Series A-2 Preferred are identical except with respect to certain voting
rights as discussed below. If Pegasus transfers the Series A-1 Preferred to
any non-affiliate, the stock will convert to Series A-2 Preferred on a share
for share basis. Series A-1 Preferred Stock may only be transferred as part of
a Unit with Attached Warrants.
DIVIDENDS. Series A Preferred will accrue dividends at a rate of 10%
of stated value per year, payable semi-annually on April 15 and October 15 of
each year. Stated value is $127.27 (the purchase price of a Unit). Dividends
for any partial period will be pro rated. The dividend is payable at the
option of Company in cash or in additional Units (consisting of Series A
Preferred of the same series and an Attached Warrant), with the number of Units
issuable equal to the amount of the dividend divided by the stated value of the
Series A Preferred. If a dividend
-2-
<PAGE> 3
is not paid when due, dividends will also be calculated on the unpaid dividend.
The dividend on the Series A Preferred has a preference over the dividends on
any Common Stock or other junior stock. In addition, dividends on common or
any other junior stock cannot be paid without the consent of the Series A-1
Preferred. If a "Triggering Event" (discussed below) occurs, dividends are
payable at the rate of 13% of stated value per annum.
LIQUIDATION. In the event of any bankruptcy, liquidation, dissolution
or winding up of Company, each share of Series A Preferred has a liquidation
preference equal to the greater of (i) its stated value plus accrued but unpaid
dividends or (ii) if a Triggering Event has occurred because the amendment to
Company's Articles of Incorporation increasing the number of shares of
authorized common stock to 20 million has not become effective or if Company
has failed to issue Common Stock upon exercise of the Attached Warrants, all
cash and other dividends, distributions and other payments which are paid or
payable to a holder of shares of Common Stock for which Attached Warrants held
by the holder of the Series A Preferred are exercisable at that time, plus
$.01. The Series A Preferred liquidation preference is senior to any
distribution to the holders of Common Stock or other junior stock.
VOTING. The holders of Series A-1 Preferred will have the right,
voting together as a separate class, to elect two members of Company's Board of
Directors, which is expanded from 7 to 9 members. When Pegasus and its
affiliates no longer hold at least 25% of the 55,000 shares of Series A-1
Preferred originally issued to Pegasus (without taking into account any
dividends paid in kind), the Series A-1 Preferred will no longer have the right
to elect any directors, and the Board will be reduced to 7 members.
So long as Pegasus and its affiliates hold at least 25% of the 55,000
shares of Series A-1 Preferred issued to Pegasus (without taking into account
any dividends paid in kind), Company may not, without the approval of the
holders of a majority of the Series A-1 Preferred voting together as a separate
class:
1. amend, repeal or modify the Articles of Incorporation or
Bylaws in a way that adversely affects the Series A Preferred;
2. authorize a Realization Event (a liquidation, reorganization,
merger, sale or transfer of all or substantially all of Company's or any
subsidiary's assets) or a purchase or acquisition by Company or any of its
subsidiaries of any of their stock (except the repurchase of the Units, the
Attached Warrants, the Shortfall Warrants (discussed below) and Litigation
Warrants (discussed below) and the Common Stock issuable upon exercise of these
warrants);
3. declare or pay or set aside for payments any dividend or
distribution on Common Stock or any other junior stock or redeem or repurchase
any Common Stock or other junior stock;
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4. issue new capital stock or rights to acquire capital stock
other than pursuant to the: exercise of options under the 1987 stock option
plan; issuance of warrants or Common Stock issuable upon their exercise under
the new stock option plan discussed below; issuance of warrants to General
Electric Capital Corporation ("GECC") and Common Stock upon exercise thereof;
issuance of the Litigation Warrants discussed below; issuance of Common Stock
upon exercise of the Attached Warrants, the Shortfall Warrants and the
Litigation Warrants; issuance of Series A Preferred Stock as in kind dividends;
issuance of Series B Preferred Stock; and the issuance of equity securities the
proceeds of which are intended to be, and are immediately, used to redeem all
outstanding shares of Series A Preferred and at least one-half of all
outstanding Attached Warrants.
5. make investments in assets or equity of other companies if
the investment exceeds 10% of the assets of Company and its subsidiaries as of
the end of the previous fiscal year or the income of Company and its
subsidiaries will change by more than 10% because of the acquisition;
6. incur debt for borrowed money (including lease obligations
but not including trade debt) over an aggregate of $1 million;
7. amend the stock option plans or adopt new ones;
8. modify or enter into any employment agreement or other
compensation arrangement with any officer or director of Company or any
subsidiary;
9. create an executive or other committee of the Board of
Directors of Company or any subsidiary;
10. change in any material respect the nature of the business of
Company or any subsidiary; or
11. enter into any transaction with any affiliate of Company or
any subsidiary.
If a "Triggering Event" occurs, holders of Series A-1 Preferred have
the right to vote on all matters requiring action by Company's stockholders,
voting together as a single class with the holders of the Common Stock, with
each such Series A-1 Preferred holder entitled to a number of votes equal to
three votes multiplied by the number of shares of Common Stock which such
holder would have received upon exercise of such holder's Attached Warrants.
"Triggering Events" are (i) failure to redeem Series A Preferred Stock as
required, or, if repurchase is not permitted, Company fails to fulfill its
registration obligations (discussed below), (ii) failure to pay dividends on
the Series A Preferred Stock, (iii) failure to obtain approval of the Series A
Preferred Stock with respect to the transactions specified above, (iv) failure
of shareholders to approve the amendment increasing the amount of authorized
Common Stock to 20 million and to have such amendment become effective by May
31, 1998, (v) failure to issue Common Stock
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upon exercise of the Attached Warrants, (vi) breach of Company obligations
under the Registration Rights Agreement (discussed below), and (vi) a material
breach of certain obligations or certain representations of Company under the
Purchase Agreement.
REPURCHASE/REDEMPTION. At any time prior to October 19, 1998,
provided an amendment to Company's Articles of Incorporation increasing the
number of authorized shares of Common Stock to 20 million has become effective,
Company has the right to purchase all (but not less than all) the Series A
Preferred outstanding, one-half of the Attached Warrants not representing
accrued and unpaid dividends and any Attached Warrants representing accrued and
unpaid dividends at a price of 117.5% of the stated value of the shares of
Series A Preferred less cash dividends previously paid.
At any time after October 27, 1999, if Company has not exercised the
repurchase rights discussed in the preceding paragraph, Company may repurchase
all outstanding shares of Series A Preferred, all outstanding Attached
Warrants which are part of Units and all outstanding Common Stock into which
Attached Warrants have been exercised (other than Common Stock sold pursuant to
registration under the Securities Act or sold pursuant to Rule 144 -
"Nonpurchasable Stock") at a price equal to the greater of (i) the number of
shares of Common Stock for which the Attached Warrants are then exercisable
plus the number of shares of Common Stock which have been issued upon exercise
of Attached Warrants multiplied by the current market value (based upon the
previous 20 trading days) of the Common Stock or (ii) the amount necessary to
yield for each Unit (other than Units which have been transformed into
Nonpurchasable Stock) an annual return of 35% (including cash dividends
previously paid).
The right of Company to redeem Series A Preferred, Attached Warrants
and Common Stock issued upon exercise of Attached Warrants may not be exercised
until the earlier of (i) the date which is six months and one day following the
issuance to Pegasus of Litigation Warrants, provided that on or before that
date Pegasus is unconditionally released in full from any unused portion of the
Litigation Guaranty, or (ii) such time as Pegasus is unconditionally released
in full from the Litigation Guaranty (discussed below), provided no Litigation
Warrants have been issued prior to such release.
At any time after three years and six months following October 27,
1997, each holder of Series A Preferred may demand that Company redeem all (but
not less than all) Series A Preferred and Attached Warrants held by that
holder. The purchase price is the market price of the Common Stock for which
such Attached Warrants are then exercisable. If a Realization Event (as
defined above) occurs between the time of the demand for redemption and the
redemption date, then the holder shall receive the higher of (i) the market
price of the Common Stock or (ii) the amount equal to the cash which would have
been received upon the occurrence of the Realization Event had such warrants
been exercised immediately prior to the event. If Company is prohibited from
making the repurchase by any agreements evidencing indebtedness for borrowed
money or if repurchase would cause a default in such obligations or would
violate applicable law, Company must use reasonable best efforts to remove the
restrictions. If Company notifies the holder that, despite Company's best
efforts Company cannot fund the
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repurchase, Company must, at the request of the holder, register the Common
Stock for which the Attached Warrants which will not be repurchased may be
exercised. If Company will be redeeming Series A-1 Preferred in an amount
which would result in the loss of voting rights, but not all such Series A-1
Preferred is being redeemed, then the holder of the Series A-1 Preferred may
require Company to redeem only such lesser number of shares of Series A-1
Preferred as will not result in a loss of voting rights.
REMEDIES. Upon the occurrence of certain Triggering Events (see
discussion above), certain remedies (in addition to those noted above) are
afforded the holders of Series A Preferred. If an amendment to Company's
Articles of Incorporation increasing the number of authorized shares of Common
Stock to 20 million is not effective by May 31, 1998 and thereafter until it is
so adopted and effective or if Company fails to issue Common Stock upon
exercise of Attached Warrants, holders of Series A Preferred will be
entitled to receive all dividends, distribution and other payments which would
be paid or payable to a holder of the number of Common Shares for which the
Attached Warrants held by such Series A Preferred holder are exercisable. If
the amendment to the Articles as set forth in the preceding sentence is not
effective by May 31, 1998 and until it is thereafter adopted, dividends on
Series A Preferred to the extent permitted by law must be paid in cash. If a
Triggering Event occurs, Company's right of first refusal with respect to
certain transfers for value of Series A Preferred Stock and/or Units to third
parties not affiliated or associated with Pegasus shall cease.
TRANSFERS. Shares of Series A-1 Preferred Stock may only be
transferred together with the same number of Attached Warrants.
ATTACHED WARRANTS
If Company exercises its rights to repurchase the Series A Preferred,
the Attached Warrants not repurchased will have a term of seven years. If
Company has not repurchased the Series A Preferred, the term of the Attached
Warrants will not expire.
If Company has not exercised its rights to redeem Series A Preferred,
the exercise price of the Attached Warrants must be paid by delivery of Series
A Preferred Stock with a stated value plus accrued and unpaid dividends equal
to the exercise price. If, however, Company has exercised its rights to redeem
Series A Preferred, then the exercise price is payable at the option of the
holder in either cash or by a surrender of "in the money warrants."
The number of shares of Common Stock into which Attached Warrants are
exercisable and the exercise price are subject to adjustment, if a dividend is
payable to the holders of Common Stock in Common Stock, if the Common Stock is
subdivided or combined or if a dividend is paid on the Common Stock in cash,
evidence of indebtedness, securities or rights to acquire securities. If
additional shares of Common Stock or rights to acquire additional shares of
Common Stock or securities convertible into Common Stock, other than specified
permitted issuances, are issued for less than the greater of the then current
exercise price or the then
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current market price of the Common Stock, then the exercise price and number of
shares into which the Attached Warrants are exercisable shall be subject to
weighted-average antidilution protection. If, at any time prior to the
approval of an amendment to Company's Articles of Incorporation authorizing an
increase in the number of authorized shares of Company Common Stock to 20
million, Company pays or makes any dividend or distribution on Common Stock
which is not otherwise accounted for by the antidilution provisions of the
Attached Warrants, then that dividend or distribution shall also be paid or
made to the holders of the warrants as if the warrants had been exercised.
Company is required to reserve from its authorized but unissued shares
of Common Stock a sufficient number of shares of Common Stock to permit
exercise in full of all Attached Warrants. Company has reserved 2,267,421
shares of Common Stock for exercise of Attached Warrants and Shortfall
Warrants, but Company needs to authorize additional shares of Common Stock to
permit exercise in full of these warrants. Thus, Company's Board of Directors
has approved an amendment to Company's Articles of Incorporation for
presentation at the next stockholders meeting increasing the number of
authorized shares of Common Stock from 5 million to 20 million.
As indicated above, Attached Warrants can only be transferred as part
of Units with shares of Series A Preferred. If Company has repurchased Units
prior to October 19, 1998, this restriction shall no longer apply.
Attached Warrants are subject to repurchase at the option of the holder
after three years and six months from October 27, 1997, as indicated above.
SHORTFALL WARRANTS
Pegasus and GECC have entered into a Limited Supplemental Guaranty
(filed herewith) pursuant to which Pegasus guarantees up to $4 million of the
indebtedness of Company and its subsidiaries under the Credit Agreement (other
than that covered by the Litigation Guaranty discussed below). In exchange,
Pegasus has received warrants to purchase 1 million shares of Common Stock (the
"Shortfall Warrants," the form of which is filed herewith). PP is receiving
Shortfall Warrants to purchase 277,727 shares of Common Stock and PRP is
receiving Shortfall Warrants to purchase 722,273 shares of Common Stock,
subject to antidilution protection. The Shortfall Warrants have a term of
seven years and an exercise price of $1.8759559 per share.
If Pegasus is fully and unconditionally released from the Limited
Supplemental Guaranty, Company has a right to repurchase portions of the
outstanding Shortfall Warrants as follows: within the first six months after
October 27, 1997, 75% of outstanding Shortfall Warrants; within 6 to 9 months
after October 27, 1997, 50% of outstanding Shortfall Warrants; and within 9 to
12 months after October 27, 1997, 25% of outstanding Shortfall Warrants. The
purchase price is $.0001 per share of Common Stock into which the repurchased
warrants are exercisable. The purchase period is restricted in the same manner
that repurchase of Series A Preferred Stock is
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restricted during the first year as provided above; however, to the extent such
restriction is in effect, the time to repurchase is extended to a date thirty
days after the restriction lapses. If, as a consequence of the exercise of
Shortfall Warrants, the repurchase cannot be accomplished, then Company shall
have the right to repurchase a number of shares of Common Stock equal to the
number of shares of Common Stock into which the Shortfall Warrants which would
have been repurchased were exercised.
The exercise price of the Shortfall Warrants is payable in cash or by
surrender of in the money warrants. The Shortfall Warrants have the same
antidilution protection as is outlined above with respect to the Attached
Warrants.
At any time after three years and six months following October 27,
1997, each holder of a Shortfall Warrant may demand that Company redeem all or
a portion of the Shortfall Warrants held by that holder. The purchase price is
the market price of the Common Stock for which such Shortfall Warrants are then
exercisable. If a Realization Event (as defined above) has occurred between
the time of the demand for redemption and the redemption date, then the holder
shall receive the higher of (i) the market price of the Common Stock or (ii)
the amount equal to the cash which would have been received upon the occurrence
of the Realization Event had such warrants been exercised immediately prior to
the event, less the exercise price payable with respect to the number of shares
being redeemed. If Company is prohibited from making the repurchase by any
agreements evidencing indebtedness for borrowed money or if repurchase would
cause a default in such obligations or would violate applicable law, Company
must use reasonable best efforts to remove the restrictions. If Company
notifies the holder that, despite Company's best efforts, Company cannot fund
the repurchase, Company must at the request of the holder register the Common
Stock for which the Shortfall Warrants which will not be repurchased may be
exercised.
LITIGATION WARRANTS
If, at the request of Company, Pegasus provides Company with financing
(including, by way of illustration, a guaranty of Company's obligations, such
financing being termed the "Litigation Guaranty") for a judgment, appeal bond
or settlement in connection with the litigation pending in the United States
District Court for the Eastern District of Michigan known as Code Alarm, Inc.
v. Electromotive Technology Corporation, case number 87-CV-74022-DT (the
"Patent Litigation"), as contemplated in the Limited Litigation Guaranty
between Pegasus and GECC (filed herewith), then Company has agreed to issue
Pegasus warrants to purchase Common Stock (the "Litigation Warrants," the form
of which is filed herewith). For each $1 million financed, up to a maximum of
$12 million, Company will issue to Pegasus Litigation Warrants which will
increase Pegasus' aggregate ownership interest in the Company by 2%, on a fully
diluted basis. The exercise price for each one percent is $164,731. The
Litigation Warrants will expire seven years from October 27, 1997. If
Litigation Warrants were issued for a guaranty of $12 million by Pegasus, the
Litigation Warrants, together with the Attached Warrants and the Shortfall
Warrants held by Pegasus, if exercised, would represent approximately 78% of the
shares of Common Stock of Company on a fully diluted basis (assuming no
additional Attached Warrants have been issued, all dividends on Series A
Preferred are paid in cash, no changes have resulted by reason
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of the antidilution provisions of the warrants and no Attached Warrants or
Shortfall Warrants have been repurchased).
If Company repurchases all outstanding Units and the Common Stock for
which Attached Warrants have previously been exercised pursuant to its rights of
repurchase, then simultaneously therewith Company, at its option, has a right to
repurchase 95% of the outstanding Litigation Warrants and 95% of the shares of
Common Stock for which Litigation Warrants have been exercised (other than any
such shares which have been sold to a person or entity that is not an associate
or an affiliate of the initial holder). The purchase price is the number of
shares of Common Stock into which the all of the Litigation Warrants (whether
repurchased or not) are exercisable plus the number of shares of Common Stock
for which Litigation Warrants have been exercised (whether repurchased or not,
but not including shares sold to parties other than affiliates or associates),
multiplied by the current market price of a share of Common Stock, less the
exercise price of Litigation Warrants repurchased.
The exercise price of Litigation Warrants is payable in cash or by
surrender of in the money warrants. The Litigation Warrants have the same
antidilution protection as is outlined above with respect to the Attached
Warrants.
At any time after three years and six months following October 27,
1997, each holder of Litigation Warrants may demand that Company redeem all or
a portion of the Litigation Warrants held by that holder. The purchase price
is the market price of the Common Stock for which such Litigation Warrants are
then exercisable. If a Realization Event (as defined above) has occurred
between the time of the demand for redemption and the redemption date, then the
holder shall receive the higher of (i) the market price of the Common Stock or
(ii) the amount equal to the cash which would have been received upon the
occurrence of the Realization Event had such warrants been exercised
immediately prior to the event, less the exercise price payable with respect to
the number of shares being redeemed. If Company is prohibited from making the
repurchase by any agreements evidencing indebtedness for borrowed money or if
repurchase would cause a default in such obligations or would violate
applicable law, Company must use reasonable best efforts to remove the
restrictions. If Company notifies the holder that, despite Company's best
efforts, Company cannot fund the repurchase, Company must at the request of the
holder register the Common Stock for which the Shortfall Warrants which will
not be repurchased may be exercised.
PURCHASE AGREEMENT
The Purchase Agreement contains a number of covenants requiring
Company to take specified actions. Company is required to obtain term life
insurance in the amount of $5 million on Rand Mueller, Company President.
Company is required to seek shareholder approval by May 31, 1998 of an amendment
to its Articles of Incorporation increasing the number of shares of its
authorized Common Stock to 20 million. If Company issues any securities (other
than specified permitted issuances) which do not result in adjustment of the
Attached Warrants pursuant to their antidilution provisions, then Pegasus is
given a preemptive right to
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purchase up to a portion of such securities which would maintain the percentage
ownership in Company represented by Attached Warrants then held. The new
securities will be sold to Pegasus at the price and on the terms on which
Company is proposing to sell such securities to third parties. Until the
earlier of six months and one day following the issuance of Litigation Warrants
(provided that on or before that date Pegasus is unconditionally released in
full from any unused portion of the Litigation Guaranty) or such time as
Pegasus is unconditionally released from its Litigation Guaranty (provided no
Litigation Warrants have been issued), Company shall not permit a Realization
Event to occur.
Pegasus is prohibited from selling or transferring Units, Attached
Warrants, Shortfall Warrants or Litigation Warrants as provided in the Unit
Purchase Agreement.
If Company has not exercised its right to repurchase Units by October
19, 1998, and if any holder of Units desires to transfer for value any Units
to a third party which is not an affiliate or associate of that holder, then
Company or its designee shall have a right to purchase those Units on the same
terms and conditions as the holder is offering to the third party.
The conditions to closing of the equity financing by Pegasus included:
1. Execution of employment agreements or amendments to
existing agreements for Messrs. Mueller and Camalo in forms acceptable to
Pegasus (discussed below and filed herewith);
2. Adoption of a new non-qualified stock option plan for
management providing options to purchase 1,317,178 shares of Common Stock. The
Board adopted such a plan, the 1997 Stock Option Plan (filed herewith), and
made grants thereunder (see discussion below).
3. Company's Board of Directors irrevocably exempt both
(a) the transaction with Pegasus and (b) Pegasus, itself, and its affiliate
from the application of Chapter 7A of the Michigan Business Corporation Act
("MBCA"). Section 7A precludes certain types of transactions, so-called
business combinations, of a Michigan corporation with a ten percent shareholder
unless an advisory statement from the corporation's board of directors and
supermajority approval by the corporation's shareholders are first obtained.
Pursuant to Section 782(1)(b) of MBCA, Company's Board of Directors adopted a
resolution irrevocably providing that any business combination with Pegasus or
its affiliates enacted after Pegasus becomes an interested shareholder is
exempt from the requirements of Section 7A;
4. Company's Board of Directors amend Company's Bylaws
to exempt Company from the application of Chapter 7B of the MBCA. Section 7B
denies voting rights to shares of Michigan corporations that, when added to a
person's preexisting shares, increase the person's voting power to one-fifth or
more of the voting power of the corporation in the election of directors,
unless the corporation's shareholders (excluding the interested shareholders)
approve a
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resolution granting such rights. Company's Board of Directors amended the
Bylaws to make Section 7A inapplicable to Company;
5. Adoption of an amendment to Company's Bylaws
increasing the number of directors to permit the appointment of the two
directors which the Series A Preferred has the right to elect. Company's Board
of Directors adopted an amendment to the Bylaws which provides that the Board
of Directors shall consist of seven members, plus the aggregate number of
directors that the holders of each series of Preferred Stock are entitled to
elect;
6. Company's Board of Directors adopt a resolution
approving an amendment of the articles increasing the authorized Common Stock
to 20 million shares. To protect against the possibility that the shareholders
may not approve the amendment, warrant holders are given rights to receive
dividends and distributions as if they were owners of Common Stock. In
addition, Pegasus required that the Robyn L. Mueller Trust, the Kenneth M.
Mueller Charitable Remainder Trust and Rand W. Mueller agree to vote their
shares of Common Stock in favor of this amendment (this agreement is filed
herewith).
7. The Robyn L. Mueller Trust agrees (pursuant to an agreement
filed herewith) not to sell or dispose of a number of shares in any 12 month
period in excess of 20% of the number of shares of Company Common Stock
beneficially held by it at the beginning of each such 12 month period. Rand W.
Mueller agrees not to sell more than 20% of his shares of Company Common Stock
for a five year period. These obligations terminate on the earlier of five
years or when Pegasus and its successors and assigns no longer hold 25% of the
55,000 Units originally issued under the Purchase Agreement.
8. Grant of registration rights (see discussion below).
SENIOR SECURED CREDIT FACILITY
Company has replaced its senior secured debt facility with a new
facility as set forth in (i) the Credit Agreement dated as of October 24, 1997
among Company as Borrower, certain of Company's subsidiaries as other "Credit
Parties", GECC as Lender and Agent and other Lenders who may become parties
thereto (the "Credit Agreement") filed herewith (including attached exhibits
and annexes) and (ii) the Litigation L/C and Term Loan C Agreement dated as of
October 24, 1997 between Company as Borrower, GECC as Lender and Agent (the
"Litigation Agreement"), filed herewith (together with related collateral
documents). Under the Credit Agreement and the Litigation Agreement, GECC is
currently the only Lender, but GECC has the right to assign or sell
participations in the facility. A Lender's participation must be at least $5
million of the total facility.
The facility is composed of the following: (i) a revolving loan of up
to $12 million (the "Revolving Credit"), (ii) a $1.5 million term loan ("Term
Loan A"), (iii) a loan of up to $3 million to pay a final judgment in the
current Patent Litigation ("Term Loan B"), (iv) in lieu
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of Term Loan B and pursuant to the Litigation Agreement, up to $12 million to
procure a letter of credit to secure a supersedeas or appeal bond or similar
obligation in order to appeal a judgment of the U.S. District Court in the
Patent Litigation, provided that such judgment is not in excess of $12 million
(the "Litigation L/C"), and (v) if the Litigation L/C is paid or alternatively
if the Litigation L/C is not incurred or is terminated prior to its being
drawn, a loan of up to $12 million to facilitate payment of a settlement or
final judgment of the Patent Litigation ("Term Loan C"). The Shortfall
Warrants are being issued as consideration for a guaranty by Pegasus of $4
million of the Revolving Credit. If the Litigation L/C is issued, the
Litigation Warrants will be issued to Pegasus as consideration for its guaranty
of the Litigation L/C and Term Loan C.
Borrower is Company. Each U.S. subsidiary of Company, including
Tessco Group, Inc., Anes, Inc, Chapman Security Systems, Inc. and Intercept
Systems, Inc., is guarantying the obligations of Company under the facility.
All assets of Company and its U.S. subsidiaries are being pledged to GECC on a
combined basis to secure the facility. Company has also pledged the stock of
its U.S. subsidiaries to GECC. The facility is also secured by a pledge of one
share of Company's Series B Preferred Stock as discussed below.
The first loans under the facility were drawn down on October 27,
1997. The term of the facility is 3 years, with the outstanding balance of all
loans being due at that time. Term Loan A is amortized over three years in
equal quarterly payments plus interest. Term Loan B, if issued, will be
amortized over three years in equal quarterly installments plus interest. Term
Loan C, if issued, will be payable in quarterly installments equal to the
lesser of $250,000 or one-twelfth of its aggregate original principal amount.
A condition to the issuance of Term Loan B is that if the judgment
exceeds $3 million, Company shall have received the balance from net capital
contributions or net proceeds from a subordinated loan.
Interest may be based on the index rate or LIBOR. If based on the
index rate, the rates are index plus 1.5% for the Revolving Credit, index plus
1.75% for the Term Loan A, and index plus 2% for Term Loan B and Term Loan C.
The LIBOR rates are LIBOR plus 3.25% for the Revolving Credit, LIBOR plus 3.5%
for the Term Loan B, and LIBOR plus 3.75% for Term Loan B and Term Loan C.
The default interest rate is an additional 2%.
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The fees payable by Company in connection with the facility include a
closing fee, an annual monitoring fee, a letter of credit fee (other than the
Litigation L/C) of 2%, a Litigation L/C fee of 3%, and an unused facility fee of
0.4%.
Mandatory prepayments include: (i) if Company issues stock or any
debt securities, 100% of the net proceeds shall be used to prepay the
obligations or collateralize letter of credit obligations or the Litigation
L/C; (ii) if any asset is sold including stock of a subsidiary, the net
proceeds (including payment of senior liens on the asset sold) shall be used to
prepay the obligations; (iii) 100% of excess cash flow shall be applied to Term
Loan B or Term Loan C if either is outstanding; (iv) if proceeds of any money
judgment or other payment arising out of any litigation involving patents or
intellectual property are received, then either (i) 50% of such proceeds shall
be used to prepay the loans or cash collateralize the Litigation L/C (provided
neither Term Loan B or Term Loan C is outstanding and the Litigation L/C shall
not have been used) or (ii) 100% of such proceeds shall be used to prepay Term
Loan B or Term Loan C or to collateralize the Litigation L/C.
The Credit Agreement and Litigation Agreement contain representations,
covenants (including financial covenants) and events of default. Any
repurchase of Units, Attached Warrants, Shortfall Warrants or Litigation
Warrants requires the consent of GECC.
PEGASUS PURCHASE AND OTHER RIGHTS
GECC has granted to Pegasus pursuant to the letter dated October 27,
1997 filed herewith, the right to purchase the facility if the loans are
accelerated. The obligation to sell expires on the sixty-first day following
notice of acceleration given to Pegasus by GECC. The purchase price is 100% of
all obligations under the facility. In the Litigation Guaranty, the Lenders
and Agent agreed not to waive or modify certain provisions of the documents
evidencing the senior debt facility without the prior written consent of
Pegasus.
WARRANT PURCHASE AGREEMENT AND WARRANTS
In connection with providing the facility, Company and GECC entered
into a Warrant Purchase Agreement dated as of October 24, 1997, filed herewith.
Pursuant to that agreement, Company sold to GECC in a private placement under
the Securities Act warrants (the "GECC Warrants"), filed herewith. The GECC
Warrants entitle the holder to purchase 131,718 shares of Common Stock at an
exercise price of $1.8759559 per share. The number of shares of Common
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Stock into which the GECC Warrants are exercisable and the exercise price are
subject to adjustment for dilutive events as described above for the Attached
Warrants; however, the issuance of the Litigation Warrants is also a dilutive
event. The GECC Warrants have a 7 year term, and their exercise price may be
paid in cash or with in-the-money warrants.
SERIES B PREFERRED STOCK PLEDGE
As additional security for its loans, GECC required that Company
create a series of preferred stock designated Series B Preferred Stock and
cause one share of that stock to be pledged to GECC. As a consequence,
Company's Board of Directors adopted a resolution, pursuant to the authority
given to it in Company's Articles of Incorporation, approving a certificate of
designation of Series B Preferred Stock (the "Series B Certificate"), which
certificate has been filed with the State of Michigan, has become part of
Company's Articles of Incorporation and is filed herewith. Only one share of
Series B Preferred Stock is authorized. The share of Series B Preferred Stock
is entitled to dividends at the rate of $1.00 per year, has a liquidation
preference over Common Stock of $10 plus accrued but unpaid dividends, and is
subject to repurchase by Company in an amount equal to its liquidation
preference when all obligations under the Credit Agreement have been paid and
all commitments under the Credit Agreement have been terminated. The Series B
Preferred has the following voting rights: (i) if there is an event of default
under the Credit Agreement and the obligations thereunder are accelerated, then
the number of directors of Company shall be increased to one more than the
number of directors then authorized and the Series B Preferred Stock shall be
entitled to elect all these new directors; (ii) without the consent of the
Series B Preferred Stock, Company shall not amend, repeal, modify or supplement
any provision of its Articles of Incorporation, any certificate setting forth
the rights, preferences and privileges of any capital stock or Bylaws, if such
amendment, repeal, modification or supplement would adversely affect the
powers, designations, preferences or other rights of the Series B Preferred
Stock; and (iii) only such other voting rights as are required by law.
On October 23, 1997, Company sold for $10.00 to Craig Camalo the share
of Series B Preferred Stock. Company has a right to repurchase the share for
$10.00, plus accrued and unpaid dividends after the Credit Agreement is
terminated and all obligations thereunder have been paid in full. Mr. Camalo
has pledged that share of Series B Preferred Stock to GECC pursuant to a Pledge
Agreement filed herewith.
REGISTRATION RIGHTS
Company has entered into a Registration Rights Agreement with GECC and
Pegasus, filed herewith, pursuant to which Pegasus and GECC will receive
specified registration rights with respect to registrable securities. Pegasus
will receive the right to require that Company on five occasions register
shares of Common Stock and GECC will have one such right (at least 50,000
shares must be registered). There must be 6 months between such demand
registrations.
-14-
<PAGE> 15
Company's Board of Directors has a right to postpone a registration for up to
60 days. In addition, Pegasus and GECC are granted the right to participate in
any other registration of Common Stock which Company undertakes (other than a
registration on form S-4 or S-8 or a registration filed in connection with a
dividend reinvestment plan) for itself or for a person having demand
registration rights, but subject to underwriter cutbacks. All expenses of
registration (including one counsel for the registering holders), except
brokerage fees and commissions, will be paid by Company. Company is prohibited
from granting registration rights to any other person which are inconsistent
with those being granted to Pegasus and GECC. Pegasus and GECC may transfer
the registration rights with any transfer of the registrable securities. The
registration rights expire when there are no more registrable securities.
Registrable securities include (i) Common Stock issued upon exercise of the
Attached Warrants, Shortfall Warrants, Litigation Warrants and GECC Warrants
and (ii) Common Stock issued or issuable with respect to the Common Stock
referred to in clause (i) upon any stock split, dividend, recapitalization or
similar event, but excluding Common Stock sold in a public offering or sold in
a transaction exempt from the registration requirements of the Securities Act
such that all transfer restrictions and legends are removed.
1997 STOCK OPTION PLAN
As noted above, Company's Board of Directors adopted on October 21,
1997 a non-qualified stock option plan filed herewith. The Board granted
options as follows: options to purchase 790,306 shares of Common Stock to
Rand Mueller, options to purchase 200,624 shares to Peter Stouffer, options to
purchase 200,624 shares to Michael Schroeder, and options to purchase 125,624
shares to Craig Camalo. The options are exercisable at $1.88 per share,
payable in cash or by surrender of in the money options. One-third of the
options granted to each person vest on each of the third, fourth and fifth
anniversaries from the date of grant; however, if a change of control as
in the plan occurs, all options immediately vest. A condition to the
exercise of the grants is an amendment to Company's Articles of Incorporation
increasing the number of shares of Common Stock to 20 million.
Options vest and are exercisable only if the fair market value of Company's
Common Stock or its value in a change of control shall have reached or exceeded
the price specified during the period of time specified, measured from the date
of adoption of the plan:
From Plan Adoption Price
Up to 1 year $2 3/8
1 to 2 years $3
2 to 3 years $3 7/8
3 to 4 years $5
4 to 5 years $6 5/8
5 to 6 years $8 5/8
after 6 years $11 1/2
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<PAGE> 16
Options which are canceled or terminated cannot be reissued.
AGREEMENTS WITH DIRECTORS AND MANAGEMENT
KENNETH M. MUELLER - DIRECTOR
Company entered into an amended agreement (filed herewith) dated
October 1, 1997 with Kenneth M. Mueller, pursuant to which he will
provide consulting services, including with respect to public relations and
special projects. Mr. Mueller also agrees to continue to serve as a Director
of Company. For such services, Company will pay Mr. Mueller $14,000 per year,
which amount includes payment for his services as a Director. The agreement
has a three year term, that automatically renews for one year periods if not
terminated.
RAND W. MUELLER - CHAIRMAN OF THE BOARD, DIRECTOR, CHIEF EXECUTIVE OFFICER AND
PRESIDENT
Rand W. Mueller's employment agreement was amended as of May 20, 1997
and as of October 15, 1997 (the amendments are filed herewith). His
employment term was extended to May 31, 2001, and automatically
continues for successive one year periods thereafter, unless at least 24 months
prior to such termination Company gives notice that the employment will not be
continued. Mr. Mueller's annual salary is $500,000 starting on October 1,
1997. In addition, Mr. Mueller will receive an annual incentive bonus equal to
5% of operating income after the first $5 million of Company operating income.
PETER J. STOUFFER - DIRECTOR AND VICE PRESIDENT OF MANUFACTURING AND
ENGINEERING
Peter J. Stouffer and Company entered into an employment agreement as
of May 20, 1997 (filed herewith), with employment term provisions the same as
those in Rand W. Mueller's employment agreement described above. Mr.
Stouffer is to serve as Vice President of Manufacturing and Engineering. The
annual salary is $105,000. Company will pay Mr. Stouffer an annual bonus equal
to 1% of the first $1 million of Company operating income, and 2% of all
additional operating income. Mr. Stouffer will also be entitled to a bonus
based on the increase in shareholder value (the price of Company Common Stock).
Mr. Stouffer is subject to non-competition and confidentiality obligations
during his employment and for two years after termination of employment.
MICHAEL P. SCHROEDER - VICE PRESIDENT OF SALES AND MARKETING
Michael P. Schroeder and Company entered into an employment agreement
as of May 20, 1997 (filed herewith), with employment term provisions
the same as those in Rand W. Mueller's employment agreement discussed above.
Mr. Schroeder is to serve as Vice President of Sales and Marketing. His annual
salary is $90,000. He will be entitled to the same bonus arrangements and
subject to
-16-
<PAGE> 17
the same non-competition and confidentiality obligations as those is Mr.
Stouffer's agreement discussed above.
CRAIG S. CAMALO - VICE PRESIDENT OF FINANCE, CHIEF FINANCIAL OFFICER, TREASURER
AND SECRETARY
Craig S. Camalo and Company entered into an employment agreement as of
May 20, 1997, with employment term provisions the same as those in Rand W.
Mueller's employment agreement discussed above. Mr. Camalo is to serve as Vice
President of Finance and Chief Financial Officer. His annual salary is
$100,000. He will be entitled to the same bonus arrangements as those in Mr.
Stouffer's agreement discussed above. Mr. Camalo is subject to non-competition
and confidentiality obligations during his employment and for six months after
termination of employment.
Item 7. Financial Statements and Exhibits.
(c) Exhibits.
3.1.1 Certificate of Designation, Numbers, Powers, Preferences and
Relative, Participating, Optional and Other Rights of Series A
Preferred Stock of Code-Alarm, Inc. ("Company").
3.1.2 Certificate of Designation, Numbers, Powers, Preferences and
Relative, Participating, Optional and Other Rights of Series B
Preferred Stock of Company.
3.2.1 Bylaws of Company, as amended.
10.40 Credit Agreement dated as of October 24, 1997 (the "Credit
Agreement") among Company, General Electric Capital
Corporation ("GECC"), in its capacity as a "Lender", and the
other financial institutions which may from time to time
become parties to the Credit Agreement (GECC, in such
capacity, and such other financial institutions being
sometimes hereinafter referred to collectively as the
"Lenders" and individually as a "Lender"), and GECC, in its
separate capacity as agent for the Lenders (the "Agent") with
Exhibits and Annexes attached.
10.41 Security Agreement dated as of October 24, 1997 executed by
Company in favor of the Agent and the Lenders (Credit
Agreement).
10.42 Security Agreement dated as of October 24, 1997 executed by
Tessco Group, Inc. ("Tessco"), in favor of the Agent and the
Lenders (Credit Agreement).
10.43 Guaranty dated as of October 24, 1997 executed by Tessco in
favor of Agent and the Lenders (Credit Agreement).
10.44 Pledge Agreement dated as of October 24, 1997 executed by
Company in favor of the Agent and the Lenders (Credit
Agreement).
10.45 Pledge Agreement dated as of October 24, 1997 executed by
Craig S. Camalo in favor of the Agent and the Lenders (Credit
Agreement).
-17-
<PAGE> 18
10.46 Patent Security Agreement dated October 24, 1997 executed by
Company in favor of the Agent and the Lenders (Credit
Agreement).
10.47 Contribution Indemnification and Subordination Agreement dated
October 24, 1997 among the Credit Parties (Credit Agreement).
10.48 Litigation L/C and Term Loan C Agreement (the "Litigation
Agreement") dated as of October 24, 1997 among Company, Agent
and other financial institutions which may from time to time
become parties to the Litigation Agreement as Term Lenders.
10.49 Security Agreement dated October 2, 1997 executed by the
Company in favor of the Agent and the Term Lenders (Litigation
Agreement).
10.50 Security Agreement dated October 24, 1997 executed by Tessco
in favor of the Agent and the Term Lenders (Litigation
Agreement).
10.51 Guaranty dated as of October 24, 1997 executed by Tessco in
favor of the Agent and the Term Lenders (Litigation Agreement).
10.52 Pledge Agreement dated as of October 24, 1997 executed by
Company in favor of the Agent and the Term Lenders (Litigation
Agreement).
10.53 Pledge Agreement dated as of October 24, 1997 executed by
Craig S. Camalo in favor of the Agent and the Terms Lenders
(Litigation Agreement).
10.54 Patent Security Agreement dated as of October 24, 1997
executed by Company in favor of the Agent and the Term Lenders
(Litigation Agreement).
10.55 Warrant Purchase Agreement dated as of October 24, 1997
executed by GECC and Company.
10.56 Warrant to Purchase Common Stock of Company issued to GECC and
executed by Company.
10.57 Unit Purchase Agreement dated as of October 27, 1997 among
Company, Pegasus Partners, L.P. ("PP"), Pegasus Related
Partners, L.P. ("PRP").
10.58 Letter granting PP and PRP the right to purchase accelerated
obligations executed by GECC and acknowledged by Company.
10.59 Registration Rights Agreement dated as of October 27, 1997
among Company, PP, PRP and GECC.
10.60 Form of Attached Warrant to purchase Common Stock of Company.
10.61 Form of Shortfall Warrant to purchase Common Stock of Company.
10.62 Form of Litigation Warrant to purchase Common Stock of
Company.
10.64 Limited Supplemental Guaranty dated as of October 24, 1997 by
and among PP, PRP and GECC.
10.65 Limited Litigation Guaranty dated as of October 24, 1997 by
and among PP, PRP and GECC.
10.66 Company's 1997 Stock Option Plan.
10.67 Letter Agreement dated as of October 27, 1997 among Robyn L.
Mueller Trust, the Kenneth M. Mueller Charitable Remainder
Unitrust, Mr. Rand Mueller, PP, PRP and Company.
10.68 Amendment No.4 to Employment Agreement between Company and
Rand W. Mueller dated May 20, 1997, and Amendment No. 5 to
Employment Agreement between Company and Rand W. Mueller dated
May 29, 1997.
-18-
<PAGE> 19
10.69 Employment Agreement dated May 20, 1997 between Company and
Craig S. Camalo.
10.70 Employment Agreement dated May 20, 1997 between Company and
Peter Stouffer.
10.71 Employment Agreement dated May 20, 1997 between Company and
Michael Schroeder.
10.72 Letter Agreement dated October 1, 1997 between Company and
Kenneth M. Mueller.
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 hereto duly authorized.
CODE-ALARM, INC.
------------------------------
Date: November 10, 1997
By: /s/ RAND W. MUELLER
---------------------------
RAND W. MUELLER
President
-19-
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