CODED COMMUNICATIONS CORPORATION
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
SEPTEMBER 10, 1996
The Annual Meeting of Shareholders (the "Annual
Meeting")of Coded Communications Corporation (the "Company")
will be held at the offices of the Company, 1939 Palomar
Oaks Way, Carlsbad, California on September 10, 1996, at
9:00 a.m., local time, and at any and all adjournments
thereof, for the following purposes:
1. To elect a Board of Directors to serve for the
ensuing year until the next Annual Meeting and until their
successors are elected and qualified.
2. To consider and vote on the following proposals
(collectively, the "Investment Proposals"):
(a) The approval of the Mutual Agreement of Terms
and Conditions dated as of May 1, 1996 (the "Investment
Agreement") by and among the Company, Grupo Information,
Satellite and Advertising, S.A. de C.V. ("ISA"), Renaissance
Capital Parties, II LTD ("RenCap") and the holders of the
Company's $1,800,000 principal amount Bridge Loan (the
"Bridge Lenders");
(b) The amendment of the Certificate of Incorporation
to increase the number of authorized shares of common stock,
$.01 par value per share (the "Common Stock"), from
50,000,000 shares to 100,000,000 shares, to provide
primarily for the issuance of shares of Common Stock to ISA,
RenCap and the Bridge Lenders pursuant to the Investment
Agreement; and
(c) The amendment of the Certificate of Incorporation
to authorize 2,000,000 shares of preferred stock, $.01 par
value per share (the "Preferred Stock"), to be issued from
time to time in such amounts and designations as authorized
by the Board of Directors.
The effectiveness of each of the above three proposals
is contingent on the approval of the others, and no action
will be taken by the Company unless all such matters are
approved. Therefore, a vote against any of the proposals
may have the effect of a vote against the other proposals.
3. To ratify the appointment of Coopers & Lybrand, LLP
as independent accountants for the current year.
4. To transact such other business as may properly come
before the Annual Meeting and any adjournment or
adjournments thereof.
The Board of Directors fixed the close of business on
July 26, 1996, as the record date for the determination of
shareholders entitled to notice of, and to vote at, the
Annual Meeting or any adjournments thereof.
All shareholders are cordially invited to attend the
Annual Meeting in person. Those who cannot attend are urged
to complete, sign and date the accompanying proxy card and
return it promptly in the enclosed envelope. If you return
your proxy card you may nevertheless attend the Annual
Meeting and vote your shares in person.
This Notice of Annual Meeting of Shareholders is given
pursuant to Section 222 of the Delaware Corporation Law and
the Notice and the accompanying Proxy Statement are
scheduled to be mailed on or about August 9, 1996. All
inquiries with respect to the Annual Meeting, this Notice of
Annual Meeting and Proxy Statement and the enclosed proxy
card should be directed to the Company, Attention: John A.
Robinson, Jr., at its principal executive office, 1939
Palomar Oaks Way, Carlsbad, California 92009.
By Order of the Board of Directors,
/s/ John A. Robinson, Jr.
John A. Robinson Jr.
Chairman of the Board
Carlsbad, California
August 8, 1996
Please use the enclosed envelope to return your Proxy.
Returning your Proxy will not prevent you from voting in
person at the Annual Meeting. Your prompt response will
help your Company assure a quorum and avoid additional
expense for proxy solicitations.
<TABLE>
TABLE OF CONTENTS
PAGE
<S> <C>
INTRODUCTION 1
Matters to be Considered 1
Proxies and Voting 2
Solicitation of Proxies 2
SUMMARY OF THE INVESTMENT PROPOSALS 3
Introduction 3
Votes Required 3
Background; Board of Directors Recommendations 4
Certain Considerations 5
Summary of Investment Agreement and Second Agreement 7
Nomination of Directors and Election of the Chairman
of the Board 10
Capitalization 11
Selected Financial Information 12
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION 13
Pro Forma Condensed Consolidated Statements of
Income (Loss) 14
Pro Forma Condensed Consolidated Balance Sheet 15
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGERS
ELECTION OF DIRECTORS AND INFORMATION CONCERNING
DIRECTORS AND EXECUTIVE OFFICERS 17
General 17
Interest of Management and Insiders on Material
Transactions 19
Information About the Board of Directors and Committees of
the Board 19
Executive Compensation and Benefits 19
Summary of Coded Communications 1992 Stock Option Plan
(as Amended) 22
Compliance with Section 16(a) of the Securities Exchange
Act of 1934. 23
INVESTMENT PROPOSALS 23
Introduction 23
Votes Required 24
Background of and Reasons for the Investment Proposals 24
Board of Directors Recommendations 26
Source of Funds 28
Recent Price of Common Stock 28
Certain Considerations 28
Second Agreement with ISA 31
INVESTMENT AGREEMENT 32
Summary of Investment Agreement 32
Amendments to Certificate of Incorporation 34
Increase in Number of Authorized Shares of Common
Stock 35
Authorization of Preferred Stock 35
Employee Stock Option Plan 38
INFORMATION ON ISA AND MANAGEMENT FOLLOWING THE
INVESTMENT PROPOSALS 39
Background 39
Management and Directors 39
INFORMATION CONCERNING THE COMPANY 40
Price Range of Common Stock 40
Selected Financial Information 41
Capitalization 42
RATIFICATION OF SELECTION OF ACCOUNTANTS 43
OTHER MATTERS 43
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE 43
1995 ANNUAL REPORT ON FORM 10-KSB 44
</TABLE>
(i)
CODED COMMUNICATIONS CORPORATION
1939 PALOMAR OAKS WAY
CARLSBAD, CALIFORNIA 92009
PROXY STATEMENTNNUAL MEETING OF SHAREHOLDERS
SEPTEMBER 10, 1996
INTRODUCTION
This Proxy Statement is furnished in connection with
the solicitation of proxies for use at the Annual Meeting of
Shareholders (the "Annual Meeting") of Coded Communications
Corporation, a Delaware corporation (the "Company"), to be
held on September 10, 1996, at the offices of the Company,
1939 Palomar Oaks Way, Carlsbad, California, at 9:00 a.m.
local time, and at any adjournments thereof. The
accompanying Proxy is solicited by and on behalf of the
Board of Directors of the Company.
The Notice of Annual Meeting, this Proxy Statement, and
the form of proxy will be mailed to shareholders on or about
August 9, 1996. The shares represented by all properly
executed proxies received by the Board of Directors in time
for the Annual Meeting will be voted. Failure to return a
properly executed and dated proxy card or to vote in person
at the Annual Meeting will have the effect of a vote AGAINST
Proposals 2(a), (b) and (c).
Matters to be Considered
The matters to be considered and voted on at the Annual
Meeting will be:
1. To elect a Board of Directors to serve for the
ensuing year until the next Annual Meeting and until their
successors are elected and qualified.
2. To consider and vote on the following proposals
(collectively, the "Investment Proposals"):
(a) The approval of the Mutual Agreement of Terms and
Conditions dated as of May 1, 1996 (the "Investment
Agreement") by and among the Company, Grupo Information,
Satellite and Advertising, S.A. de C.V. ("ISA"), Renaissance
Capital Parties, II LTD ("RenCap") and the holders of the
Company's $1,800,000 principal amount Bridge Loan (the
"Bridge Lenders");
(b) The amendment of the Certificate of Incorporation
to increase the number of authorized shares of common stock,
$.01 par value per share (the "Common Stock"), from
50,000,000 shares to 100,000,000 shares to provide primarily
for the issuance of shares of Common Stock to ISA, RenCap
and the Bridge Lenders pursuant to the Investment Agreement;
and
(c) The amendment of the Certificate of Incorporation
to authorize 2,000,000 shares of preferred stock, $.01 par
value per share (the "Preferred Stock"), to be issued from
time to time in such amounts and designations as authorized
by the Board of Directors.
The effectiveness of each of the above three proposals
is contingent on the approval of the others, and no action
will be taken by the Company unless all such matters are
approved. Therefore, a vote against any of the proposals
may have the effect of a vote against the other proposals.
3. To ratify the appointment of Coopers & Lybrand, LLP
as independent accountants for the current year.
4. To transact such other business as may properly
come before the Annual Meeting and any adjournment or
adjournments thereof.
Proxies and Voting
A Proxy for use at the Annual Meeting is enclosed.
Shareholders will be entitled to one vote per share on all
matters presented at the Annual Meeting. Any shareholder
who executes and delivers a Proxy has the right to revoke it
at any time before it is exercised by filing with the
Company a written revocation of the Proxy or a duly executed
Proxy bearing a later date, or by the shareholder personally
appearing at the Annual Meeting and casting a contrary vote.
Subject to such revocation, all shares represented by a
properly executed Proxy received in time for the Annual
Meeting will be voted in accordance with the instructions
contained therein, and in the absence of instructions will
be voted "FOR" the nominees for directors named herein;
"FOR" the Investment Proposals; and FOR the ratification of
independent accountants. The Board of Directors does not
anticipate any matters being presented at the Annual Meeting
other than as set forth in the accompanying Notice of Annual
Meeting. If, however, any other matters are properly
presented at the Annual Meeting, the Proxy will be voted by
the proxyholders in accordance with the discretionary
authority conferred in the Proxy.
The shareholders are entitled to cumulative voting for
directors if the Company is characterized as a pseudo-
California corporation pursuant to California law.
Generally, a corporation is a pseudo-California corporation
if more than 50% of its property, payroll and sales are
located or generated in California, and more than 50% of its
voting securities are held of record by persons resident in
California. Currently, the Company believes that it is a
pseudo-California corporation.
No shareholder may cumulate votes, however, unless a
shareholder has announced at the Annual Meeting the
intention to do so, but if any shareholder makes such an
announcement, all shareholders may cumulate votes.
Cumulative voting rights entitle a shareholder to give one
nominee as many votes as are equal to the number of
Directors to be elected, multiplied by the number of shares
owned by such shareholder, or to distribute his or her votes
as the shareholder sees fit among two or more nominees on
the same principle, up to the total number of nominees to be
elected. The three nominees for Director receiving the
highest number of votes at the Annual Meeting from the
holders of Common Stock will be elected.
At the close of business on July 26, 1996, the record
date for purposes of determining the shareholders entitled
to notice of, and to vote at, the Annual Meeting, there were
issued and outstanding 24,830,201 shares of the Common
Stock. The required quorum for the Annual Meeting is a
majority of outstanding shares of Common Stock (12,415,101
shares) represented in person or by proxy. Assuming a
quorum is present at the Annual Meeting, directors will be
elected by a plurality of the votes cast by the shares
present and entitled to vote in the election at the Annual
Meeting. The approval of each of the Investment Proposals,
requires an affirmative vote of a majority of the
outstanding Common Stock entitled to vote at the Annual
Meeting (i.e., the affirmative vote of 12,415,101 shares).
The ratification of the appointment of independent
accountants requires the vote of a majority of the shares of
Common Stock present and entitled to vote at the Annual
Meeting.
At July 26, 1996, ISA held 10,000,000 shares of Common
Stock, or approximately 40% of the outstanding shares of
Common Stock. ISA has indicated it will vote all of its
shares "FOR" approval of the Investment Proposals. In
addition, the management of the Company has indicated that
they will vote "FOR" the approval of the Investments
Proposals. See "Security Ownership of Certain Beneficial
Owners and Management."
Solicitation of Proxies
The enclosed Proxy is solicited on behalf of the Board
of Directors of the Company. The cost of this solicitation
will be borne by the Company. This will include the cost of
supplying necessary additional copies of the solicitation
material (and, if requested, the annual report to
shareholders) to beneficial owners of shares held of record
by brokers, dealers, banks and voting trusts, and their
nominees, and, upon request, the reasonable expenses of the
record holders for completing the mailing of such materials
and reports to such beneficial owners. The original
solicitation will be by mail. Following the original
solicitation, certain individual shareholders may be further
solicited through telephonic or other oral communications
from management. Management may elect to use specially
engaged employees or paid solicitors, and the cost of these
services will be borne by the Company.
SUMMARY OF THE INVESTMENT PROPOSALS
The following is a brief summary of the more detailed
information contained in this Proxy Statement with respect
to the Investment Proposals. Cross references in this
Summary are to the captions or sections of this Proxy
Statement unless otherwise indicated.
Shareholders are urged to read this Proxy Statement
carefully and in its entirety.
Introduction
The shareholders of the Company will be asked at the
Annual Meeting to consider and act upon the Investment
Proposals, which contemplate, among other things, approval
of the grant of an option to ISA to acquire approximately
49,009,000 shares of Common Stock (the "Option") (of which
5,000,000 shares of Common Stock have already been issued to
ISA as of July 26 1996 pursuant to the Second Agreement
described below), the issuance of Series A Preferred Stock
to the Bridge Lenders (which includes RenCap with $1,000,000
in principal amount of the Bridge Loan), and the issuance of
a 6% debenture to RenCap, which is convertible into Series B
Preferred Stock upon the Company meeting certain financial
goals or the Company's Common Stock trading at or above a
certain price. For purposes of effecting the Investment
Proposals, the Board of Directors approved the execution and
delivery by the Company of the Investment Agreement which
provides for the transactions and acts collectively
constituting the Investment Proposals. The Investment
Agreement also requires that the Company amend its
Certificate of Incorporation in the form set out elsewhere
in this Proxy Statement (i) to increase the number of
authorized shares of Common Stock to 100,000,000 shares and
(ii) to authorize 2,000,000 shares of Preferred Stock. Upon
the exercise of the Option held by ISA, the Company is
required to authorize and issue 8,000 shares of Series A
Preferred Stock and to authorize 48,000 shares of Series B
Preferred Stock. See "Investment Agreement." Assuming ISA
elects to exercise its Option, the Board of Directors
currently anticipates effecting the transactions
contemplated by the Investment Proposals as soon as
practical.
Effective July 17, 1996, ISA, RenCap and the Company
entered into a second agreement (the "Second Agreement").
The Second Agreement does not require shareholder approval
and the Company is NOT soliciting proxies from shareholders
for approval of the Second Agreement. In accordance with
the provisions of the Second Agreement, ISA funded the
$1,000,000 Working Capital Loan initially agreed to in the
Investment Agreement and immediately converted the loan into
4,000,000 shares of Common Stock at a conversion price of
$.25 per share. Additionally, ISA placed product orders with
the Company in the amount of approximately $2,000,000. As
part of the order placement, ISA deposited with the Company
approximately $500,000 as a down payment for the orders.
These orders will be credited against the $10,000,000 worth
of orders ISA has agreed to place with the Company under the
Investment Agreement. Currently, ISA has placed
approximately $3,000,000 worth of orders with the Company,
leaving only $7,000,000 worth of orders still to be placed
with the Company in accordance with the terms of the
Investment Agreement. In accordance with the terms of the
Second Agreement, the Company issued 6,000,000 shares of
Common Stock to ISA. Of these shares, 5,000,000 shares will
be credited against the number of shares ISA is entitled to
under its Option, thereby entitling ISA to only
approximately 44,009,000 shares upon exercise of its Option.
In the event ISA does not exercise its Option under the
Investment Agreement, then ISA will nevertheless continue to
own the 10,000,000 shares of Common Stock issued pursuant to
the Second Agreement and ISA will have no further commitment
to place additional product orders with the Company. "See
Investment Proposals - Second Agreement with ISA."
Votes Required
Under Delaware Law, the required quorum for the Annual
Meeting is a majority of outstanding shares of the Company's
Common Stock represented in person or by proxy. Assuming a
quorum is present, approval of the Investment Proposals
requires the affirmative vote by a majority of the Company's
outstanding Common Stock entitled to vote at the Annual
Meeting. The Investment Agreement does not require the
approval of shareholders; however, the increase in the
number of shares of authorized Common Stock and the
authorization of Preferred Stock do require shareholder
approval. See "Introduction - Proxies and Voting."
The effectiveness of each of the three Investment
Proposals is contingent on the approval of the others, and
no action will be taken by the Company to consummate the
Investment Agreement unless all of the three Investment
Proposals are approved. Therefore, the non-vote or a vote
against any of the Investment Proposals may have the effect
of a vote against the other related proposals. If a
majority of shares voting at the Annual Meeting vote "FOR"
the Investment Proposals, but the affirmative vote of
shareholders falls short of the required majority of
outstanding shares because of, among other things, the non-
vote of brokers, nominees and shareholders, then the Company
intends to pursue an agreement with ISA, RenCap and the
Bridge Lenders on terms and conditions the Board of
Directors deems to be in the best interest of the Company
and its shareholders. Any further agreements may be
structured so that shareholder approval will not be
required. However, if the Investment Proposals are not
approved by the requisite number of shares, there is no
assurance that the Board of Directors can negotiate any new
agreement with all parties on terms and conditions
acceptable to all parties.
At July 26, 1996, ISA held 10,000,000 shares of Common
Stock, or approximately 40% of the outstanding shares of
Common Stock. ISA has indicated it will vote all of its
shares "FOR" approval of the Investment Proposals. In
addition, the management of the Company has indicated that
they will vote "FOR" approval of the Investment Proposals.
See "Investment Proposals-Introduction" regarding ISA's
early funding of the Working Capital Loan and its conversion
into shares of Common Stock.
If the shareholders approve the Investment Proposals,
but ISA does not exercise its Option, the Board will proceed
with the amendment to the Certificate of Incorporation, so
that the Certificate will authorize 100,000,000 shares of
Common Stock and 2,000,000 shares of Preferred Stock.
Therefore, the Board will have the flexibility to issue
additional shares of Common Stock and Preferred Stock
without further shareholder approval.
Background; Board of Directors Recommendations
The Board of Directors of the Company believes the
Investment Proposals and the Second Agreement are fair to,
and in the best interests of, the Company and its
shareholders. The Investment Agreement and the Second
Agreement were unanimously approved by the Board of
Directors. In evaluating the transactions contemplated by
the Investment Agreement and the Second Agreement, the Board
of Directors considered the following factors in relative
order of importance: (a) ISA's commitment to place
$10,000,000 in orders for the Company's products over an 18-
month period, which is anticipated to have a substantial
positive economic impact on the operations of the Company
over the next 12 months; (b) ISA's decision that it would
not award any future orders to the Company unless the
transaction was consummated, because of ISA's belief that
the financial instability of the Company and its lack of
liquidity presented a significant risk to ISA and its
customers; (c) the immediate release by ISA of approximately
$3,000,000 in product orders accompanied by cash deposits
for the product orders of approximately $1,000,000; (d) the
agreement of RenCap and the Bridge Lenders to restructure
secured debt of approximately $6,600,000, all of which had
been declared in default or for which events of default
existed; (e) the potential impact the Investment Proposals
were anticipated to have on the market value of the
Company's Common Stock; (f) the potential dilution to
existing shareholders' Common Stock ownership interest in
the Company; (g) ISA's funding of a $1,000,000 Working
Capital Loan and its immediate conversion into 4,000,000
shares of Common Stock; and (h) the change in the Company's
Board of Directors and change in control of the Company in
light of ISA's 69% or more ownership interest in the
Company's Common Stock. The Board also carefully considered
the immediate need for capital to finance operations, and
alternatives to the Investment Proposals and the likelihood
of such alternatives, including public or private equity or
debt financing, a sale of the Company's assets or a possible
foreclosure action on the Company's assets by the secured
creditors. The Board and management of the Company
discussed the alternatives with its financial advisors, W.B.
McKee Securities, Inc. and Strategica Group; and RenCap and
the Bridge Lenders. No written or oral financial analysis
was performed by the Company's financial advisors.
The Board of Directors unanimously concluded that it is
in the best interests of the Company and its shareholders to
consummate the transactions with ISA, RenCap and the Bridge
Lenders. The Board of Directors unanimously recommends that
shareholders vote FOR all of the proposals collectively
comprising the Investment Proposals. The Second Agreement
does not require shareholder approval and the Company is NOT
soliciting proxies from shareholders for approval of the
Second Agreement.
See "Investment Proposals-Background of and Reasons for
the Investment Proposals" and "Board of Directors
Recommendation."
Certain Considerations
While the Board of Directors is of the opinion that the
Investment Proposals are in the best interests of the
Company and its shareholders, the approval of the Investment
Proposals may have certain potential adverse effects which
shareholders should consider. These considerations are
summarized below.
Change in Composition of Board of Directors.
Upon exercise of its Option, ISA will be entitled to
appoint and thereafter nominate three of the five members of
the Board. In addition, the Board of Directors must elect
as the Chairman of the Board the director designated by ISA.
Further, because ISA will own a majority of the outstanding
Common Stock, ISA will have the power, in the absence of any
agreements regarding the composition of the Board or
cumulative voting, to elect all of the directors. RenCap
will have the right to nominate one director or to have one
representative attend Board meetings. John Robinson,
currently a member of the Board of Directors and the
Company's CEO and President, is expected to continue as a
director of the Company; however, if Mr. Robinson resigns or
is removed from the Board of Directors, then a committee
composed of one representative of ISA and one representative
of RenCap will have the right to nominate Mr. Robinson's
replacement. If ISA exercises its Option, Messrs. Borgardt
and Kenney will resign from the Board.
Commitment for Product Orders.
ISA has committed to place $10,000,000 in orders for
the Company's products from ISA customers in Mexico and
Latin America, over an 18-month period. ISA, however, is
not the end-use customer, and ISA's ability to deliver
orders for products may be impacted by events outside the
control of ISA, including economic and political conditions
in Mexico and Latin America, the availability of end-user
financing for the purchase of equipment, and the
compatibility of the Company's technology with the
customer's existing radio systems. ISA's commitment to
place $10,000,000 in orders will be secured by ISA placing
in escrow, pursuant to the Investment Agreement, 50% of the
shares of the Company's Common Stock to be issued to ISA
upon exercise of its Option. If ISA places less than
$10,000,000 in product orders with the Company, then ISA
will forfeit 2.4 shares of Common Stock for each dollar in
orders less than $10,000,000. To date in 1996, ISA had
placed approximately $3,000,000 in orders for the Company's
products, representing 30% of its total order commitment.
Change of Control of the Company.
As a result of the Second Agreement, ISA beneficially
owns 40% of the outstanding Common Stock. The beneficial
ownership of 40% of the Common Stock may give ISA effective
control of the Company in certain instances, including but
not limited to, election of a majority of the Board of
Directors, transactions for the sale of the Company, or the
sale of all or substantially all of the Company's assets.
Additionally, the Investment Agreement grants to ISA an
Option to receive shares that will represent a majority of
the outstanding shares of Common Stock. Therefore, approval
of the Investment Proposals will prevent the sale of the
Company or its assets to a buyer other than ISA, without the
approval of ISA.
As a result of the approval of the Investment Proposals
by the shareholders, ISA will have control of the Board of
Directors and beneficial ownership of a majority of the
outstanding shares of Common Stock. Therefore, ISA will
have the ability to approve transactions that may result in
the Company no longer being required to file reports with
the Securities and Exchange Commission or to cause the
Company's Common Stock to be delisted from a national
securities exchange or removed from quotation on NASDAQ,
should the Common Stock be listed or quoted in the future.
ISA has expressed its present intent to maintain the Company
as a publicly-held and traded company.
Conflicts of Interest.
The Company, ISA, RenCap and the Bridge Lenders have
agreed to maintain the number of shares of Common Stock
available for grant to employees, including officers and
directors, under the Company's 1992 Stock Option Plan to an
amount equal to approximately 15% of the fully diluted
number of outstanding shares of Common Stock, or
approximately the same percentage in effect prior to the
transactions contemplated by the Investment Agreement. All
of the members of the Board of Directors participate in the
1992 Option Plan, and two officers who also serve as members
of the Board of Directors, John Robinson and Steven
Borgardt, have been granted a significant number of options
to purchase shares of Common Stock under the 1992 Stock
Option Plan. Because of their participation in the 1992
Stock Option Plan, Messrs. Robinson and Borgardt may not be
considered disinterested with respect to the Investment
Proposals. Messrs. Robinson and Borgardt have informed ISA
of their intent to vote the shares of the Company's Common
Stock held by them in favor of the Investment Proposals. See
"Investment Agreement - Employee Stock Option Plan" and
"Security Ownership of Certain Beneficial Owners and
Management." In addition, conflicts could arise in future
commercial relationships between the Company and ISA.
ISA may be characterized as having a conflict of
interest because it holds 40% of the outstanding Common
Stock at July 26, 1996 and has indicated it will vote all of
its shares "FOR" the Investment Proposals, which will result
in ISA holding approximately 78% of the Common Stock
(excluding the conversion of Series A and Series B Preferred
Stock into Common Stock).
Certain Federal Income Tax Consequences.
The Company and its subsidiaries have a combined
Federal net operating loss carryforward benefit of
approximately $30,000,000. The Second Agreement, for
Federal income tax purposes, will likely result in an
"ownership change" and, as a result, the Company's annual
use of Federal net operating loss carryforward tax benefits
could be severely limited. Due to this limitation, only a
portion of the Company's Federal net operating loss benefits
may ultimately be utilized, but then only in the event the
Company has future taxable income. A determination of the
annual limitation of future income tax benefits, which has
not been calculated as yet, will be subject to various
factors existing at the date the ownership change was
effected. ISA's organization as a foreign corporation has
no impact on the determination of whether an ownership
change has occurred.
Regulatory Matters.
The Company's wholly-owned subsidiary, Decom, pursuant
to Federal regulations, has been granted a classified
security clearance. The Company notified the Department of
Defense of the transactions contemplated by the Investment
Agreement and the issuance to ISA of approximately 40% of
outstanding Common Stock pursuant to the Second Agreement.
As a result of ISA's foreign ownership, control and
influence, the Department of Defense will review the
Company's organization, operations and management and,
subject to this review, it may revoke Decom's classified
security clearance. In determining whether Decom is under
foreign ownership, control and influence, the Department of
Defense will consider the relative significance of the
following factors: (a) the level of foreign ownership; (b)
management positions held by foreign interests such as
directors, officers and executive personnel; (c) whether
foreign interests control or are in a position to control or
influence the election or appointment of directors or
officers; (d) contracts with an indebtedness to foreign
interests; and (e) any other factors that indicate a
capability on the part of the foreign interest to control or
influence the operations and management of Decom. ISA has
agreed to take all reasonable actions requested by the
Department of Defense to exclude ISA and its directors and
officers from the classified business and operations of
Decom. The Department of Defense has not advised the
Company of any timetable regarding its deliberations. The
revocation of Decom's classified security clearance could
have an adverse impact on Decom's future operations. Decom
was not awarded any prime contracts or subcontracts
requiring a classified security clearance in the last 12
months.
Pursuant to the regulations generally referred to as
the "Exon-Florio Regulations", the Company and ISA have
filed a joint notice describing the Investment Proposals and
the Second Agreement with the Committee on Foreign
Investment in the United States ("CFIUS"). Under the Exon-
Florio Regulations, if CFIUS does not determine to undertake
an investigation of the transactions contemplated by the
Investment Agreement within thirty (30) days of receipt of
the joint notice, or if an investigation is undertaken but
there is no finding by the President within sixty (60) days
that the Investment Proposals and the Second Agreement
threaten to impair the national security of the United
States, then the Investment Proposals and the Second
Agreement will no longer be subject to any governmental
action under the Exon-Florio Regulations. However, if there
is an investigation and an adverse presidential finding, the
Investment Proposals and the Second Agreement may be
suspended temporarily or prohibited.
Blank Check Preferred Stock.
As part of the proposals comprising the Investment
Proposals, the Company's Certificate of Incorporation will
be amended to authorize the issuance by the Company's Board
of Directors, without the necessity of further notice or
authorization by stockholders, of up to 2,000,000 shares of
Preferred Stock. The Preferred Stock may be issued from
time to time in one or more series and may have such voting
powers, preferences and relative rights, designations,
qualifications and limitations as the Board of Directors may
fix by resolution at the time of issuance. The
authorization of a class of preferred stock may be viewed as
potentially having the effect of discouraging an unsolicited
attempt by any person or entity to acquire control of the
Company. Authorized shares of preferred stock can be
issued, and have in the past been issued by some
corporations, with voting or conversion privileges intended
to make the acquisition of the issuer more difficult or
costly. By allowing the Board of Directors to establish a
class or series of preferred stock without shareholder
approval, the amendment of the Company's Certificate of
Incorporation could in the future discourage such an attempt
to acquire control of the Company or limit the shareholders'
ability to participate in certain types of transactions
(such as an unsolicited tender offer at a premium price to
market), whether or not such transactions are favored by a
majority of the shareholders, and, as a result, could
enhance the ability of officers and directors to retain
their positions. Pursuant to the Investment Proposals, upon
the exercise of the ISA Option, the Board of Directors will
authorize 8,000 shares of Series A Preferred Stock and
48,000 shares of Series B Preferred Stock for issuance by
the Company. See "Investment Agreement - Authorization of
Preferred Stock."
In the event shareholders approve the Investment
Proposals, but ISA does not exercise its Option, the Board
of Directors will proceed with the Amendment to the
Certificate of Incorporation to authorize 2,000,000 shares
of preferred stock. Therefore, the Board of Directors will
have the flexibility to issue additional shares of Preferred
Stock without further shareholder approval.
See "Investment Proposals - Certain Considerations."
Summary of Investment Agreement and Second Agreement
The material provisions of the Investment Agreement
between the Company, ISA, RenCap and the Bridge Lenders
(which includes RenCap as a Bridge Lender holding $1,000,000
of the total principal amount of the Bridge Loan), are
described below. The following discussion is qualified in
its entirety by reference to the text of the Investment
Agreement, a copy of which is attached as Exhibit A to the
proxy statement.
Pursuant to the Investment Agreement entered into among
the Company, ISA, RenCap, and the Bridge Lenders on May 1,
1996, ISA has the right, as of the date of the Investment
Agreement or pursuant to the exercise of its Option
thereunder, to the following: (i) to receive approximately
49,009,000 shares of newly issued Common Stock (of which
5,000,000 shares of Common Stock have already been issued to
ISA pursuant to the Second Agreement), giving ISA a Common
Stock ownership interest in the Company of approximately 69%
(assuming the conversion of Series A and Series B Preferred
Stock into shares of Common Stock); (ii) to be appointed as
the Company's exclusive distributor of mobile data products
in Mexico and Central and South America for 18 months; (iii)
to appoint and thereafter nominate the majority of the
members of the Company's Board of Directors, including the
Chairman of the Board; (iv) and to manage and control the
daily operations of the Company. Except for the right to
manage and control the daily operations of the Company and
the appointment as the Company's exclusive distributor of
mobile data products in Mexico, and Central and South
America, which were effective on May 1, 1996, all other
rights will become effective at the time ISA exercises its
Option under the Investment Agreement. Since May 1, 1996,
ISA has been primarily involved with assisting the Company
to restructure and reduce its secured and unsecured debt,
and ISA is working with the Company's current management to
improve organizational and operating efficiency. The Option
is exercisable, by ISA for a period of up to twenty days
after the date of shareholder approval of the Investment
Proposals, or as extended by ISA. The Investment Agreement
requires stockholder approval on certain matters on or
before June 30, 1996. ISA has extended this date to
September 30, 1996.
ISA and RenCap have agreed that during the period
before the exercise of the Option by ISA, ISA and RenCap
will not commence foreclosure pursuant to any of their
respective security agreements without the written consent
of the other party. ISA and the Bridge Lenders also have
agreed not to commence foreclosure pursuant to any of their
respective security agreements during the period before ISA
exercises its Option without the mutual consent of the
other party.
Under the Investment Agreement, the Company received or
is to receive, (i) a deposit from ISA of $500,000 as advance
payment for $1,000,000 in orders for the Company's products;
(ii) a deposit from ISA of $400,000 placed in a third-party
escrow, representing a contribution to the capital of the
Company, such deposit to be released to the Company at the
time ISA exercises its Option; (iii) a commitment to loan
the Company $1,000,000 for working capital (the "Working
Capital Loan"), with funding of the loan to be made at the
time ISA exercises its Option; (iv) the agreement of RenCap
and the Bridge Lenders to restructure their secured debt
(described below) at the time ISA exercises its Option; and
(v) a commitment from ISA to place $10,000,000 in orders for
the Company's products, over an 18-month period commencing
on the date of the Investment Agreement. ISA's commitment
to place $10,000,000 in orders for the Company's products
will be secured by ISA placing in escrow, pursuant to the
Investment Agreement, 50% of the shares of the Company's
Common Stock to be issued to ISA. If ISA places less than
$10,000,000 in product orders with the Company, then ISA
shall forfeit 2.4 shares of the Company's Common Stock for
each dollar in orders less than $10,000,000. Further, if ISA
does not exercise its Option and the shareholders approve
the transaction, Company has the right to retain $200,000 of
the $400,000 capital contribution. The Working Capital Loan
will be due one year from the date made and will pay
interest at the rate of 6% per year. The Working Capital
Loan is convertible (at the option of ISA) into shares of
the Company's Common Stock at a price of $.25 per share, and
will be collateralized by a security interest in
substantially all of the assets of the Company, subject to a
more senior priority security interest in the Company's
assets collateralizing the 6% Note to be issued to the
Bridge Lenders and any other future working capital loans
from third party lenders.
Second Agreement With ISA
On July 17, 1996, ISA and the Company entered into a
second agreement (the "Second Agreement") pursuant to which
(i) ISA funded in advance the $1,000,000 principal amount
Working Capital Loan required under the Investment Agreement
and immediately converted the working capital loan into
4,000,000 shares of
Common Stock at a price of $.25 per share; (ii) ISA
placed in advance product orders of approximately
$2,000,000, together with a cash deposit of approximately
$500,000 against these orders; and (iii) the Company issued
6,000,000 shares of Common Stock to ISA. Of the 6,000,000
shares of Common Stock issued to ISA, 5,000,000 shares, or
approximately 10% of the shares to be issued to ISA under
the Investment Agreement, will be credited against the
49,009,000 shares of Common Stock to be issued to ISA
pursuant to the Investment Agreement, (if shareholders
approve the Investment Agreement and ISA exercises its
Option). The balance of 1,000,000 shares of Common Stock
were issued to ISA in consideration for, among other things,
ISA's early funding of the Working Capital Loan and its
immediate conversion into shares of Common Stock, and the
release in advance by ISA of $2,000,000 in product orders.
Pursuant to the July 17, 1996 agreement, the $2,000,000 in
orders placed by ISA are to be credited against ISA's
commitment under the Investment Agreement to place
$10,000,000 in orders for the Company's products. To date in
1996, ISA has placed orders totaling approximately
$3,000,000 with the Company, or approximately 30% of its
total order commitment under the Investment Agreement. In
the event ISA does not exercise its Option under the
Investment Agreement, then ISA will nevertheless continue to
own the 10,000,000 shares of Common Stock issued pursuant to
the Second Agreement and ISA will have no further commitment
to place additional product orders with the Company. See
"Investment Proposals-Second Agreement with ISA."
Restructure of RenCap Secured Debt
Upon the exercise of ISA's Option, RenCap will amend
its $4,000,000 principal amount, 12% Convertible Debenture,
and all interest accrued and payable thereon, totaling
approximately $4,800,000, to a 6% debenture ("6%
Debenture"), principal payable in seven years, with interest
of 6% per year payable semi-annually. Interest is to be
paid 50% in cash and 50% in shares of the Company's Common
Stock. The 6% Debenture is to be collateralized by
substantially all of the assets of the Company; however,
this security interest is to be subordinated to existing
senior debt, future working capital debt and the 6% Note.
The 6% Debenture is convertible into 48,000 shares of Series
B Preferred Stock at the option of RenCap, or at the option
of the Company, at such time as (i) the value of the shares
of Common Stock to be issued upon the conversion of Series B
Preferred Stock is equal to 70% or more of the principal
amount of the 6% Debentures (approximately $3,380,000 if the
principal amount of the 6% Debenture is $4,800,000); or (ii)
at such time as the Company's shareholders' equity shall
equal or exceed $1,000,000. In addition, based on certain
increases in the market price of the Company's Common Stock
ranging from a base of $.25 per share to $1.00 per share, as
set out in the Investment Agreement, RenCap may receive up
to an additional 2,400,000 shares of Common Stock.
Currently, the original 12% Convertible Debenture is in
default due to the Company's failure to pay interest and
principal when due.
ISA has agreed to transfer shares of the Company's
Common Stock to RenCap if the market value of the 7,344,101
shares of Common Stock into which the Series B Preferred
Stock is convertible falls below $3,360,000 on the date
three years from the date of the closing of the Investment
Agreement. ISA has further agreed to place into an escrow
account 7,344,000 shares of the Company's Common Stock
(received by ISA pursuant to the Investment Agreement)
concurrently with the conversion of the 6% Debenture into
the Series B Preferred Stock.
Restructure of Bridge Loan
Upon the exercise of ISA's Option, the Bridge Lenders
will cancel the $1,800,000 principal amount Bridge Loan in
exchange for the following: (i) the payment of $400,000 in
cash, (ii) the issuance of a new $600,000 principal amount
promissory note (the "6% Note"), with interest at 6% per
year; and (iii) the issuance of 8,000 shares of Series A
Preferred Stock (which are convertible into 2,400,000 shares
of Common Stock). In addition, based on certain increases
in the market price of the Company's Common Stock ranging
from a base of $.25 per share to $1.00 per share, as set out
in the Investment Agreement, the Bridge Lenders may receive
up to an additional 600,000 shares of Common Stock.
The 6% Note is due in full one year from the date made,
and is collateralized by a security interest in the assets
of the Company's wholly-owned subsidiaries Decom Systems,
Inc. and Coded Mobile Communications, Inc. This security
interest will be senior to the security interest
collateralizing the Working Capital Loan and the 6%
Debenture. The 6% Note is convertible into shares of the
Company's Common Stock at a price of $.25 per share. The
final terms and conditions of the 6% Note are subject to the
review and approval of ISA and the Company.
The Bridge Loan is currently in default due to the
Company's failure to pay $1,800,000 in principal when due on
April 17, 1996.
Change of Control of the Company
Upon the execution of the Investment Agreement, and
subject to any restrictions imposed by the Department of
Defense regarding the management of Decom Systems, Inc.,
ISA was given the right to manage and control the daily
operations of the Company. As part of its management
control, ISA has the authority to negotiate, and subject to
Board approval where required by law, enter into agreements
with creditors on behalf of the Company.
Following shareholder approval of the Investment
Proposals, and the exercise of the Option by ISA, ISA will
hold approximately 54,009,000 shares of the Company's Common
Stock, or approximately 78% of the outstanding Common Stock,
excluding the issuance of any shares of Common Stock upon
the conversion of Series A and Series B Preferred Stock and
the exercise of outstanding options to purchase shares of
Common Stock under the Company's 1992 Stock Option Plan.
Assuming only the issuance of 9,744,100 shares of Common
Stock on the conversion of Series A and Series B Preferred
Stock, ISA will hold approximately 69% of the issued and
outstanding shares of Common Stock. As a result of its
Common Stock ownership and the organization of the Board of
Directors, ISA will effectively control the Company.
See "Investment Proposals" and "Investment Agreement."
Nomination of Directors and Election of Chairman of the
Board
ISA will be entitled to appoint and thereafter nominate
three of five members of the Board of Directors; RenCap will
be entitled to nominate one member to the Board, and the
Company will nominate John Robinson to the Board. In
addition, the Board of Directors of the Company have agreed
to appoint as Chairman of the Board the director designated
by ISA. See "Information Concerning ISA and Management
Following the Investment Proposals."
The slate of directors nominated by management for
election at the Annual Meeting, consisting of Messrs.
Robinson, Borgardt and Kenney, if elected at the Annual
Meeting, will serve as Directors for the ensuing year.
Messrs. Robinson, Borgardt and Kenney constitute all of the
current members of the Board of Directors. If shareholders
approve the Investment Proposals, then Messrs. Borgardt and
Kenney will resign from the Board, and ISA and RenCap will
nominate their own representatives.
Capitalization
<TABLE>
Set forth below is the consolidated capitalization of
the Company as of June 29, 1996 which is derived from the
unaudited consolidated financial statements of the Company,
and the pro forma capitalization of the Company as of that
date, adjusted first to only give effect to the Investment
Proposals and the conversion of the Working Capital Loan
into shares of Common Stock, and second adjusted further to
give effect to the conversion of the (i) Series A Preferred
Stock into shares of Common Stock and (ii) the 6% Debenture
into Series B Preferred Stock and then the immediate
conversion of Series B Preferred Stock into shares of Common
Stock. See "Unaudited Pro Forma Condensed Financial
Information."
(Dollars in Thousands)
June 29, 1996
As Pro Forma Pro
Actual Adjustments Adjusted Adjustments Forma
<S> <C> <C> <C> <C> <C>
Bridge Loan $ 1,800 $ (1,800)(a) $ 0 $ 0 $ 0
12% Convertible Debentures, including
accrued interest 4,800 (4,800)(b) 0 0 0
Working Capital Loan, 6% interest 0 0 (c) 0 0 0
6% Note 0 600 (a) 600 0 600
6% Convertible Debenture (discounted to
10% interest rate) 0 3,150 (b) 3,150 (3,150)(e) 0
Creditors' Note and other current
liabilities 1,343 0 1,343 0 1,343
Total short-term and long-term debt 7,943 (2,850) 5,093 (3,150) 1,943
Shareholders' equity (deficit):
Preferred stock, no shares authorized
(as adjusted 2,000,000 shares
authorized) 0 800(a) 800 (800)(f) 0
Common Stock, 50,000,000 shares authorized
(as adjusted 100,000,000 shares authorized);
14,758,201 shares outstanding (as adjusted
77,511,301 shares outstanding) 23,510 3,050(b)(d) 26,560 3,950 (e)(f) 30,510
Accumulated deficit (31,010) 0 (31,010) 0 (31,010)
Total shareholders' equity (deficit) (7,500) 3,850 (3,650) 3,150 (500)
Total capitalization $ 443 $ 1,000 $ 1,443 $ 0 $ 1,443
<FN>
The adjustments to reflect the Investment Agreement and
conversion of the Working Capital Loan into Common Stock are
as follows:
(a) Adjustments to reflect cancellation of Bridge Loan
in exchange for a cash payment of $400,000 and the
issuance of a one year 6% Note and 8,000 shares of
Series A Preferred Stock.
(b) Adjustment to reflect cancellation of 12%
Convertible Debenture and accrued interest in exchange
for a new 6% Debenture, net of a discount of $1,650,000
to reflect an effective interest rate of 10%. For
purposes of this presentation, the discount of
$1,650,000 is credited to Common Stock.
(c) Adjustment to reflect $1,000,000 Working Capital
Loan and its immediate conversion into 4,000,000 shares
of Common Stock.
(d) Adjustment to reflect issuance of 49,009,000 shares
of Common Stock for cash payment of $400,000.
The pro forma adjustments to reflect the conversion of the
6% Debenture into Series B Prefered Stock and the conversion
of Series A and B Preferred Stock into Common Stock are as
follows:
(e) Adjustments to reflect the conversion of the 6%
Debenture, first into 48,000 shares of Series B
Preferred Stock and second the conversion of 48,000
shares of Series B Preferred Stock into 7,344,100 shares
of Common Stock. The mandatory conversion of the 6%
Debenture into Series B Preferred Stock and the
conversion of Series B Preferred Stock into shares of
Common Stock is subject to certain future events not
controlled by the Company.
(f) Conversion of 8,000 shares of Series A Preferred
Stock into 2,400,000 shares of Common Stock. The
conversion of the Series A Preferred Stock into shares
of Common Stock is subject to certain future events not
controlled by the Company.
</FN>
</TABLE>
Selected Financial Information
The consolidated financial statements of the Company
and related notes thereto for the year ended December 31,
1995 and the unaudited consolidated condensed financial
statements and related notes for the six month period ended
June 29, 1996, are being mailed to all shareholders of
record with this Proxy Statement. Shareholders may obtain a
copy of the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1995, at the principal office of the
Company, 1939 Palomar Oaks Way, Carlsbad, California 92009.
The consolidated statement of loss data for the fiscal
years ended December 31, 1994 and 1995, and the consolidated
balance sheet data at December 31, 1994 and 1995 are derived
from audited consolidated financial statements not included
in this Proxy Statement. The consolidated statement of
income (loss) data for the six month periods ended July 1,
1995 and June 29, 1996, and the consolidated balance sheet
data at July 1, 1995 and June 29, 1996 are derived from
unaudited consolidated financial statements not included in
this Proxy Statement. The Company believes that the
information at July 1, 1995 and June 29, 1996 and for the
six month periods then ended, contained all adjustments,
consisting of only normal recurring accruals, necessary for
the fair presentation of the financial position at such
dates and the results of operations for such periods. The
results of operations for the six months ended June 29, 1996
are not necessarily indicative of the results to be expected
for the full year.
<TABLE>
(Amounts in thousand except per share)
Six Months Ended
<CAPTION> Year Ended December 31, July 1, June 29,
1994 1995 1995 1996
Consolidated Statement of Loss:
<S> <C> <C> <C> <C>
Net sales $ 14,291 $ 10,171 $ 4,526 $ 5,270
Gross margin 3,803 2,788 685 2,324
Operating expenses 12,859 4,476 2,623 2,084
Restructuring expenses 3,151 0 0 0
Operating income (loss) (12,207) (1,688) (1,938) 240
Extraordinary item 0 1,367 0 215
Net income (loss) (12,929) (1,117) (2,331) 37
Net income (loss) per share $ (1.07) $ (.07) $ (.18) $ 0
Average shares outstanding 12,127 14,244 13,313 14,712
<CAPTION>
December 31, July 1, June 29,
1994 1995 1995 1996
Consolidated Balance Sheet:
<S> <C> <C> <C> <C>
Total assets $ 8,175 $ 5,821 $ 6,730 $ 5,096
Current and long-term debt 6,051 7,195 5,412 7,152
Shareholders' deficit (7,614) (7,571) (8,890) (7,500)
Working capital (deficit) $ (9,232) $ (7,648) $ (10,148) $ (7,579)
</TABLE>
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma condensed
consolidated financial information should be read in
conjunction with the audited and unaudited consolidated
financial statements of the Company incorporated by
reference into this Proxy Statement.
The pro forma information is presented for illustrative
purposes only and is not necessarily indicative of the
operating results or financial position that would have
occurred if the Investment Proposals were consummated, nor
is it necessarily indicative of future operating results or
financial position.
The unaudited Pro Forma Condensed Consolidated
Statements of Income (Loss) for the six month period June
29, 1996, and the year ended December 31, 1995, give effect
to the Investment Agreement and (i) the issuance of
49,009,000 shares of Common Stock to ISA, (ii) the
restructuring of the Bridge Loan and the 12% Convertible
Debenture, and (iii) the conversion of the Working Capital
Loan into shares of Common Stock.
The unaudited Pro Forma Condensed Consolidated Balance
Sheet as at June 29, 1996, gives effect to the Investment
Agreement and the conversion of the Working Capital Loan
into shares of Common Stock and, additionally, (i) the
conversion of Series A Preferred Stock into shares of Common
Stock and (ii) the conversion of the 6% Debenture, first
into Series B Preferred Stock and second the Series B
Preferred Stock into shares of Common Stock. The 6%
Debenture is convertible into 48,000 shares of Series B
Preferred Stock at such time as (i) the value of the shares
of Common Stock to be issued upon the conversion of Series B
Preferred Stock is equal to 70% or more of the principle
amount of the 6% Debenture or (ii) the net worth of the
Company equals or exceeds $1,000,000. The Series B
Preferred Stock, at the option of the Company, is required
to be converted into 7,344,100 shares of Common Stock at any
time that the value of the underlying shares of Common Stock
equals or exceeds 1.5 times the liquidation preference of
the Series B Preferred Stock. See "Investment Agreement-
Amendments to Certificate of Incorporation-Series B
Preferred Stock." The Series A Preferred Stock, at the
option of the Company, is required to be converted into
2,400,000 shares of Common Stock at any time that the value
of the underlying shares of Common Stock equals or exceeds
1.5 times the liquidation preference of the Series A
Preferred Stock. See "Investment Agreement-Amendments to
Certificate of Incorporation-Series A Preferred Stock."
The mandatory conversion of the 6% Debenture into
Series B Preferred Stock, and the conversion of the Series A
and Series B Preferred Stock into shares of Common Stock are
dependent upon certain future events that are not under the
control of the Company, and there is no assurance that such
events will occur. For purposes of the Pro Forma Condensed
Consolidated Balance Sheet, the Series A and B Preferred
Stock are assumed to be converted into shares of Common
Stock to show the effects of dilution in the shareholders'
common stock ownership interest in the Company.
<TABLE>
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
YEAR ENDED DECEMBER 31, 1995 AND SIX MONTHS ENDED
JUNE 29, 1996
(UNAUDITED)
<CAPTION>
(Amounts in thousands except per share)
Year Ended December 31, 1995 Six Months Ended June 29, 1996
Pro Forma As Pro Forma As
Actual Adjustments Adjusted Actual Adjustments Adjusted
Net sales $ 10,171 $ 0 $10,171 $ 5,270 $ 0 $ 5,270
Operating expense:
Cost of sales 7,383 0 7,383 2,946 0 2,946
Selling and general expense 3,397 0 3,397 1,308 0 1,308
Research and development expense 1,079 0 1,079 776 0 776
Interest expense, net 772 (240)(a) 532 406 (120)(d) 286
Income taxes 24 0 24 12 0 12
12,655 (240) 12,415 5,448 (120) 5,328
Net income (loss) before
extraordinary gain (2,484) 240 (2,244) (178) 120 (58)
Extraordinary gain 1,367 0 1,367 215 0 215
Net income (loss) (1,117) 240 (877) 37 120 157
Preferred stock dividends 0 (64)(b) (64) 0 (32)(b) (32)
Net income (loss) available for
common stock $(1,117) $ 176 $ (941) $ 37 $ 88 $ 125
Net income (loss) per common share $ (.07) $ 0 $ (.01) $ 0 $ 0 $ 0
Average shares outstanding 14,244 53,009(c) 67,253 14,712 53,009(c) 67,721
(a) Adjustments to reflect the following:
<CAPTION>
<S> <C>
1. Eliminate interest expense on 12% Convertible Debentures
and Bridge Loan $ (756)
2. Adjust for interest expense on 6% Debenture (discounted
to reflect an annual interest rate of 10%) and
the 6% Note 516
$ (240)
(b) Adjustment to reflect 8% per annum dividend on Series A Preferred Stock.
(c) Adjustment to reflect the following, assumed to have occurred at the
beginning of the period presented:
<CAPTION>
<S> <C>
1. Issuance of shares of Common Stock pursuant to the
Investment Agreement 49,009
2. Conversion of Working Capital Loan into shares of
Common Stock 4,000
53,009
(d) Adjustments to reflect the following:
<CAPTION>
<S> <C>
1. Eliminate interest expense on 12% Convertible
Debenture and Bridge Loan $ (378)
2. Adjust for interest expense on 6% Debenture
(discounted to reflect an annual rate of 10%)
and the 6% Note 258
$ (120)
</TABLE>
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AT
JUNE 29, 1996
(UNAUDITED)
(Dollars in Thousands)
<TABLE>
June 29, 1996
As Pro Forma Pro
Actual Adjustments Adjusted Adjustments Forma
<CAPTION>
Assets:
<S> <C> <C> <C> <C>
Current assets $ 4,065 $ 1,000 (a)(b)(d) $ 5,065 $ 0 $ 5,065
Property and equipment, net 743 0 743 0 743
Other assets 288 0 288 0 288
$ 5,096 $ 1,000 $ 6,096 $ 0 $ 6,096
Current liabilities:
Bridge Loan $ 1,800 $ (1,800)(b) $ 0 $ 0 $ 0
12% Convertible Debentures,
including accrued interest 4,800 (4,800)(c) 0 0 0
Working Capital Loan, 6% interest 0 0 (a) 0 0 0
6% Note 0 600 (b) 600 0 600
Creditors' Note and other current
liabilities 5,044 0 5,044 0 5,044
Total current portion and
long-term debt 11,644 (6,000) 5,644 0 5,644
6% Convertible debenture (discounted
to 10% interest rate) 0 3,150(c) 3,150 (3,150)(e) 0
Creditors' Note, long-term net of
current portion 952 0 952 0 952
Shareholders' equity (deficit):
Preferred stock, no shares
authorized (as adjusted 2,000,000
shares authorized) 0 800(b) 800 (800)(f) 0
Common Stock, 50,000,000 shares
authorized (as adjusted
100,000,000 shares authorized);
14,758,201 shares outstanding
(as adjusted 77,511,301 shares
outstanding) 23,510 3,050(a)(c)(d) 26,560 3,950 (e)(f) 30,510
Accumulated deficit (31,010) 0 (31,010) 0 (31,010)
Total shareholders'
equity (deficit) (7,500) 3,850 (3,650) 3,150 (500)
$ 5,096 $ 1,000 $ 6,096 $ 0 $ 6,096
<FN>
The adjustments to reflect the Investment Agreement and
conversion of the Working Capital Loan into Common Stock are
as follows:
(a) Adjustment to reflect $1,000,000 Working Capital Loan
and its immediate conversion into 4,000,000 shares of
Common Stock.
(b) Adjustments to reflect cancellation of Bridge Loan in
exchange for a cash payment of $400,000 and the issuance
of a one-year 6% Note and 8,000 shares of Series A
Preferred Stock.
(c) Adjustment to reflect cancellation of 12% Convertible
Debenture and accrued interest in exchange for a new 6%
Convertible Debenture, net of a discount of $1,650,000
to reflect an effective interest rate of 10%. For
purposes of this presentation, the discount of
$1,650,000 is credited to Common Stock.
(d) Adjustment to reflect issuance of 49,009,000 shares
of Common Stock for cash payment of $400,000.
The pro forma adjustments to reflect the conversion of the
6% Debenture into Series B Prefered Stock and the conversion
of Series A and B Preferred Stock into Common Stock are as
follows:
(e) Adjustments to reflect the conversion of the 6%
Debenture, first into 48,000 shares of Series B
Preferred Stock and second the conversion of 48,000
shares of Series B Preferred Stock into 7,344,100 shares
of Common Stock. The mandatory conversion of the 6%
Debenture into Series B Preferred Stock and the
conversion of Series B Preferred Stock into shares of
Common Stock is subject to certain future events not
controlled by the Company.
(f) Conversion of 8,000 shares of Series A Preferred
Stock into 2,400,000 shares of Common Stock. The
conversion of the Series A Preferred Stock into shares
of Common Stock is subject to certain future events not
controlled by the Company.
</FN>
</TABLE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
<TABLE>
The following table sets forth certain information with
respect to (i) each person who, as of July 26, 1996, is
known to the Company to be the beneficial owner of more than
5% of any class of its Common Stock, (ii) each director of
the Company and (iii) all directors and executive officers
as a group. The table does not reflect the change in
beneficial ownership that will occur pursuant to the terms
of the Investment Agreement.
<CAPTION>
Common Shares Percent of
Name and Address (8) Position With Company Beneficially Owned (1) Class (1)
Officers and directors:
<S> <C> <C> <C>
John A. Robinson, Jr. (2) Chairman of the Board and CEO 662,185 2.6%
Steven E. Borgardt (2) Vice President Finance and Director 296,573 1.1%
Mahrookh Driver (6) Director 100,000 *
James W. Kenney (3) Director 116,665 *
All directors and executive 1,550,621 6.1%
officers as a group (6 persons)(4)
Other Shareholders:
ISA Investments Corporation 10,000,000 40.0%
Orizaba No. 182 Col. Rima
C.P. 06700 Mexico DF (7)
Renaissance Capital Partners II, LTD. 4,666,667 15.9%
8080 North Central Expressway, Suite 210/LB59
Dallas, Texas 75206 (5)
* Less than 1%
<FN>
(1) Includes and reflects the ownership by the named
director of shares of Common Stock subject to options
exercisable within 60 days of July 26, 1996.
(2) Includes options to purchase 240,000 and 131,600 shares
of Common Stock for Messrs. Robinson and Borgardt,
respectively.
(3) Includes options to purchase 16,665 shares of Common
Stock for Mr. Kenney.
(4) Includes options to purchase 615,731 shares of Common
Stock.
(5) Includes 2,666,667 shares of Common Stock issuable upon
the conversion of $4,000,000 principal amount 12%
Convertible Debentures and warrants exercisable to
purchase 2,000,000 shares of Common Stock.
(6) Ms. Driver resigned from the Board of Directors in June
1996.
(7) ISA Investments Corporation is a wholly-owned
subsidiary of ISA. Mr. Hugo R. Camou is the majority
shareholder of ISA.
(8) For purposes of this Proxy Statement, the address of
Messrs. Borgardt, Robinson and Kenney is 1939 Palomar
Oaks Way, Carlsbad, CA 92009.
</FN>
</TABLE>
ELECTION OF DIRECTORS AND INFORMATION CONCERNING
DIRECTORS AND EXECUTIVE OFFICERS
(PROPOSAL 1)
General
The directors and executive officers of the Company are
elected annually. The Bylaws of the Company provide for a
Board of Directors of not less than three nor more than
seven, with the exact number to be fixed from time to time
by the Board of Directors. At the present time, the number
of directors is fixed at three. The Board will revise the
By-laws to increase the number of directors to five if
shareholders approve the Investment Proposals and ISA
exercises its Option. The nominees receiving the highest
number of affirmative votes of the shares present in person
or represented by proxy and entitled to vote for them, are
elected as directors. Only votes cast for a nominee will be
counted in determining whether that nominee has been elected
as director. Shareholders may withhold authority to vote
for the entire slate nominated or, by writing the name of an
individual nominee in the space provided on the proxy card,
withhold the authority to vote for any individual nominee.
Abstentions, broker non-votes, and instructions on the
accompanying proxy card to withhold authority to vote for
one or more of the nominees will result in such nominee
receiving fewer votes, but will not otherwise affect the
outcome of the vote. At this time, three individuals have
been nominated by the Board for election as directors at the
Annual Meeting. The Board intends to add directors in the
future if qualified individuals are identified and agree to
serve as directors. Should any nominee become unavailable
to serve as a director, the proxies will be voted for such
other person as the proxyholder may in its discretion
determine. To the best of the Company's knowledge, all
nominees are and will be available to serve.
Shares represented by the enclosed Proxy will be voted
"FOR" the election of the nominees, unless authority to vote
for one or more nominees is withheld.
The Company knows of no arrangement or understanding
between any director or nominee pursuant to which he was or
is to be elected as a director or nominee, except that
Renaissance Capital Partner II, LTD ("RenCap"), pursuant to
the 12% Convertible Debenture Loan Agreement, may appoint
one member of the Company's Board of Directors. Mr. Kenney
was appointed to the Board of Directors by RenCap in January
1993.
Set out below are the names of, and certain information
with respect to, the directors all of whom are also
nominees, and officers of the Company. If the Investment
Proposals are approved by shareholders and the transactions
contemplated by the Investment Agreement among ISA, RenCap
and the Bridge Lenders are consummated, then only John A.
Robinson, Jr. will continue as a director of the Company,
and all of the other nominees will resign at the time their
successors are qualified and appointed by ISA and RenCap.
See "Investment Proposals" and "Investment Agreement."
<TABLE>
Further, if the Investment Proposals are approved by
shareholders and the transactions contemplated thereby are
consummated, ISA may elect, at its option, to retain or
replace the executive officers of the Company. At the
present time, ISA has indicated that it expects to retain
all executive officers in positions of responsibility. All
executive officers have in effect executive employment
agreements or letter arrangements which provide severance
benefits in the event the officer's employment with the
Company is terminated; at the present time, all of the
Company's executive officers have expressed their intent to
continue their employment with the Company. See "Executive
Compensation and Benefits - Employment Agreements."
<CAPTION>
Name Age Position Held With Company
<S> <C> <C>
Directors and Nominees:
Steven E. Borgardt 44 Vice President Finance and
Director
James W. Kenney (1)(2)(3) 54 Director
John A. Robinson, Jr.(1) 61 Chairman of the Board,
President and Chief
Executive Officer
Officers:
Richard K. Carrine 53 Vice President Manufacturing
Edward Sharp 54 Vice President Business
Development, Mobile Data
John Wiggins 45 Chief Operating Officer
<FN>
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
(3) Member of the Stock Option Committee
</FN>
</TABLE>
Steven E. Borgardt was appointed the Company's Vice
President Finance and Chief Financial Officer in August
1993, and was elected a Director on September 13, 1995.
Since September 1981, he has served in the capacities of
Vice President Finance or Chief Financial Officer of the
Company's wholly-owned subsidiary, Decom Systems, Inc.
("Decom"). Mr. Borgardt holds a Bachelor of Science degree
in Accounting from San Diego State University and he is a
Certified Public Accountant in California.
James W. Kenney was appointed to the Board of Directors
in January 1993. Mr. Kenney has served as executive vice
president of San Jacinto Securities, an investment and
brokerage firm in Dallas, Texas, since October 1993. From
February 1992 until October 1993, Mr. Kenney was associated
with Renaissance Capital Group, Inc. as a Vice President,
Director, and consultant. Prior to joining Renaissance
Capital Group, Inc., Mr. Kenney served as senior vice
president for Capital Institutional Services, Inc., and
prior to that for more than 5 years, in executive positions
with major southwest regional brokerage firms. Mr. Kenney
holds a Bachelor of Arts degree in Economics from the
University of Colorado. Mr. Kenney serves as a director of
the following public companies: AmeriShop Corp.; Scientific
Measurement Systems, Inc.; Technol Medical Products, Inc.;
Consolidated Health Care Associates, Inc.; Industrial
Holdings, Inc.; Prism Group, Inc.; Appoint Technologies,
Inc. and Tricom Corporation.
John A. Robinson, Jr. has served as the Company's
Chairman of the Board of Directors and in varying capacities
as an officer since February 1987. On March 13, 1995, Mr.
Robinson was appointed to the additional positions of
President and Chief Executive Officer. Mr. Robinson is also
a Director, President, and Chief Executive Officer of the
Company's wholly-owned subsidiary, Decom Systems, Inc., and
has served in such capacities since 1976. Mr. Robinson
holds a BSEE degree from Bridgeport Engineering Institute.
Richard K. Carrine was appointed the Company's Vice
President Manufacturing in August 1993. Prior to August
1993, he served as Decom's Vice President Manufacturing and
Operations and in similar positions since September 1976.
Edward Sharp joined the Company in December 1995 as
Vice President Business Development, Mobile Data. Mr. Sharp
has over ten years of experience in management and sales in
the wireless data communications industry. From 1990 to
December 1995, Mr. Sharp served as Executive Vice President,
Marketing and Sales, for RAM Mobile Data USA-UK. Prior to
joining RAM Mobile Data, Mr. Sharp was the Director of Sales
for Motorola MDI. Mr. Sharp holds a Bachelors of Science
degree in Marketing and Management from St. Peter's
University.
John Wiggins joined the Company in April 1994 and was
appointed Vice President Operations, Mobile Data, in August
1995. Mr. Wiggins has over 12 years experience in sales and
software applications support of mobile data communications
systems. Prior to joining Coded in 1994 as the General
Manager of Coded Europe, Mr. Wiggins served in various sales
and engineering management positions over a twelve year
period with Motorola Inc., most recently as Senior Systems
Manager, Southeast Region. Mr. Wiggins holds a Bachelors of
Science degree in Computer Science from Knightsbridge
University in the U.K. In June 1996, Mr. Wiggins was
appointed the Company's Chief Operating Officer.
Interest of Management and Insiders in Material Transactions
None of the directors or officers of the Company, nor
any person who beneficially owns, directly or indirectly,
shares carrying more than 10% of the voting rights attached
to all outstanding shares of common stock, nor any associate
or affiliate of the foregoing persons has any material
interest, direct or indirect, in any transaction since the
commencement of the Company's last completed fiscal year or
in any proposed transaction which, in either case, has or
will materially affect the Company, except as disclosed in
this Proxy Statement.
There are no family relationships between any of the
directors or executive officers of the Company.
Information About The Board of Directors and Committees of
the Board
In 1995, the Board of Directors held 4 meetings. No
director attended less than 75% of such meetings. In
addition to regular and special meetings of the Board of
Directors, members of the Board participated in informal
weekly telephonic meetings throughout 1995. The independent
directors of the Company in 1995, Mahrookh Driver and James
Kenney, each received 100,000 unregistered shares of the
Company's common stock, valued at $26,000, for services in
1995. Ms. Driver resigned as a director in June 1996.
Independent directors are entitled to receive an annual
grant of options to purchase shares of common stock under
the Company's 1992 Option Plan. Directors who are also
officers of the Company or its subsidiaries receive no
additional compensation for their services as directors. All
directors are reimbursed for their expenses incurred to
attend meetings.
The standing committees of the Board of Directors are
the Compensation Committee, Audit Committee and Stock Option
Committee. The principal duties of the Compensation
Committee are to determine and review all compensation of
directors and officers of the Company, and to report to the
Board of Directors of the Company. The principal duties of
the Audit Committee are to advise and assist the Board of
Directors in evaluating the performance of the Company's
independent auditors, including the scope and adequacy of
the auditor's examination, and to review with the auditors
the accuracy and completeness of the Company's financial
statements and procedures. The principal duty of the Stock
Option Committee is to determine grants of stock options
under the Company's option plans.
The Compensation Committee and the Audit Committee held
no meetings in 1995. The Stock Option Committee held no
formal meetings in 1995, however, options to purchase shares
of common stock under the 1992 Option Plan were granted by
the Stock Option Committee on several occasions by unanimous
written consent.
Executive Compensation and Benefits
The compensation and benefits program of the Company is
designed to attract, retain, and motivate employees to
operate and manage the Company for the best interests of its
shareholders.
Executive compensation is designed to provide
incentives for those senior members of management who are
responsible for the Company's goals and achievements. The
compensation policy calls for base salaries, with the
opportunity for bonuses to reward outstanding performance,
and a stock option program.
Summary Compensation Table
<TABLE>
The following table and notes show the compensation
provided to the Chief Executive Officer and the other
executive officers, who served as such at the end of 1995,
and whose annual compensation exceeded $100,000.
<CAPTION>
Long-Term
Compensation
Annual Compensation Stock Option All Other
Name and Position Year Salary ($) Bonus ($) Other($)(1) Shares (#) Compensation($)
<S> <C> <C> <C> <C> <C> <C>
John A. Robinson, Jr. (2) 1995 128,84 0 0 430,000 0
Chief Executive Officer 1994 136,177 0 0 0 0
and President 1993 132,127 16,506 0 50,000 0
Maurice Nieman (3) 1995 114,692 0 0 350,000 (3) 0
Vice President Marketing 1994 119,419 0 0 0 100,000(4)
and Sales Mobile 1993 105,000 0 0 50,000 (3) 0
<FN>
(1) In the interest of attracting and retaining
qualified personnel, the Company provides executive
officers with certain other benefits, which may include
relocation allowances, automobile allowances, insurance
and other benefits. Unless otherwise noted, the cost of
providing such personnel benefits did not exceed, as to
any individual named above, the lesser of $25,000 or 10%
of the total annual salary reported for the executive
officer.
(2) Includes compensation in 1995 as Chief Operating
Officer through March 13, 1995 and as Chief Executive
Officer thereafter. Includes compensation for services
as the Company's Chief Operating Officer and Decom's
Chief Executive Officer in 1994 and 1993.
(3) Mr. Nieman's employment was terminated in February
1996. All options expired unexercised in May 1996.
(4) Loan made for relocation and financing of a new
personal residence in San Diego, California.
</FN>
</TABLE>
Employment Agreements
Messrs. Robinson, Carrine and Borgardt entered into
employment agreements with the Company in 1993 providing
initial base salaries of $140,000, $100,000 and $90,000,
respectively. The term of the agreement is three years for
Mr. Robinson and two years for Messrs. Carrine and Borgardt.
In 1995, the employment agreements with Messrs. Carrine and
Borgardt were extended for a one year period. The
agreements provide each officer an opportunity to earn an
annual incentive bonus of 25% of base salary, under a plan
to be approved annually by the Board of Directors. No
incentive bonuses were paid to executive officers in 1995.
If the agreements are terminated by the Company, Mr.
Robinson is to receive 1.25 times his then annual salary,
payable over a period of 12 months; and Messrs. Carrine and
Borgardt, are to receive .75 times their then annual salary.
If the agreement is terminated by the officer, the officer
will receive up to 100% of his then current base salary in
the case of Mr. Robinson, and 75% of his then current base
salary in the case of Messrs. Carrine and Borgardt, as a
severance benefit. In the event of termination or
resignation following a change of control in the ownership
of the Company, as that term is defined in the agreements,
an officer can receive the greater of his then current
salary over the remaining employment contract term or, in
the case of Mr. Robinson, 1.25 times his current salary; and
in the case of Messrs. Carrine and Borgardt, an amount equal
to their annual salary. The agreements also provide, on a
case by case basis, additional benefits such as paid life
insurance and automobile allowances or the use of a Company-
provided automobile. The value of these benefits, for any
one officer, does not exceed 10% of his annual base salary.
The Company expects to enter into new employment
agreements in 1996 with Messrs. Robinson, Carrine, Borgardt
and Wiggins, under terms and conditions to be negotiated
between the Company, ISA and the executive officers. These
new agreements are expected to provide for increased
salaries for all executive officers and benefits that are
comparable to existing agreements.
In 1995, all officers of the Company voluntarily
accepted salary reductions ranging from 5% to 10% of their
respective salaries.
Stock Options Granted During Fiscal Year
<TABLE>
The following table shows certain information
concerning stock options granted during the year ended
December 31, 1995, to the named executive officers. Stock
option grants are normally considered for executive officers
every year. There were no grants of stock options to any
named executive officer in 1994.
<CAPTION>
1995 Stock Option Grants
% of Total
Options Options Granted Exercise Expiration
Name Granted to Employees Price Date
<S> <C> <C> <C> <C>
John A. Robinson, Jr. 215,000 6.7% $.20 2000
John A. Robinson, Jr. 215,000 6.7% $.50 2000
Maurice Nieman 175,000 5.0% $.20 2000
Maurice Nieman 175,000 5.0% $.50 2000
</TABLE>
In January 1996, options previously granted to certain
employees and officers, including Messrs. Robinson and
Borgardt, were canceled and reissued at a new exercise
price. Options to purchase 215,000 and 175,000 shares of
the Company's Common Stock granted in 1995 under the 1992
Option Plan to Messrs. Robinson and Borgardt, respectively,
at an exercise price of $.50 were canceled and new options
for the same number of shares of Common Stock were granted
at a price of $.25 per share. The exercise price of the new
options were granted at the then current market price of the
Common Stock, as quoted by the NASD Electronic Bulletin
Board.
Stock Options Exercised During the Fiscal Year and Year-End
Value of Unexercised Options
<TABLE>
The following table sets forth information about stock
options held by the Company's named executive officers
individually, as of December 31, 1995.
<CAPTION>
Aggregated Option Exercises in Last
Fiscal Year and FY-End Option Values
Shares Acquired Value Number of Value of Unexercised
on Realized Unexercised Options In-the Money Options($)(2)
Name Exercise (#) ($) (1) Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
John A. Robinson, Jr. 0 0 56,250 430,000 0 0
Maurice Nieman 0 0 50,000 350,000 0 0
<FN>
(1) Calculated by taking the difference between the fair
market value of common stock at the time of exercise and
the exercise price of the option.
(2) Calculated by taking the difference between the fair
market value of common stock at December 29, 1995 and the
exercise price of the options.
</FN>
</TABLE>
Summary of Coded Communications 1992 Stock Option Plan (as
Amended)
A summary of the material provisions of the 1992 Option
Plan (as amended) is set forth below.
The purpose of the 1992 Option Plan is to (i) enable
the Company and its subsidiaries to recruit and retain
capable employees in a highly competitive labor market for
the successful operation of its businesses and (ii) provide
an additional incentive to non-employee directors, officers
and other eligible key employees upon whom rest major
responsibilities for the successful operation and management
of the Company and its subsidiaries.
In June 1992, shareholders approved the 1992 Option
Plan. The 1992 Option Plan provides for the grant of
incentive stock options and non-qualified options. No
incentive stock options have been granted to date. Under
the 1992 Option Plan, as amended, options may be granted to
key employees, officers and directors to purchase an
aggregate of 3,500,000 shares of Common Stock.
The 1992 Option Plan is administered by a committee of
"disinterested directors" (the "Committee") as defined in
Section 16 of the Securities Exchange Act of 1934. The
Committee, comprised of Mahrookh Driver and James Kenney in
1995, is authorized to determine the grant of options to
eligible employees, the number of shares to be covered by
the option, the exercise date of each option, and the
exercise price of each option which, in the case of an
incentive stock option can be no less than fair market value
at the date of grant, and in the case of a non-qualified
stock option can be no less than 75% of fair market value at
the date of grant.
Options may be granted under the 1992 Option Plan by
the Committee to key full or part-time employees of the
Company and its subsidiaries. Disinterested directors who
are not also employees automatically receive options
covering a specified number of shares on their election or
re-election to the Board. Disinterested directors are
granted options under the 1992 Option Plan as follows: (i)
on the date when a disinterested director first becomes a
member of the Board of Directors, he or she will receive a
one time grant of a non-qualified option covering 50,000
common shares, which will become exercisable for 20,000
shares 6 months after the date of grant and 15,000 shares in
2 annual installments beginning the first anniversary
following the date of grant and (ii) following re-election
to the Board of Directors at the annual meeting of
shareholders, a grant of an option covering 50,000 common
shares which is exercisable in 3 annual installments of
approximately 16,666 shares beginning the first anniversary
following the date of grant. All grants of options to
disinterested directors will be at an exercise price of not
less than 85% of fair market value at the date of grant.
All options granted under the 1992 Option Plan to
officers and other eligible key employees may be exercisable
only at a price which is not less than 75% of the fair
market value of the stock on the date of grant. Payment of
the exercise price may be made in cash, by certified check
or in property (including other securities of the Company)
and may be subject to a deferred payment arrangement that is
a "cashless exercise" arrangement which meets the
requirements of Federal Reserve Board Regulation T. Taxes
required to be withheld at the time of exercise may be paid
in cash, by certified check, by the withholding of shares
deliverable pursuant to the exercise, or by the delivery of
previously acquired shares. In addition, the Board may
authorize loans and loan guarantees, as the case may be, for
the exercise price and taxes due by reason of exercise of
options granted under the 1992 Option Plan.
If an optionee's employment terminates, the exercisable
portion of the option remains exercisable for a fixed period
of 3 months (12 months where employment has terminated
because of death or disability). In no case may an option
be exercised after the expiration of the option term. An
option may be exercised by the optionee or his guardian or
legal representative.
The Committee has the authority to "reprice options"
(i.e. to grant new options in exchange for the cancellation
of outstanding options).
Options granted to employees generally are made
cumulatively exercisable in installments, although the
actual dates of exercise may be modified by the Committee so
long as the option holder's interest is not thereby
diminished without the option holder's consent. Options are
exercisable no sooner than six months after grant, or
exercisable only under such conditions as the Committee may
establish, such as if the optionee remains employed until a
specified date, if specified performance goals have been
met, or in the event of a change of control.
Unless otherwise terminated by the Board of Directors,
the 1992 Option Plan will terminate on March 25, 2002. The
Board of Directors may amend or terminate the 1992 Option
Plan at any time; however, once granted, no option may be
terminated and no amendment of the 1992 Stock Option Plan
may adversely affect any previously granted options without
the consent of the option holder. Any material amendment to
the 1992 Stock Option Plan is subject to approval of
shareholders to the extent required by applicable laws and
regulations.
Compliance with Section 16(a) of the Securities Exchange Act
of 1934
Under the securities laws of the United States, the
Company's directors, officers and any person holding more
than 10% of outstanding shares of Common Stock are required
to report their initial ownership of Common Stock and any
subsequent changes in ownership to the Securities and
Exchange Commission. Specific due dates for these reports
have been established, and the Company is required to
disclose in this proxy statement any failure to file these
reports on a timely basis. Based solely on a review of the
copies of such forms furnished to the Company, the Company
believes that from January 1, 1995 through December 31,
1995, its Directors, Officers and greater than 10%
beneficial owners complied with the Section 16(a) filing
requirements.
INVESTMENT PROPOSALS
(Proposals 2(a), (b) and (c))
Introduction
The shareholders of the Company will be asked at the
Annual Meeting to consider and act upon the Investment
Proposals, which contemplate, among other things, approval
of the grant of an Option to ISA to acquire approximately
49,009,000 shares of Common Stock (of which 5,000,000 shares
have been already issued to ISA pursuant to the Second
Agreement), the issuance of Series A Preferred Stock to the
Bridge Lenders, and the issuance of a 6% Convertible
Debenture to RenCap, which is convertible into Series B
Preferred Stock at the option of RenCap, or at the option of
the Company upon meeting certain financial goals or the
Company's Common Stock trading at or above a certain price.
For purposes of effecting the Investment Proposals, the
Board of Directors approved the execution and delivery by
the Company of the Investment Agreement which provides for
the transactions and acts collectively constituting the
Investment Proposals. The Investment Agreement also requires
that the Company amend its Certificate of Incorporation in
the form set out elsewhere in this Proxy Statement, (i) to
increase the number of authorized shares of Common Stock to
100,000,000 shares and (ii) to authorize 2,000,000 shares of
preferred stock. Upon the exercise of the Option held by
ISA, the Company is required to authorize and issue 8,000
shares of Series A Preferred Stock and to authorize 48,000
shares of Series B Preferred Stock. See "Investment
Agreement." Assuming ISA elects to exercise its Option, the
Board of Directors currently anticipates effecting the
transactions contemplated by the Investment Proposals as
soon as practical.
Effective July 17, 1996, ISA, RenCap and the Company
entered into a second agreement (the "Second Agreement").
The Second Agreement does not require shareholder approval
and the Company is NOT soliciting proxies from shareholders
for approval of the Second Agreement. In accordance with
the provisions of the Second Agreement, ISA funded the
$1,000,000 Working Capital Loan required by the Investment
Agreement and immediately converted the loan into 4,000,000
shares of Common Stock at a conversion price of $.25 per
share. Additionally, ISA placed product orders with the
Company in the amount of approximately $2,000,000. As part
of the order placement, ISA deposited with the Company
approximately $500,000 as a down payment for the orders.
These orders will be credited against the $10,000,000 worth
of orders ISA has agreed to place with the Company under the
Investment Agreement. Currently, ISA has placed
approximately $3,000,000 worth of orders with the Company,
leaving only $7,000,000 worth of orders still to be placed
with the Company in accordance with the terms of the
Investment Agreement. In accordance with the terms of the
Second Agreement, the Company issued 6,000,000 shares of
Common Stock to ISA. Of these shares, 5,000,000 shares will
be credited against the number of shares ISA is entitled to
under its Option, thereby entitling ISA to approximately
44,009,000 shares upon exercise of its Option. In the event
ISA does not exercise its Option under the Investment
Agreement, then ISA will nevertheless continue to own the
10,000,000 shares of Common Stock issued pursuant to the
Second Agreement and ISA will have no further commitment to
place additional product orders with the Company. "See
Investment Proposals - Second Agreement with ISA."
As a result of the Second Agreement, ISA is the
beneficial owner of 10,000,000 shares of the Common Stock,
representing 40% of the outstanding shares of Common Stock.
Votes Required
Under Delaware Law, the required quorum for the Annual
Meeting is a majority of outstanding shares of the Company's
Common Stock represented in person or by proxy. Assuming a
quorum is present, approval of the Investment Proposals
requires the affirmative vote by a majority of the Company's
outstanding Common Stock entitled to vote at the Annual
Meeting. The Investment Agreement does not require the
approval of shareholders; however, the increase in the
number of shares of authorized Common Stock and the
authorization of Preferred Stock do require shareholder
approval. See "Introduction - Proxies and Voting".
The effectiveness of each of the three Investment
Proposals is contingent on the approval of the others, and
no action will be taken by the Company to consummate the
Investment Agreement unless all of the three Investment
Proposals are approved. Therefore, the non-vote or a vote
against any of the Investment Proposals may have the effect
of a vote against the other related proposals. If a
majority of shares voting at the Annual Meeting vote "FOR"
the Investment Proposals, but the affirmative vote of
shareholders falls short of the required majority of
outstanding shares because of, among other things, the non-
vote of brokers, nominees and shareholders, then the Company
intends to pursue an agreement with ISA, RenCap and the
Bridge Lenders on terms and conditions the Board of
Directors deems to be in the best interest of the Company
and its shareholders. Any further agreements may be
structured so that shareholder approval will not be
required. However, if the Investment Proposals are not
approved by the requisite number of shares, there is no
assurance that the Board of Directors can negotiate any new
agreement with all parties on terms and conditions
acceptable to all parties.
At July 26, 1996, as a result of the Second Agreement,
ISA held 10,000,000 shares of Common Stock, or approximately
40% of the outstanding shares of Common Stock. ISA has
indicated it will vote all of its shares "FOR" approval of
the Investment Proposals. In addition, the management of
the Company has indicated that they will vote "FOR" approval
of the Investment Proposals.
If the shareholders approve the Investment Proposals,
but ISA does not exercise its Option, the Board will proceed
with the amendment to the Certificate of Incorporation, so
that the Certificate will authorize 100,000,000 shares of
Common Stock and 2,000,000 shares of Preferred Stock.
Therefore, the Board will have the flexibility to issue
additional shares of Common Stock and Preferred Stock
without further shareholder approval.
Background of and Reasons for the Investment Proposals
The Company, on a consolidated basis, has operated at a
net loss since inception in 1987. The net losses
accelerated in 1993 and 1994 as the Company, under the
direction of a prior CEO, aggressively expanded its
marketing and sales efforts in Europe, Australia, Japan,
Mexico and the Philippines. In addition, research and
development programs were compressed and accelerated, and
the management organization was expanded to support an
international business and projections of significantly
increased revenues. When orders for mobile data products
from international markets failed to materialize, net losses
increased dramatically, and deficits in working capital and
net worth resulted. The Company could not meet the
repayment terms of its secured debt and trade credit, and
the principal holder of the Company's secured debt, RenCap,
declared its secured debt in default and the acceleration of
payment of principal and interest.
In the first quarter of 1995, management of the Company
took action to restructure its business and management
organization. These actions included the close of the
Company's VSAT satellite earthstation product line and its
mobile data international sales organization. In addition,
the Company's CEO resigned and its Chairman of the Board and
Chief Operating Officer, John Robinson, assumed the
additional responsibilities as CEO and President. As a
result of the restructuring and management reorganization, a
number of management positions were eliminated to streamline
operations, personnel reductions were implemented, and
operating expenses were reduced by approximately $8,400,000
in 1995 compared to the prior year. Recently, primarily as
a result of the actions taken by management to restructure
the Company, the Company reported three consecutive quarters
of income from operations (before interest and income
taxes), and continued improvement in operating results
compared to the prior year.
The Company's net losses in 1993 and 1994 adversely
impacted the Company's financial position by decreasing
working capital and increasing debt. As a result of severe
liquidity problems, the Company was unable to meet its
financial obligations in a timely manner, with trade debt
increasing to nearly $6,000,000 and secured debt, including
accrued and unpaid interest, increasing to approximately
$5,300,000. In March 1995, management of the Company met
with RenCap to discuss several alternative financial
strategies, including foreclosure on the assets of the
Company by RenCap, reorganization under Chapter 11 of the
Federal Bankruptcy Code and an informal voluntary
reorganization of the Company's unsecured creditors or
claims outside of the protection of bankruptcy. At the
meeting in March 1995 with the Company's management, RenCap
agreed to allow the Company to attempt an informal voluntary
reorganization of its unsecured creditors, and further
agreed to subordinate its security interest in the Company's
assets to the senior security interest of a new $1,800,000
Bridge Loan. RenCap also agreed to participate as one of
the lenders in the Bridge Loan, providing $1,000,000 out of
a total of $1,800,000 in Bridge Loan financing.
In 1995, following the restructuring, the Company
negotiated the conversion of $990,000 in debt into shares of
Common Stock at a negotiated price of $.75 per share, and
negotiated settlements with unsecured creditors with claims
in excess of $3,200,000 on terms favorable to the Company.
In October 1995, following the Company's first-ever
quarterly operating profit (before interest and income tax
expense) for the quarter ended September 30,
1995, and following the implementation of the settlement
plan with unsecured creditors, management explored
alternatives to strengthen the Company's financial position
and liquidity and help ensure its short-term and long-term
viability. The Company required additional financing to
support its operations, to repay the $1,800,000 Bridge Loan
(of which principal of $1,000,000 is held by RenCap) which
was due in April 1996, and to pay past due interest and
principal owed to RenCap on the 12% Convertible Debenture.
In connection with these efforts, the Company considered
various alternatives in order to finance the Company's
operations and maximize shareholder value, including the
possible issuance of additional Common Stock or other
securities in the private market and the sale of all or part
of the Company. The Company contacted potential investors
that it believed might have an interest in an investment in
the Company, and engaged the investment banking firm of W.B.
McKee Securities and other financial advisors to assist
management in obtaining the financing necessary to support
the Company's operations and meet its debt obligations. The
Company also met with RenCap on a continuous basis to
monitor the financial progress of the Company and its short-
term and long-term liquidity.
The Company and its advisors contacted more than ten
prospective purchasers or investors. The Company and its
financial advisors provided each prospective investor with
financial information and a written overview of the Company
and responded to all other due diligence requests. The
Company did not receive any written investment or purchase
offers from any party. A verbal offer of an expression of
interest was made by a potential equity investor; however,
this informal offer was rejected by RenCap as unacceptable.
The Company believes that RenCap rejected the informal offer
because, at that time, RenCap was of the belief that there
were other financial alternatives available, including the
reorganization of the Company or an action to foreclose on
the assets of the Company, that would be more economically
favorable to RenCap. The Company has received a proposal
from a third-party financing source for a one year,
$1,500,000 working capital line of credit, to be secured by
a senior security interest in substantially all of the
Company's assets. Discussions with this third-party lender
are continuing, subject to completion of the third party
lender's due diligence and the agreement of RenCap and the
Bridge Lenders to subordinate their security interest in the
Company's assets to a more senior priority security interest
of the third-party lender. The third-party lender has
informed the Company that it's proposal for a working
capital line of credit is contingent upon the consummation
of the transactions contemplated by the Investment Proposals
and the guarantee of the credit line by ISA.
In March 1996, management first contacted ISA to
determine its possible interest in a transaction with or an
investment in the Company. At that time, ISA was the
Company's only distributor of mobile data products in
Mexico, and substantial marketing and selling activities had
been conducted in Mexico by ISA and the Company. In March
1996, ISA informed the Company that it did not have an
interest in an investment in the Company as proposed, and
ISA expressed its concern that the weak financial condition
of the Company could jeopardize future business
opportunities in Mexico. In April 1996, ISA met directly
with the Company's principal secured creditor, RenCap, to
discuss the financial condition of the Company and ISA's
decision not to pursue new business opportunities with the
Company in Mexico, unless ISA could acquire a controlling
interest in the Company and its senior secured creditors
agreed to restructure their debt on terms acceptable to ISA.
In April 1996, RenCap informed the Company that it had
met on at least two occasions with the representatives of
ISA to discuss a proposal by ISA to acquire a controlling
interest in the Company and restructure existing secured
debt. At that time, RenCap informed the Company of the
terms and conditions of ISA's proposal. Through the end of
April 1996, there were intense negotiations of the terms and
conditions of the Investment Agreement between RenCap, the
Bridge Lenders and ISA. On April 30, 1996, following the
approval of the Investment Agreement by RenCap and the
Bridge Lenders, the Board of Directors approved the
execution of the Investment Agreement. The Company's
financial advisors, W.B. McKee Securities, Inc. and
Strategica Group did not render any formal written or oral
opinion on the proposed Investment Agreement, and the
financial advisors were not a party to the negotiations of
the Investment Agreement. On May 2, 1996, the Company
publicly announced the general terms and conditions of the
Investment Agreement.
In early July 1996, the Company met with ISA to discuss
the possibility of ISA releasing, in advance of ISA's
exercise of its Option and the shareholders' approval of the
Investment Proposals, additional product orders. The
Company believed there was an opportunity in Mexico to
accelerate the roll-out of pilot projects for mobile data
communications systems, and it was in the best interests of
the Company and ISA to support the early implementation
schedules of potential customers. ISA expressed a
willingness to release additional orders in advance, but
expressed reservations regarding the Company's weak
financial position.
Discussions continued between the parties to address
ISA's investment in the capital of the Company and the
impact any new agreement would have on the Investment
Agreement. The Company and ISA thereafter reached agreement
on the terms and conditions of the Second Agreement,
pursuant to which ISA would release in advance $2,000,000 in
product orders with a cash deposit of $500,000 against the
orders, and ISA would fund and immediately convert into
equity the Working Capital Loan; in exchange for Coded's
issuance of 5,000,000 of the 49,009,000 shares of Common
Stock to be issued to ISA under the Investment Agreement,
and an additional 1,000,000 shares of Common Stock. The
Second Agreement was dated as of July 17, 1996 by and
between the Company, ISA and RenCap. See "Investment
Proposals - Second Agreement."
Board of Directors Recommendations
The Board of Directors of the Company believes the
Investment Proposals and the Second Agreement are fair to,
and in the best interests of, the Company and its
shareholders. The Investment Agreement and the Second
Agreement were unanimously approved by the Board of
Directors. In evaluating the transactions contemplated by
the Investment Agreement and the Second Agreement, the Board
of Directors considered the following factors in relative
order of importance: (a) ISA's commitment to place
$10,000,000 in orders for the Company's products over an 18-
month period, which is anticipated to have a substantial
positive economic impact on the operations of the Company
over the next 12 months; (b) ISA's decision that it would
not award any future orders to the Company unless the
transaction was consummated, because of ISA's belief that
the financial instability of the Company and its lack of
liquidity presented a significant risk to ISA and its
customers; (c) the immediate release by ISA of approximately
$3,000,000 in product orders accompanied by cash deposits
for the product orders of approximately $1,000,000; (d) the
agreement of RenCap and the Bridge Lenders to restructure
secured debt of approximately $6,600,000, all of which had
been declared in default or for which events of default
existed; (e) the potential impact the Investment Proposals
were anticipated to have on the market value of the
Company's Common Stock; (f) the potential dilution to
existing shareholders' Common Stock ownership interest in
the Company; (g) ISA's funding of a $1,000,000 Working
Capital Loan and its immediate conversion into 4,000,000
shares of Common Stock; and (h) the change in the Company's
Board of Directors and change in control of the Company in
light of ISA's 69% or more ownership interest in the
Company's Common Stock. The Board also carefully considered
the immediate need for capital to finance operations, and
alternatives to the Investment Proposals and the likelihood
of such alternatives, including public or private equity or
debt financing, a sale of the Company's assets or a possible
foreclosure action on the Company's assets by the secured
creditors. The Board and management of the Company
discussed the alternatives with its financial advisors, W.B.
McKee Securities, Inc. and Strategica Group; and RenCap and
the Bridge Lenders. No written or oral financial analysis
was performed by the Company's financial advisors.
In considering the Investment Proposals, the Board of
Directors assigned the most weight to the growth prospects
of the Company with up to $10,000,000 in orders over an 18-
month period generated by ISA from customers in Mexico, and
Latin and South America. In approving the Second Agreement,
the Board's primary considerations were the immediate
improvement in liquidity provided by the release of
$3,000,000 in orders by ISA prior to July 30, 1996 and the
funding of the Working Capital Loan and the immediate
conversion of the loan into Common Stock. The Board of
Directors believes that this export business, together with
potential business opportunities in the United States, will
allow the Company to accelerate its sales growth and
continue its recent trend of improving financial operating
results. The Board of Directors believes that sales growth,
continuing improvement in financial performance, expansion
into export markets with ISA as a strategic and financial
partner, and the restructuring of the Company's secured
debt, are among the more significant impacts of the
Investment Proposals that could lead to continued
improvement in the Company's financial condition and
increased shareholder value.
The Board of Directors recognized that without the
order base provided by ISA's customers, and without ISA
customer contacts in Mexico, and Latin and South America, it
would be difficult for the Company to develop a profitable
export business in those geographical areas in an acceptable
timeframe. Moreover, the loss of $10,000,000 in orders from
ISA could not be replaced by other customers in a like
timeframe, and the Company's business and its relationship
with RenCap and the Bridge Lenders would be adversely
affected. In evaluating the potential loss of the ISA
orders, the Board considered the possible actions of its
principal secured creditor, RenCap, which included the
possible foreclosure on the assets of the Company or the
sale of all or a portion of the assets of the Company, on
terms the Board believed would be unfavorable and
unacceptable to the Company and its shareholders.
The Board of Directors carefully considered the terms
and conditions of the RenCap and Bridge Lender agreement to
restructure their secured debt. The Board believes that
this secured debt, all past due and in default in April
1996, was a significant factor adversely impacting the
Company's relationship with its customers, its ability to
win new business, and the market price of the Company's
Common Stock. The Board believes the terms and conditions
under which the secured debt of RenCap and the Bridge
Lenders is to be restructured are favorable to the Company,
and might not be possible without ISA's financial
commitments to the Company and its commitment to provide
$10,000,000 in new orders.
The Board of Directors also considered that, in
accordance with the terms of the Second Agreement, ISA
agreed to (i) fund the $1,000,000 Working Capital Loan and
immediately convert this loan into 4,000,000 shares of
Common Stock at a conversion price of $.25 per share, and
(ii) immediately release an additional $2,000,000 in product
orders with a cash deposit of $500,000 against the orders.
The Board believes that this current infusion of $1,500,000
significantly improved the Company's liquidity. Moreover,
the Board believes that this improvement in the Company's
financial position will allow the Company to retain
customers and key employees.
Based primarily on the considerations discussed above,
the Board of Directors unanimously concluded that it is in
the best interests of the Company and its shareholders to
consummate the transactions with ISA, RenCap and the Bridge
Lenders. The Board of Directors unanimously recommends that
shareholders vote "FOR" the Investment Proposals.
Source of Funds
ISA has informed the Company that the $400,000 of funds
ISA has deposited in a third party escrow to purchase the
shares of Common Stock subject to the Option was obtained
from available cash resources. The $1,000,000 Working
Capital Loan, which was funded in accordance with the terms
of the Second Agreement, also was obtained from available
cash resources. On July 20, 1996, ISA funded the Working
Capital Loan and immediately converted the loan into shares
of Common Stock.
Recent Price of Common Stock
The average of the closing bid prices for the Company's
Common Stock for the 15 trading days prior to the
announcement of the Investment Agreement, as reported by the
NASD Electronic Bulletin Board, was approximately $.33 per
share; the average of the closing bid prices for the
Company's Common Stock for the 15 trading days following the
announcement of the Investment Agreement, as reported by the
NASD Electronic Bulletin Board, was approximately $.47 per
share. On August 2, 1996, the closing bid price for the
Company's Common Stock was $.42 per share.
Certain Considerations
While the Board of Directors is of the opinion that the
Investment Proposals are in the best interests of the
Company and its shareholders, the approval of the Investment
Proposals may have certain potential adverse effects which
shareholders should consider. These considerations are
summarized below.
Change in Composition of Board of Directors.
Upon exercise of its Option, ISA will be entitled to
appoint and thereafter nominate 3 of the 5 members of the
Board. In addition, the Board of Directors must elect as
the Chairman of the Board the director designated by ISA.
Further, because ISA will own a majority of the outstanding
Common Stock, ISA will have the power, in the absence of any
agreements regarding the composition of the Board or
cumulative voting, to elect all of the directors. RenCap
will have the right to nominate one director or to have one
representative attend Board meetings. John Robinson,
currently a member of the Board of Directors and the
Company's CEO and President, is expected to continue as a
director of the Company; however, if John Robinson resigns
or is removed for reason from the Board of Directors, then a
committee composed of one representative of ISA and one
representative of RenCap shall have the right to nominate
Mr. Robinson's replacement. If ISA exercises its Option,
Messrs. Borgardt and Kenney will resign from the Board.
Commitment for Product Orders.
ISA has committed to place $10,000,000 in orders for
the Company's products from ISA customers in Mexico and
Latin America, over an 18-month period. ISA, however, is
not the end-use customer, and ISA's ability to deliver
orders for products may be impacted by events outside the
control of ISA, such as the economic conditions in Mexico
and Latin America, the availability of end-user financing
for the purchase of equipment and the compatibility of the
Company's technology with the customer's existing radio
systems. ISA's commitment to place $10,000,000 in orders
will be secured by ISA placing in escrow, pursuant to the
Investment Agreement, 50% of the shares of the Company's
Common Stock to be issued to ISA upon exercise of its
Option. If ISA places less than $10,000,000 in product
orders with the Company, then ISA will forfeit 2.4 shares of
Common Stock for each dollar in orders less than
$10,000,000. To date, ISA has placed approximately
$3,000,000 in orders for the Company's products,
representing 30% of its total commitment.
Change of Control of the Company.
As a result of the Second Agreement, ISA beneficially
owns 40% of the outstanding Common Stock. The beneficial
ownership of 40% of the Common Stock may give ISA effective
control of the Company in certain instances, including but
not limited to, election of a majority of the Board of
Directors, transactions for the sale of the Company, or the
sale of all or substantially all of the Company's assets.
Additionally, the Investment Agreement grants to ISA an
Option to receive shares that will represent a majority of
the outstanding shares of Common Stock. Therefore, approval
of the Investment Proposals will prevent the sale of the
Company or its assets to a buyer other than ISA, without the
approval of ISA.
As a result of the approval of the Investment Proposals
by the shareholders, ISA will have control of the Board of
Directors and beneficial ownership of a majority of the
outstanding shares of Common Stock. Therefore, ISA will
have the ability to approve transactions that may result in
the Company no longer being required to file reports with
the Securities and Exchange Commission or to cause the
Company's Common Stock to be delisted from a national
securities exchange or removed from quotation on NASDAQ,
should the Common Stock be listed or quoted in the future.
ISA has expressed its present intent to maintain the Company
as a publicly-held and traded company.
Conflicts of Interest.
The Company and ISA have agreed to maintain the number
of shares of Common Stock available for grant to employees,
including officers and directors, under the Company's 1992
Stock Option Plan, to a number equal to approximately 15% of
the fully diluted outstanding shares of Common Stock, or
approximately the same percentage in effect prior to the
transactions contemplated by the Investment Agreement. All
of the members of the Board of Directors participate in the
1992 Option Plan, and two officers who also serve as members
of the Board of Directors, John Robinson and Steven
Borgardt, have been granted a significant number of options
to purchase shares of Common Stock under the 1992 Stock
Option Plan. Because of their participation in the 1992
Stock Option Plan, Messrs. Robinson and Borgardt may not be
considered disinterested with respect to the Investment
Proposal. Messrs. Robinson and Borgardt have informed ISA
of their intent to vote the shares of the Common Stock held
by them in favor of the Investment Proposals. See "Security
Ownership of Certain Beneficial Owners and Management." In
addition, conflicts could arise in future commercial
relationships between the Company and ISA.
ISA may be characterized as having a conflict of
interest because it holds 40% of the outstanding Common
Stock at July 26, 1996 and has indicated it will vote all of
its shares "FOR" the Investment Proposals, which will result
in ISA holding approximately 78% of the Common Stock
(excluding the conversion of Series A and Series B Preferred
Stock into Common Stock).
Limitation of Use of Net Operating Loss Carryovers.
Section 382 of the Internal Revenue Code of 1986, as
amended (the "Code"), may limit the Company's use of its net
operating loss carryovers. Section 382 of the Code limits
the amount of taxable income of a corporation following an
"ownership change" that may be offset by the "pre-change
loss" of the corporation to an amount equal to the fair
market value of the stock of the corporation immediately
before the ownership change multiplied by the "long-term
tax-exempt rate" as defined in Section 382(f) of the Code.
The pre-change loss of a corporation includes any net
operating loss carryover of the corporation before the year
of the ownership change and any net operating loss of the
corporation for the year of the ownership change to the
extent such loss is allocable to the period in such year on
or before the change date.
An ownership change would have occurred with respect to
the Company if the percentage of the Common Stock of the
Company owned by one or more "5-percent shareholders" within
the meaning of Section 382(k) of the Code increased by more
than fifty percentage points over the lowest percentage of
Common Stock of the Company owned by such shareholders at
any time during a "testing period". A testing period is
generally the three-year period ending on the date of any
change in the ownership of stock of a corporation involving
a 5-percent shareholder.
The Company and its subsidiaries have a combined
Federal net operating loss carryforward benefit of
approximately $30,000,000. The Second Agreement, for
Federal income tax purposes, will likely result in an
"ownership change" and, as a result, the Company's annual
use of Federal net operating loss carryforward tax benefits
could be severely limited. Due to this limitation, only a
portion of the Company's Federal net operating loss benefits
may ultimately be utilized, and then only in the event the
Company has future taxable income. A determination of the
limitation of future income tax benefits, which has not been
calculated as yet, will be subject to various factors
existing at the date the ownership change was effected.
ISA's organization as a foreign corporation has no impact on
the determination of whether an ownership change has
occurred.
Regulatory Matters.
The Company's wholly-owned subsidiary, Decom, pursuant
to Federal regulations, has been granted a classified
security clearance. The Company notified the Department of
Defense of the transactions contemplated by the Investment
Agreement and the issuance to ISA of approximately 40% of
outstanding Common Stock pursuant to the Second Agreement.
As a result of ISA's foreign ownership, control and
influence, the Department of Defense will review the
Company's organization, operations and management and,
subject to this review, it may revoke Decom's classified
security clearance. In determining whether Decom is under
foreign ownership, control and influence, the Department of
Defense will consider the relative significance of the
following factors: (a) the level of foreign ownership; (b)
management positions held by foreign interests such as
directors, officers and executive personnel; (c) whether
foreign interests control or are in a position to control or
influence the election or appointment of directors or
officers; (d) contracts with an indebtedness to foreign
interests; and (e) any other factors that indicate a
capability on the part of the foreign interest to control or
influence the operations and management of Decom. ISA has
agreed to take all reasonable actions requested by the
Department of Defense to exclude ISA and its directors and
officers from the classified business and operations of
Decom. The Department of Defense has not advised the
Company of any timetable regarding its deliberations. The
revocation of Decom's classified security clearance could
have an adverse impact on Decom's future operations. Decom
was not awarded any prime contracts or subcontracts
requiring a classified security clearance in the last 12
months.
The Company and ISA have, pursuant to the regulations
generally referred to as the "Exon-Florio Regulations",
filed a joint notice describing the Investment Proposals and
the Second Agreement with the Committee on Foreign
Investment in the United States ("CFIUS"). Under the Exon-
Florio Regulations, if CFIUS does not determine to undertake
an investigation of the transactions contemplated by the
Investment Agreement within 30 days of receipt of the joint
notice, or if an investigation is undertaken but there is no
finding by the President within sixty (60) days that the
Investment Proposals and the Second Agreement threaten to
impair the national security of the United States, then the
Investment Proposals and the Second Agreement will no longer
be subject to any governmental action under the Exon-Florio
Regulations. However, if there is an investigation and an
adverse presidential finding, the Investment Proposals and
the Second Agreement may be suspended temporarily or
prohibited.
Section 203 of the Delaware General Corporation Law
limits business combinations (as therein defined) between
corporations and interested persons (as therein defined,
which would include ISA with respect to the Company
following the exercise of the ISA Option). However, the
statute exempts business combinations with interested
stockholders who became such in a transaction approved by
the board of directors. Accordingly, this statute will not
apply to ISA.
Blank Check Preferred Stock.
As part of the proposals comprising the Investment
Proposals, the Company's Certificate of Incorporation will
be amended to authorize the issuance by the Company's Board
of Directors, without the necessity of further notice of, or
authorization by, stockholders, of up to 2,000,000 shares of
Preferred Stock. The Preferred Stock may be issued from
time to time in one or more series and may have such voting
powers, preferences and relative rights, designations,
qualifications and limitations as the Board of Directors may
fix by resolution at the time of issuance. The
authorization of a class of preferred stock may be viewed as
potentially having the effect of discouraging an unsolicited
attempt by any person or entity to acquire control of the
Company. Authorized shares of preferred stock can be
issued, and have in the past been issued by some
corporations, with voting or conversion privileges intended
to make the acquisition of the issuer more difficult or
costly. By allowing the Board of Directors to establish a
class or series of preferred stock without shareholder
approval, the amendment of the Company's Certificate of
Incorporation could in the future discourage such an attempt
to acquire control of the Company or limit the shareholders'
ability to participate in certain types of transactions
(such as an unsolicited tender offer at a premium price to
market), whether or not such transactions are favored by a
majority of the shareholders, and, as a result, could
enhance the ability of officers and directors to retain
their positions. Pursuant to the Investment Proposals, upon
the exercise of the ISA Option, the Board of Directors will
authorize 8,000 shares of Series A Preferred Stock and
48,000 shares of Series B Preferred Stock for issuance by
the Company. See "Investment Agreement - Authorization of
Preferred Stock."
In the event shareholders approve the Investment
Proposals, but ISA does not exercise its Option, the Board
of Directors will proceed with the Amendment to the
Certificate of Incorporation to authorize 2,000,000 shares
of preferred stock. Therefore, the Board of Directors will
have the flexibility to issue additional shares of Preferred
Stock without further shareholder approval.
See "Investment Proposals - Certain Considerations."
Second Agreement with ISA
Effective July 17, 1996, ISA, RenCap and the Company
entered into a second agreement (the "Second Agreement").
The Second Agreement does not require shareholder approval
and the Company is NOT soliciting proxies from shareholders
for approval of the Second Agreement. The material
provisions of the Second Agreement among the Company, ISA
and RenCap are described below. The following discussion is
qualified in its entirety by reference to the text of the
Second Agreement, a copy of which is attached as Exhibit B
to the Proxy Statement.
In accordance with the provisions of the Second
Agreement, ISA has funded the $1,000,000 Working Capital
Loan initially agreed to in the Investment Agreement and
immediately converted the loan into 4,000,000 shares of
Common Stock at a conversion price of $.25 per share.
Additionally, ISA placed product orders with the Company in
the amount of approximately $2,000,000. As part of the
order placement, ISA deposited with the Company
approximately $500,000 as a down payment for the orders.
These orders will be credited against the $10,000,000 worth
of orders ISA has agreed to place with the Company under the
Investment Agreement. Currently, ISA has placed $3,000,000
worth of orders with the Company, leaving only $7,000,000
worth of orders still to be placed with the Company in
accordance with the terms of the Investment Agreement. In
accordance with the terms of the Second Agreement, the
Company issued 6,000,000 shares of Common Stock to ISA. Of
these shares, 5,000,000 shares will be credited against the
number of shares ISA is entitled to under its Option,
thereby entitling ISA to only approximately 44,009,000
shares upon exercise of its Option.
RenCap has agreed as part of the Second Agreement to
waive its rights under the 12% Convertible Debenture to
receive additional shares of Common Stock. RenCap had the
right under the terms of the 12% Convertible Debenture to
receive Common Stock due to the issuance of shares of Common
Stock to ISA at a price lower than the conversion price set
forth in the 12% Convertible Debenture.
The Company has also agreed to grant access to Ing.
Fernando Pliego, a representative of ISA, necessary to
inspect, monitor and coordinate ISA's orders. Mr. Pliego
will not be granted access to any areas or information that
may be restricted by the regulations of the Department of
Defense. The Company has agreed to reimburse ISA up to
$10,000 per month for ISA's costs in retaining Mr. Pliego.
As a result of the Second Agreement, ISA is the
beneficial owner of 10,000,000 shares of the Common Stock,
representing 40% of the outstanding shares of Common Stock
at July 26, 1996.
INVESTMENT AGREEMENT
Summary of Investment Agreement
The material provisions of the Investment Agreement
among the Company, ISA, RenCap and the Bridge Lenders are
described below. The following discussion is qualified in
its entirety by reference to the text of the Investment
Agreement, a copy of which is attached as Exhibit A to the
proxy statement.
Pursuant to the Investment Agreement entered into among
the Company, ISA, RenCap, and the Bridge Lenders on May 1,
1996, ISA has the right, as of the date of the Investment
Agreement or pursuant to the exercise of its Option
thereunder, to the following: (i) to receive approximately
49,009,000 shares of newly issued Common Stock (of which
5,000,000 shares of Common Stock have already been issued to
ISA pursuant to the Second Agreement), representing
approximately a 69% Common Stock ownership interest in the
Company (assuming the conversion of Series A and Series B
Preferred Stock into shares of Common Stock); (ii) to be
appointed as the Company's exclusive distributor of mobile
data products in Mexico and Central and South America for 18
months; (iii) to appoint and thereafter nominate the
majority of the members of the Company's Board of Directors,
including the Chairman of the Board; (iv) and to manage and
control the day-to-day operations of the Company. Except
for the right to manage and control the day-to-day
operations of the Company and the appointment as the
Company's exclusive distributor of mobile data products in
Mexico, and Central and South America, which were effective
on May 1, 1996, all other rights will become effective at
the time ISA exercises its Option under the Investment
Agreement. Since May 1, 1996, ISA has been primarily
involved with assisting the Company to restructure and
reduce its secured and unsecured debt, and ISA is working
with the Company's current management to improve operating
efficiencies. The Option is exercisable by ISA for a period
of up to twenty days after the date of shareholder approval
of the Investment Proposals, or as extended by ISA. The
Investment Agreement requires shareholder approval on
certain matters on or before June 30, 1996. ISA has
extended this date to September 30, 1996.
Under the Investment Agreement, the Company received or
is to receive, (i) a deposit from ISA of $500,000 as advance
payment for $1,000,000 in orders for the Company's mobile
data products; (ii) a deposit from ISA of $400,000 placed in
a third-party escrow, representing a contribution to the
capital of the Company, such deposit to be released to the
Company at the time ISA exercises its Option; (iii) a
commitment to loan the Company $1,000,000 for working
capital (the "Working Capital Loan"), with funding of the
loan to be made at the time ISA exercises its Option; (iv)
the agreement of RenCap and the Bridge Lenders to
restructure their secured debt (described below) at the time
ISA exercises its Option; and (v) a commitment from ISA to
place $10,000,000 in orders for the Company's products, over
an 18-month period commencing on the date of the Investment
Agreement. ISA's commitment to place $10,000,000 in orders
for the Company's products will be secured by ISA placing in
escrow, pursuant to the Investment Agreement, 50% of the
shares of the Company's Common Stock to be issued to ISA.
If ISA places less than $10,000,000 in orders for mobile
data products with the Company, then ISA shall forfeit 2.4
shares of the Company's Common Stock for each dollar in
orders less than $10,000,000. Further, if ISA does not
exercise its Option and the shareholders approve the
transaction, the Company has the right to retain $200,000 of
the $400,000 capital contribution. The Working Capital Loan
will be due one year from the date made and will pay
interest at the rate of 6% per year. The Working Capital
Loan is convertible into shares of the Company's Common
Stock at a price of $.25 per share, and will be
collateralized by a security interest in substantially all
of the assets of the Company, subject to a more senior
priority security interest in the Company's assets
collateralizing the 6% Note to be issued to the Bridge
Lenders and any other future working capital loans from
third party lenders.
ISA and RenCap have agreed that during the period
before the exercise of the Option by ISA, ISA and RenCap
will not commence foreclosure pursuant to any of their
respective security agreements without the written consent
of the other party. ISA and Bridge Lenders also have agreed
not to commence foreclosure pursuant to any of their
respective security agreements during the period before ISA
exercises its Option without the written consent of the
other party.
Restructure of RenCap Secured Debt
Upon the exercise of ISA's Option, RenCap will amend
its $4,000,000 principal amount, 12% Convertible Debenture,
and all interest accrued and payable thereon, totaling
approximately $4,800,000, to a 6% Debenture ("6%
Debenture"), principal payable in seven years, with interest
of 6% per year payable semi-annually. Interest is to be
paid 50% in cash and 50% in shares of the Company's Common
Stock. The 6% Debenture is to be collateralized by
substantially all of the assets of the Company; however,
this security interest is to be subordinated to existing
senior debt, future working capital debt and the 6% Note.
The 6% Debenture is convertible into 48,000 shares of Series
B Preferred Stock (described below), at such time as: (i)
the value of the shares of Common Stock to be issued upon
the conversion of Series B Preferred Stock is equal to 70%
or more of the principal amount of the 6% Debentures
(approximately $3,380,000 if the principal amount of the 6%
Debenture is $4,800,000); or (ii) at such time as the
Company's shareholders' equity shall equal or exceed
$1,000,000. In addition, based on certain increases in the
market price of the Company's Common Stock ranging from a
base of $.25 per share to $1.00 per share, as set out in the
Investment Agreement, RenCap may receive up to an additional
2,400,000 shares of Common Stock. See "Bonus Shares" below.
Currently, the original 12% Convertible Debenture is in
default due to the Company's failure to pay interest and
principal when due.
The Company can require RenCap to convert the Series B
Preferred Stock into 7,344,100 shares of Common Stock at
such time as the value of the shares of Common Stock, as
determined by the average per share price as quoted by the
NASD, NASDAQ or other applicable over-the-counter market or
stock exchange for the 20 trading days following the filing
of the Company's Form 10-QSB or Form 10-KSB with the
Securities and Exchange Commission, are equal to or exceed
1.5 times the liquidation preference of the Series B
Preferred Stock (approximately $7,200,000 if the liquidation
preference of the Series B Preferred Stock is $4,800,000).
ISA has agreed to transfer shares of the Company's
Common Stock to RenCap if the market value of the 7,344,101
shares of Common Stock into which the Series B Preferred
Stock is convertible falls below $3,360,000 on the date
three years from the date of the closing of the Investment
Agreement. ISA has further agreed to place into an escrow
account 7,344,000 shares of the Company's Common Stock
concurrently with the conversion of the 6% Debenture into
the Series B Preferred Stock.
Restructure of Bridge Loan
Upon the exercise of ISA's Option, the Bridge Lenders
(including RenCap as a holder of $1,000,000 in Bridge Loan
principal) will cancel the $1,800,000 principal amount
Bridge Loan in exchange for the following: (i) the payment
of $400,000 in cash, (ii) the issuance of a new $600,000
principal amount promissory note (the "6% Note"), with
interest at 6% per year; and (iii) the issuance of 8,000
shares of Series A Preferred Stock (described below). In
addition, based on certain increases in the market price of
the Company's Common Stock ranging from a base of $.25 per
share to $1.00 per share, as set out in the Investment
Agreement, the Bridge Lenders could receive up to an
additional 600,000 shares of Common Stock. See "Bonus
Shares" below.
The 6% Note is due in full one year from the date made,
and is collateralized by a security interest in the assets
of the Company's wholly-owned subsidiaries, Decom Systems,
Inc. and Coded Mobile Communications, Inc. This security
interest will be senior to the security interest
collateralizing the 6% Debenture. The 6% Note is
convertible into shares of Common Stock at a conversion
ratio of $.25 of principal for one share.
The Bridge Loan is currently in default due to the
Company's failure to pay interest and principal when due.
Bonus Shares
Pursuant to the terms of the Investment Agreement, the
Company will place into an escrow account 3,000,000 shares
of the Company's Common Stock for the benefit of RenCap and
the Bridge Lenders. The shares will be delivered to RenCap
and the Bridge Lenders upon the exercise of the ISA Option
and the Company's Common Stock reaching certain minimum
trading prices as follows. If the market value of the
Company's Common Stock is at or above $.25 per share, the
holders of the Series A Preferred Stock will receive 200,000
shares and RenCap will receive 800,000 shares of Common
Stock. If the market value of the Company's Common Stock is
at or above $.50 per share, the holders of the Series A
Preferred Stock will receive an additional 200,000 shares
and RenCap will receive an additional 800,000 shares of
Common Stock. If the market value of the Company's Common
Stock is at or above $1.00 per share, the holders of the
Series A Preferred Stock will receive an additional 200,000
shares and RenCap will receive an additional 800,000 shares
of Common Stock. The market value of the Common Stock is to
be determined by the average per share bid price as quoted
by the NASD, NASDAQ or other applicable over the counter
market or stock exchange for the 20 trading days following
the filing of the Company's Form 10-QSB or Form 10-KSB with
the Securities and Exchange Commission.
Change of Control of the Company
Upon the execution of the Investment Agreement, and
subject to any restrictions imposed by the Department of
Defense regarding the management of Decom Systems, Inc.,
ISA was given the right to manage and control the daily
operations of the Company. As part of its management
control, ISA has the authority to negotiate, and subject to
Board approval where required by law, enter into agreements
with creditors an behalf of the Company.
Following shareholder approval of the Investment
Proposals, and the exercise of the Option by ISA, ISA will
hold approximately 54,009,000 shares of the Company's Common
Stock, or approximately 78% of the Common Stock, excluding
the issuance of any shares of Common Stock upon the
conversion of Series A and Series B Preferred Stock and the
exercise of outstanding options to purchase shares of Common
Stock under the Company's 1992 Stock Option Plan. Assuming
only the issuance of 9,744,100 shares of Common Stock on the
conversion of Series A and Series B Preferred Stock, ISA
will hold approximately 69% of the issued and outstanding
shares of Common Stock. As a result of its Common Stock
ownership and the organization of the Board of Directors,
ISA will effectively control the Company.
Amendments to Certificate of Incorporation
The Investment Agreement requires shareholder approval
of an increase in the Company's authorized shares of Common
Stock and the authorization of a class of Preferred Stock.
The Board of Directors has adopted, subject to shareholder
approval, amendments to the Certificate of Incorporation
(the "Amendment" or "Amendments") providing for (i) an
increase in the authorized number of shares of Common Stock,
$.01 par value, to 100,000,000 common shares from 50,000,000
common shares and (ii) the authorization of 2,000,000 shares
of preferred stock, $.01 par value per share. The Company's
current Certificate of Incorporation authorizes 50,000,000
shares, $.01 par value per share, of Common Stock. If the
Investment Proposals are approved by the shareholders, the
Amendments will become effective at the time the Company
files the Amendments with the Secretary of the State of
Delaware. It is anticipated that such action will occur as
soon as practical after the Investment Proposals are
approved by shareholders.
The text of the Amendments to the Certificate of
Incorporation is set out below:
A.
"The total number of shares of capital stock which the
Corporation shall have authority to issue is one hundred two
million (102,000,000) shares, of which one hundred million
(100,000,000) shares shall be common stock, $.01 par value
per share, and two million (2,000,000) shares shall be
preferred stock, $.01 par value per share (the "Preferred
Stock").
B.
Shares of the Preferred Stock of the Corporation may be
issued from time to time in one or more classes or series,
each of which class or series shall have such distinctive
designation or title as shall be fixed by the Board of
Directors of the Corporation (the "Board of Directors")
prior to the issuance of any shares thereof. Each such
class or series of Preferred Stock shall have such voting
powers, full or limited, or no voting powers, and such
preferences and relative, participating, optional or other
special rights and such qualifications, limitations or
restrictions thereof, as shall be stated in such resolution
or resolutions providing for the issue of such class or
series of Preferred Stock as may be adopted from time to
time by the Board of Directors prior to the issuance of any
shares thereof pursuant to the authority hereby expressly
vested in it, all in accordance with the laws of the State
of Delaware."
Increase in Number of Authorized Shares of Common Stock
The increase in the authorized number of shares of
Common Stock from 50,000,000 shares to 100,000,000 shares is
necessary to complete the Investment Agreement. Further,
the Company has financed its operations primarily through
the private sale of Common Stock, common stock purchase
warrants, and debt convertible into shares of Common Stock.
The Board believes that the Company, in the future, will
need the additional shares of Common Stock not issued
pursuant to the Investment Agreement for additional capital,
including the private or public sale of Common Stock and/or
debt convertible into shares of Common Stock.
The increase in authorized Common Stock will allow the
Company the flexibility to issue additional shares in a
timely manner at the most favorable market conditions
without further shareholder approval. Additional Common
Stock could also be used for employee benefit plans, as
consideration in connection with the acquisition of products
or technology, and for the issuance of warrants by the
Company in special purpose financing. In the event of a
potential takeover, additional shares could be issued at
terms and conditions that might be less favorable to
shareholders; however, the increase in authorized capital is
not intended as an anti-takeover measure.
If the shareholders approve the Investment Proposals,
but ISA does not exercise its Option, the Board will proceed
with the amendment to the Certificate of Incorporation so
that the Certificate will authorize 100,000,000 shares of
Common Stock. Therefore, the Board will have the
flexibility to issue additional shares of Common Stock
without further shareholder approval.
Authorization of Preferred Stock
Under the Amendment to authorize 2,000,000 shares of
preferred stock, preferred stock could be issued in one or
more classes or series upon adoption by the Board of
Directors of an amendment to the Certificate of
Incorporation, without any further action by the
shareholders. The Amendment gives the Board of Directors
the authority to determine the designation, rights,
preferences, privileges and restrictions, including voting
rights, conversion rights, right to receive dividends, right
to assets upon any liquidation, and other relative benefits,
restrictions and limitations of any series of preferred
stock. The Board of Directors will also determine whether
such preferred stock will be convertible into other
securities of the Company, including the Common Stock.
Accordingly, the issuance of preferred stock, while
promoting flexibility in connection with possible
recapitalization and other corporate purposes, could
adversely affect the voting rights of the holders of, or the
market price of, the Common Stock. The holders of preferred
stock may also have the right to vote separately as a class
on any proposal involving fundamental changes in the rights
of holders of preferred stock pursuant to the Delaware
Corporation Law.
In addition, the authorization of a class of preferred
stock may be viewed as potentially having the effect of
discouraging an unsolicited attempt by any person or entity
to acquire control of the Company. Authorized shares of
preferred stock can be issued, and have in the past been
issued by some corporations, with voting or conversion
privileges intended to make the acquisition of the issuer
more difficult or costly. By allowing the Board of
Directors to establish a class or series of preferred stock
without shareholder approval, the Amendment could in the
future discourage such an attempt to acquire control of the
Company or limit the shareholders' ability to participate in
certain types of transactions (such as an unsolicited tender
offer at a premium price to market), whether or not such
transactions are favored by a majority of the shareholders,
and, as a result, could enhance the ability of officers and
directors to retain their positions.
The Company has no present agreements, understandings,
arrangements or other plans to issue any shares of preferred
stock, except as provided by the Investment Agreement
pursuant to which shares of Series A Preferred Stock and
Series B Preferred Stock are to be authorized by the Board
of Directors.
If the shareholders approve the Investment Proposals,
but ISA does not exercise its Option, the Board will proceed
with the amendment to the Certificate of Incorporation so
that the Certificate will authorize 2,000,000 shares of
preferred stock. Therefore, the Board will have the
flexibility to issue additional shares of preferred stock
without further shareholder approval.
Series A Preferred Stock
The Bridge Lenders will receive 8,000 shares of Series
A Preferred Stock in partial consideration for the
cancellation of the Bridge Loan. The Board of Directors of
the Company will adopt a Certificate of Designation defining
the terms of the Series A Preferred Stock. The Company
intends to cause the Certificate of Designation to become
effective immediately following the shareholder approval of
the Amendment and ISA's exercise of its Option. The general
rights and provisions of the Series A Preferred Stock are
described below.
Rank. With respect to the payment of dividends and the
distribution of assets on liquidation, dissolution and
winding up of the Company, the Series A Preferred Stock
ranks senior to the Common Stock and the Series B Preferred
Stock, and on a parity with or senior to each other series
of preferred stock thereafter issued by the Company.
Liquidation Value. The liquidation value of the Series
A Preferred Stock is equal to $100 per share or $800,000 in
the aggregate.
Dividends. Holders of Series A Preferred Stock are
entitled to receive when and as declared by the Board of
Directors, dividends at the rate of 8% of the liquidation
value ($8 per share) per annum, payable in equal semi-annual
payments. Dividends shall accrue on a daily basis and shall
cumulate from the date of original issue of the Series A
Preferred Stock. Accrued but unpaid dividends shall accrue
as of the semi-annual dividend payment date on which they
first became payable and will be paid 50% in cash and 50% in
shares of Common Stock having a market value equal to the
50% of the dividend amount. No dividends may be paid to or
declared or set aside for the benefit of holders of any
class or series of stock ranking on a parity with the Series
A Preferred Stock in the payment of dividends if at the time
there shall be any current or accumulated cash dividends
payable to the Series A Preferred Stock, unless at the same
time a like proportionate dividend, pro rata based on the
annual dividend rates of the Series A Preferred Stock and
such parity stock, shall at the same time be paid to or
declared and set aside for the benefit of holders of the
Series A Preferred Stock entitled to receive such dividend.
As to dividends, the Series A Preferred Stock will rank
senior to the Series B Preferred Stock.
Liquidation Preference. In the event of any
liquidation, dissolution or winding up of the Company,
holders of Series A Preferred Stock will be entitled to
receive in preference to holders of any stock ranking junior
to the Series A Preferred Stock, the liquidation value of
$100 per share or $800,000 plus an amount equal to all
accrued but unpaid dividends thereon on the date of final
distribution to such holders. If, upon any liquidation,
dissolution or winding up of the Company, such payment shall
not have been made in full to the holders of all outstanding
shares of Series A Preferred Stock, the holders of Series A
Preferred Stock and all other classes or series of stock of
the Company ranking on a parity therewith in the
distribution of assets, shall share ratable in any
distribution of assets in proportion to the full amounts to
which they would otherwise be respectively entitled. The
Series A Preferred Stock will rank senior to the Series A
Preferred Stock.
Voting Rights. Except as required by the Delaware
General Corporation Law, the holders of shares of Series A
Preferred Stock shall have the right to vote with the
holders of Common Stock on all matters as to which the
holders of Common Stock are entitled to vote. The number of
votes per share which the holders of Preferred Stock may
cast (300 votes per share) shall be adjusted, upon any
change in the Conversion Ratio as described below, to equal
the number of shares of Common Stock into which it would
then be convertible (whether or not such conversion is
restricted or prohibited for any reason).
Conversion. Each share of Series A Preferred Stock is
convertible into 300 shares of the Company's Common Stock,
subject to certain adjustments. The Series A Preferred
Stock provides for adjustments upon the occurrence of
certain events including, but not limited to, stock
dividends, stock subdivisions or reclassifications or
combinations. In addition, upon the occurrence of any
merger or combination or similar transaction, the Series A
Preferred Stock is convertible into the consideration
received by the holders of the Common Stock in such merger,
combination or similar transaction. The Series A Preferred
Stock will be subject to mandatory conversion into Common
Stock at any time the market value of the shares of Common
Stock into which the Series A Preferred Stock is converted,
equals to or exceeds 1.5 times the liquidation preference of
the Series A Preferred Stock (approximately $1,200,000 if
the liquidation preference is $800,000). The market value
of the Common Stock is to be determined by the average per
share bid price as quoted by the NASD, NASDAQ or other
applicable over the counter market or stock exchange for the
20 trading days following the filing of the Company's Form
10-QSB or Form 10-KSB with the Securities and Exchange
Commission.
Registration. The shares of Series A Preferred Stock
and the shares of Common Stock into which the Series A
Preferred Stock are convertible, will not be registered
under the 1933 Act and, therefore, the shares may not be
sold in a public market unless registered under the 1933
Act. The Company has agreed to give the Bridge Lenders
certain registration rights with respect to the shares of
Common Stock, with the cost of such registration to be paid
by the Company.
Series B Preferred Stock
RenCap will receive 48,000 shares of Series B Preferred
Stock upon conversion of the 6% Debenture. The Board of
Directors of the Company will adopt a Certificate of
Designation defining the terms of the Series B Preferred
Stock. The general rights and provisions of the Series B
Preferred Stock are described below.
Rank. With respect to the payment of dividends and the
distribution of assets on liquidation, dissolution and
winding up of the Company, The Series B Preferred Stock
ranks senior to the Common Stock, but ranks junior to the
Series A Preferred Stock.
Liquidation Value. The liquidation value of the Series
B Preferred Stock is equal to $100 per share or $4,800,000
in the aggregate.
Dividends. Holders of Series B Preferred Stock are
entitled to receive when and as declared by the Board of
Directors, dividends at the rate of 6% of the liquidation
preference per annum, per share, payable in equal semi-
annual payments. Dividends shall accrue on a daily basis
and shall cumulate from the date of original issue of the
Series B Preferred Stock. Accrued but unpaid dividends
shall accrue as of the semi-annual dividend payment date on
which they first became payable and will be paid 50% in cash
and 50% in shares of Common Stock having a market value
equal to the 50% of the dividend amount. No dividends may
be paid to or declared or set aside for the benefit of
holders of any class or series of stock ranking on a parity
with the Series B Preferred Stock in the payment of
dividends if at the time there shall be any current or
accumulated cash dividends payable to the Series B Preferred
Stock, unless at the same time a like proportionate
dividend, pro rata based on the annual dividend rates of the
Series B Preferred Stock and such parity stock, shall at the
same time be paid to or declared and set aside for the
benefit of holders of the Series B Preferred Stock entitled
to receive such dividend. As to dividends, the Series B
Preferred Stock will rank junior to the Series A Preferred
Stock.
Liquidation Preference. In the event of any
liquidation, dissolution or winding up of the Company,
holders of Series B Preferred Stock will be entitled to
receive in preference to holders of any stock ranking junior
to the Series B Preferred Stock, the liquidation value of
$100 per share or an aggregate of $4,800,000, plus an amount
equal to all accrued but unpaid dividends thereon on the
date of final distribution to such holders. If, upon any
liquidation, dissolution or winding up of the Company, such
payment shall not have been made in full to the holders of
all outstanding shares of Series B Preferred Stock, the
holders of Series B Preferred Stock and all other classes or
series of stock of the Company ranking on a parity therewith
in the distribution of assets, shall share ratable in any
distribution of assets in proportion to the full amounts to
which they would otherwise be respectively entitled. The
Series B Preferred Stock will rank junior to the Series A
Preferred Stock.
Voting Rights. Except as required by the Delaware
General Corporation Law, the holders of shares of Series B
Preferred Stock shall have the right to vote with the
holders of Common Stock on all matters as to which the
holders of Common Stock are entitled to vote. The number of
votes per share which the holders of Preferred Stock may
cast (153 votes per share) shall be adjusted, upon any
change in the conversion ratio as described below, to equal
the number of shares of Common Stock into which it would
then be convertible (whether or not such conversion is
restricted or prohibited for any reason).
Conversion. Each share of Series B Preferred Stock is
convertible into 153 shares of the Company's Common Stock,
subject to certain adjustments. The Series B Preferred
Stock provides for adjustments upon the occurrence of
certain events including, but not limited to, stock
dividends, stock subdivisions or reclassifications or
combinations. In addition, upon the occurrence of any
merger or combination or similar transaction, the Series B
Preferred Stock is convertible into the consideration
received by the holders of the Common Stock in such merger,
combination or similar transaction. The Series B Preferred
Stock will be subject to mandatory conversion into Common
Stock at any time the market value of the shares of Common
Stock into which the Series
B Preferred Stock is convertible, equals or exceeds 1.5
times the liquidation preference of the Series B Preferred
Stock (approximately $7,200,000 if the liquidation
preference of the Series B Preferred Stock is $4,800,000).
The market value of the Common Stock is to be determined by
the average per share bid price as quoted by the NASD,
NASDAQ or other applicable over the counter market or stock
exchange for the 20 trading days following the filing of the
Company's Form 10-QSB or Form 10-KSB with the Securities and
Exchange Commission.
Registration. The shares of Series B Preferred Stock
to be issued to RenCap upon conversion of the 6% Debenture,
and the shares of Common Stock to be issued upon the
conversion of the Series B Preferred Stock, will not be
registered under the provisions of the 1933 Act, and
therefore, the shares may not be sold in the public market
unless the shares are so registered or unless the sale of
shares are exempt from registration. The Company has agreed
to give RenCap certain registration rights, with respect to
the shares of Common Stock, with the cost of such
registration to be paid by the Company.
Employee Stock Option Plan
Pursuant to the Investment Agreement, the Company's
1992 Option Plan will be continued for the benefit and
incentive of the employees of Coded. Under the Investment
Agreement, the number of shares available for grant to
employees, including officers, is not to exceed 15% of the
total number of outstanding shares of the Company's Common
Stock, calculated on a fully diluted basis. Prior to the
issuance of additional shares of Common Stock and Series A
and Series B Preferred Stock contemplated under the
Investment Agreement, the number of shares of Common Stock
authorized under the 1992 Option Plan and available for
grant to employees equals approximately 15% of the total
number of outstanding shares of Common Stock calculated on a
fully diluted basis. In April 1996, subject to the
consummation of the Investment Agreement and thereafter the
approval of the Company's shareholders, the Company granted
to employees, including officers, options to purchase a
total of 8,000,000 shares of Common Stock, at an exercise
price of $.30 per share. The exercise price approximates
the NASD-quoted price per share of the Company's Common
Stock on the date of grant. The options vest over a three
year period. Under this grant, John Robinson, the Company's
CEO and President, was granted an option to purchase
1,000,000 shares of Common Stock, and the other officers of
the Company, as a group (4 persons), were granted options to
purchase an aggregate of 4,000,000 shares of Common Stock.
INFORMATION ON ISA AND MANAGEMENT FOLLOWING
THE INVESTMENT PROPOSALS
Background
The information summarized below regarding ISA was
provided by ISA and the Company has not confirmed the
accuracy of the information.
The Company was informed that ISA is one of a
privately-held group of 10 affiliated companies
(collectively, "Grupo ISA"), each of which is incorporated
under the laws of Mexico. The combined unaudited revenues
of Grupo ISA were approximately $48,000,000 in 1995. Mr.
Hugo R. Camou is the Chairman of the Board and majority
shareholder of ISA. In addition to the distribution of the
Company's mobile data products, Grupo ISA is engaged in the
distribution of mobile data products, satellite
communications, computer network systems, electronic signage
and advertising. ISA designs, installs, distributes and
operates electronic equipment for information display,
visual communications and advertising. ISA's products and
systems include airport flight information display systems,
and information display systems for stock exchanges and
stockbrokers. In addition, ISA operates a nationwide
network of remote controlled electronic signs throughout
Mexico featuring full color, large format signs used for
advertising. Other Grupo ISA companies include a provider
of telecommunications services in Mexico, primarily as a
long-distance telephone carrier with a teleport in Cancun,
Mexico; and the largest producer in Mexico of computerized,
full color, large format images. Grupo ISA also operates
over 1,000 billboards throughout Mexico. ISA and Grupo
ISA's principal executive offices are located at Orizaba
No.182 Col., Roma 06700, Mexico, D.F.
Prior to the date of the Investment Agreement, ISA was
the Company's only distributor of mobile data products in
Mexico. Since November 1995, ISA has placed approximately
$3,500,000 in orders for the Company's mobile data products
of which orders totaling approximately $3,000,000 are to be
credited against ISA's total order commitment of $10,000,000
pursuant to the Investment Agreement.
At July 30, 1996, ISA held 10,000,000 shares of Common
Stock, or approximately 40% of the outstanding shares of
Common Stock. ISA has indicated it will vote all of its
shares "FOR" approval of the Investment Proposals.
Management and Directors
Hugo Camou, age 39, is the Chairman of the Board of
Directors and the CEO of ISA. Mr. Camou also serves as
Chairman of the Board for all wholly-owned or majority-owned
affiliated companies. Mr. Camou founded ISA in 1988 and
presently holds all of its capital stock. Mr. Camou holds a
degree in mathematics and physics from the Instituto
Poletecnico Nacional. Prior to organizing ISA, Mr. Camou
taught computer science and mathematics for undergraduate
and graduate university programs.
In the event shareholders approve the Investment
Proposals and ISA exercises its Option under the Investment
Agreement, then, Mr. Camou will be appointed as Chairman of
the Board of the Company. The Company anticipates a Board
of Directors initially composed of five members; three of
which will be appointed by ISA, including Mr. Camou; one of
which will be John Robinson, the Company's CEO and
President; and one of which will be appointed by RenCap.
Other than Mr. Camou, ISA has not made a decision on its
appointment of the other two members of the Board of
Directors.
If the transactions contemplated by the Investment
Proposals are consummated, there is no commitment by ISA to
retain the current executive officers of the Company;
however, ISA has expressed its present intent to retain all
of the Company's executive officers in positions of
responsibility. All of the Company's executive officers
have expressed their present intent to continue employment
with the Company. All of the executive officers of the
Company have employment agreements or letter arrangements
which provide for severance benefits in the event of
termination and/or change of control. See "Executive
Compensation and Benefits - Employment Agreements."
Pursuant to the Investment Agreement and effective May
1, 1996, ISA has the right to control the day-to-day
operations of the Company. To date, ISA has been primarily
involved with assisting the Company to restructure and
reduce its secured and unsecured debt. In addition, ISA is
working with the Company's management to improve
organizational and operating efficiencies.
If the shareholders do not approve the Investment
Proposals, then the directors nominated by management and
elected at the Annual Meeting will serve as members of the
Board of Directors. Also, it is anticipated in that case
that all present executive officers will continue in their
current positions. See "Election of Directors and
Information Concerning Directors and Executive Officers."
INFORMATION CONCERNING THE COMPANY
Price Range of Common Stock
<TABLE>
The following table sets forth, for the fiscal quarter
indicated, the high and low closing price of the Company's
common stock as reported by the NASDAQ SmallCap Market and
NASD OTC Electronic Bulletin Board, as applicable. The
Company was removed from the NASDAQ SmallCap Market on
December 8, 1994, so that any quotes subsequent to that date
are from the NASD OTC Electronic Bulletin Board. The
Company is also traded on Vancouver Stock Exchange.
<CAPTION>
High Low
Year ended December 31, 1994:
<S> <C> <C>
March quarter $ 5.13 $ 2.50
June quarter 3.56 2.38
September quarter 2.81 2.13
December quarter 2.38 .63
Year ended December 31, 1995:
March quarter $ 1.22 $ .47
June quarter .63 .19
September quarter .91 .44
December quarter .63 .20
Year ending December 31, 1996:
March quarter $ .42 $ .20
June quarter .55 .28
</TABLE>
The number of beneficial owners of the Company's
common stock was estimated to be in excess of 3,000 at July
26, 1996. As of July 26, 1996, the Company had
approximately 800 shareholders of record.
There have been no dividends or other distributions
made by the Company since its inception. The Company does
not anticipate paying cash dividends in the foreseeable
future.
Selected Financial Information
The consolidated financial statements of the Company
and related notes thereto for the year ended December 31,
1995 and the unaudited consolidated condensed financial
statements and related notes for the six month period ended
June 29, 1996, are being mailed to all shareholders of
record with this Proxy Statement. Shareholders may obtain a
copy of the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1995, at the principal office of the
Company, 1939 Palomar Oaks Way, Carlsbad, California 92009.
<TABLE>
The consolidated statement of loss data for the fiscal
years ended December 31, 1994 and 1995, and the consolidated
balance sheet data at December 31, 1994 and 1995 are derived
from audited consolidated financial statements not included
in this Proxy Statement. The consolidated statement of
income (loss) data for the six month periods ended July 1,
1995 and June 29, 1996, and the consolidated balance sheet
data at July 1, 1995 and June 29, 1996 are derived from
unaudited consolidated financial statements not included in
this Proxy Statement. The Company believes that the
information at July 1, 1995 and June 29, 1996 and for the
six month periods then ended, contained all adjustments,
consisting of only normal recurring accruals, necessary for
the fair presentation of the financial position at such
dates and the results of operations for such periods. The
results of operations for the six months ended June 29, 1996
are not necessarily indicative of the results to be expected
for the full year.
<CAPTION>
(Amounts in thousand except per share)
Six Months Ended
Year Ended December 31, July 1, June 29,
1994 1995 1995 1996
Consolidated Statement of Loss:
<S> <C> <C> <C> <C>
Net sales $ 14,291 $ 10,171 $ 4,526 $ 5,270
Gross margin 3,803 2,788 685 2,324
Operating expenses 12,859 4,476 2,623 2,084
Restructuring expenses 3,151 0 0 0
Operating income (loss) (12,207) (1,688) (1,938) 240
Extraordinary item 0 1,367 0 215
Net income (loss) (12,929) (1,117) (2,331) 37
Net income (loss) per share $ (1.07) $ (.07) $ (.18) $ 0
Average shares outstanding 12,127 14,244 13,313 14,712
<CAPTION>
December 31, July 1, June 29,
1994 1995 1995 1996
Consolidated Balance Sheet:
<S> <C> <C> <C> <C>
Total assets $ 8,175 $ 5,821 $ 6,730 $ 5,096
Current and long-term debt 6,051 7,195 5,412 7,152
Shareholders' deficit (7,614) (7,571) (8,890) (7,500)
Working capital (deficit) $ (9,232) $ (7,648) $ (10,148) $ (7,579)
</TABLE>
Capitalization
<TABLE>
Set forth below is the consolidated capitalization of
the Company as of June 29, 1996 which is derived from the
unaudited consolidated financial statements of the Company,
and the pro forma capitalization of the Company as of that
date, adjusted first to only give effect to the Investment
Proposals and the conversion of the Working Capital Loan
into shares of Common Stock, and second adjusted further to
give effect to the conversion of the (i) Series A Preferred
Stock into shares of Common Stock and (ii) the 6% Debenture
into Series B Preferred Stock and then the immediate
conversion of Series B Preferred Stock into shares of Common
Stock. See "Unaudited Pro Forma Condensed Financial
Information."
<CAPTION>
(Dollars in Thousands)
June 29, 1996
As Pro Forma Pro
Actual Adjustments Adjusted Adjustments Forma
<S> <C> <C> <C> <C> <C>
Bridge Loan $ 1,800 $ (1,800)(a) $ 0 $ 0 $ 0
12% Convertible Debentures, including
accrued interest 4,800 (4,800)(b) 0 0 0
Working Capital Loan, 6% interest 0 0 (c) 0 0 0
6% Note 0 600 (a) 600 0 600
6% Convertible Debenture (discounted
to 10% interest rate) 0 3,150 (b) 3,150 (3,150)(e) 0
Creditors' Note and other current
liabilities 1,343 0 1,343 0 1,343
Total short-term and long-term debt 7,943 (2,850) 5,093 (3,150) 1,943
Shareholders' equity (deficit):
Preferred stock, no shares authorized
(as adjusted 2,000,000 shares authorized) 0 800 (a) 800 (800)(f) 0
Common Stock, 50,000,000 shares
authorized(as adjusted 100,000,000
shares authorized); 14,758,201
shares outstanding (as adjusted
77,511,301 shares outstanding) 23,510 3,050 (b)(d) 26,560 3,950 (e)(f) 30,510
Accumulated deficit (31,010) 0 (31,010) 0 (31,010)
Total shareholders' equity
(deficit) (7,500) 3,850 (3,650) 3,150 (500)
Total capitalization $ 443 $ 1,000 $ 1,443 $ 0 $ 1,443
<FN>
The adjustments to reflect the Investment Agreement and
conversion of the Working Capital Loan into Common Stock are
as follows:
(a) Adjustments to reflect cancellation of Bridge Loan
in exchange for a cash payment of $400,000 and the
issuance of a one year 6% Note and 8,000 shares of
Series A Preferred Stock.
(b) Adjustment to reflect cancellation of 12% Convertible
Debenture and accrued interest in exchange for a new 6%
Debenture, net of a discount of $1,650,000 to reflect an
effective interest rate of 10%. For purposes of this
presentation, the discount of $1,650,000 is credited to
Common Stock.
(c) Adjustment to reflect $1,000,000 Working Capital
Loan and its immediate conversion into 4,000,000 shares
of Common Stock.
(d) Adjustment to reflect issuance of 49,009,000 shares
of Common Stock for cash payment of $400,000.
The pro forma adjustments to reflect the conversion of the
6% Debenture into Series B Prefered Stock and the conversion
of Series A and B Preferred Stock into Common Stock are as
follows:
(e) Adjustments to reflect the conversion of the 6%
Debenture, first into 48,000 shares of Series B
Preferred Stock and second the conversion of 48,000
shares of Series B Preferred Stock into 7,344,100 shares
of Common Stock. The mandatory conversion of the 6%
Debenture into Series B Preferred Stock and the
conversion of Series B Preferred Stock into shares of
Common Stock is subject to certain future events not
controlled by the Company.
(f) Conversion of 8,000 shares of Series A Preferred
Stock into 2,400,000 shares of Common Stock. The
conversion of the Series A Preferred Stock into shares
of Common Stock is subject to certain future events not
controlled by the Company.
</F>
</TABLE>
RATIFICATION OF SELECTION OF ACCOUNTANTS
(PROPOSAL 3)
Unless marked to the contrary, proxies received will be
voted "FOR" the ratification of the appointment of Coopers &
Lybrand, LLP as independent accountants for the current
year. A representative of Coopers & Lybrand, LLP is
expected to attend the Annual Meeting and be available to
respond to appropriate questions. The representative will
also have an opportunity to make a statement if he or she
desires to do so. Coopers & Lybrand, LLP have been the
Company's independent accountants since 1987.
OTHER MATTERS
The Board of Directors knows of no other business which
will be presented for consideration at the Annual Meeting
other than as stated in the Notice of Annual Meeting.
However, if any other matters are properly brought before
the Annual Meeting or any adjournment thereof (including the
election of any substitute for any of the foregoing nominees
who is unable to, or for good cause will not, serve on the
Board of Directors), the proxyholders will have the
discretionary authority to vote the shares represented by
proxy in accordance with their best judgment.
Any proposal of a shareholder intended to be presented
at the Company's 1997 Annual Meeting of Shareholders must
submit such proposal no later than February 25, 1997.
Shareholder proposals should be submitted to John Robinson,
Coded Communications Corporation, 1939 Palomar Oaks Way,
Carlsbad, CA 92009.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by the Company with the
Securities and Exchange Commission (the "Commission")
pursuant to the Securities Exchange Act of 1934 (the
"Exchange Act") are incorporated into this Proxy Statement
by reference: (1) the Company's Annual Report to
Shareholders for the fiscal year ended December 31, 1995
and (2) the Company's Quarterly Report on Form 10-QSB for
the quarter ended March 30, 1996, as filed with the
Commission on April 29, 1996. Any statement incorporated by
reference herein shall be deemed to be modified or
superseded for purposes of this Proxy Statement to the
extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall
not be deemed, except as so modified or superseded, to
constitute a part of this Proxy Statement.
The Company's Annual Report to Shareholders for the
year ended December 31, 1995 and its Quarterly Report on
Form 10-QSB for the three month period ended March 30, 1996
are being furnished to shareholders with this definitive
Proxy Statement.
1995 ANNUAL REPORT ON FORM 10-KSB
The Company's Annual Report on Form 10-KSB, including
the financial statements and the financial schedules,
required to be filed with the Securities and Exchange
Commission for the year ended December 31, 1995, will be
furnished without charge to any shareholders upon written
request to: Coded Communications Corporation, Investors
Relations, 1939 Palomar Oaks Way, Carlsbad, California
92009.
By Order of the Board of Directors
/s/ John A. Robinson, Jr.
John A. Robinson, Jr., Chairman
Carlsbad, California
August 8, 1996
CODED COMMUNICATIONS CORPORATION
PROXY
FOR THE ANNUAL MEETING TO BE HELD SEPTEMBER 10, 1996
THIS PROXY IS SOLICITED ON BEHALF OF THE MANAGEMENT OF THE COMPANY
The undersigned, being a shareholder of Coded Communications Corporation (the
"Company"), hereby appoint(s) John A. Robinson, Jr., and Steven E. Borgardt,
as proxies with full power of substitution and authorizes them or any of
them, to attend the Annual Meeting of the Company to be held on September 10,
1996, and at any adjournment thereof, and to vote all the shares of
common stock of the Company registered in the name of the undersigned
with respect to the matters set forth below as follows:
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION
IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS 1, 2, AND 3.
1. ELECTION OF DIRECTORS:
/ / FOR ALL nominees listed / / WITHHOLD AUTHORITY
below (except as marked to vote for ANY of the nominees
to the contrary below) listed below
NOMINEES: Steven E. Borgardt, James W. Kenney, and John A. Robinson, Jr.
INSTRUCTION: To withhold authority to vote for any individual nominee,
write that nominee's name on the space provided below:
2. Investment Proposals (the effectiveness of each of the proposals below is
contingent on the approval of the others, and will not be effective unless
all three proposals are approved):
2(a) Proposal to approve the Investment Agreement.
/ / FOR / / AGAINST / / ABSTAIN
2 (b) Amendment of the Certificate of Incorporation to increase number of
authorized shares of Common Stock, $.01 par value, from 50,000,000
to 100,000,000 shares.
/ / FOR / / AGAINST / / ABSTAIN
2 (c) Amendment of the Certificate of Incorporation to authorize
2,000,000 shares of Preferred Stock, to be issued from
time-to-time in such amounts and designations as authorized
by the Board of Directors.
/ / FOR / / AGAINST / / ABSTAIN
3. Proposal to ratify the appointment of Coopers & Lybrand as independent
accountants for the current year.
/ / FOR / / AGAINST / / ABSTAIN
4. With respect to the transaction of such other business as may
properly come before the Annual Meeting, as the proxyholders,
in their sole discretion, may see fit.
SHAREHOLDERS WHO ATTEND THE MEETING MAY VOTE IN PERSON
EVEN THOUGH THEY HAVE PREVIOUSLY MAILED THIS PROXY.
PLEASE DATE, SIGN AND MAIL THIS PROXY CARD IN THE ENCLOSED
ENVELOPE.
Dated, 1996
SIGNATURE OF SHAREHOLDER SIGNATURE OF SHAREHOLDER
PRINT NAME PRINT NAME
IMPORTANT: Please date this Proxy and sign exactly as name(s)
appear(s) hereon. When signing as a fiduciary, please give your
full title. Return his Proxy promptly in the enclosed envelope.
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. 1
Filed by the Registrant /x/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/x/ Preliminary Proxy Statement / / Confidential for Use of the
Commission.Only (as permitted by
Rule 14a-6(e)(2)
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Coded Communications Corporation (File No. 0 17574)
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
(Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1),
or 14a-6(i)(2) or Item 22(a)(2) of Schedule 14A.\
/ / $500 per each party to the controversy pursuant to Exchange
Act Rule 14a-6(i)(3)/
/ / Fee computed on table below per Exchange Act Rules
14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth
the amount on which the filing fee is calculated and state
how it was determined);
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
/x/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange
Act Rule 0- 11(a)(2) and identify the filing for which the
offsetting fee was paid previously. Identify the previous filing by
registration statement number, or the Form or Schedule and the
date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed
EXHIBIT A
MUTUAL AGREEMENT OF
TERMS AND CONDITIONS
This Mutual Agreement of Terms and Conditions is entered
into by and between Grupo Information, Satellites & Advertising,
S.A. de C.V. ( ISA ), Renaissance Capital Partners II Limited
(Renaissance), certain holders of the $1.8 million Bridge Loan
(Bridge Lenders ) and Coded Communications Corporation (Coded)
this 1st day of May, 1996.
Whereas, all the parties to this agreement desire to
recapitalize Coded so as to enable Coded to operate efficiently
and effectively for the benefit of it customers, shareholders,
investors and employees; and
Whereas, the parties have a desire to avoid the liquidation
or foreclosure of the assets of Coded;
Now, therefore, in consideration of mutual promises by and
between the parties to this agreement, and for other valuable
consideration, receipt and sufficiency of which is hereby
acknowledged, the parties hereby agree as follows:
1.0 Current Arrangements between Coded and ISA
1.1 ISA Order and Deposit.
Upon execution of this agreement and implementation of
paragraph 1.2, ISA shall immediately place an order for
approximately One Million Dollars ($US) worth of goods and/or
services with Coded and shall deposit $500,000 ($US) against this
order placed with Coded.
1.2 Management and Control.
Upon receiving the approximately $1.0 million dollar ($US)
order and receiving the $500,000 ($US) deposit, Coded shall be
deemed to have granted ISA the right to manage and control the
day to day operations of Coded, including but not limited to the
right to negotiate and enter into agreements on behalf of Coded
to restructure the trade payables and other debt of Coded. ISA
will work with Coded to preserve working relationships and vendor
good will to the extent that such can or should be preserved.
Coded shall execute such debt restructure agreements negotiated
by ISA on Coded's behalf as partial consideration for the order
and deposit being placed by ISA and the other provisions of this
agreement. This grant to ISA shall terminate upon the expiration
of the Option period described below.
1.3 Grant of Option to ISA
Coded hereby grants to ISA an option to (1) acquire 66.7% of
the Coded common stock and (2) to become the exclusive
distributor for Coded in all of Mexico, Central and South America
during the eighteen months following exercise of the option
(provided that while ISA is the exclusive distributor for Coded
in these areas ISA can not sell products competitive to the Coded
product line), all in exchange for $400,000 in cash, a loan of
$1.0 million, the promise to place at least $10.0 million in
orders over eighteen months from the signing of this agreement
and for inducing Renaissance and the Bridge Lenders to make
modifications to their positions, the other consideration set
forth herein, all as more definitively set forth in this
Agreement. This option may be exercised if at all by faxing a
written exercise of option to Coded at (619) 438-8796 within
sixty days of execution of this agreement. ISA may, at its sole
option, extend this time period to a date twenty days after
shareholder approval is secured for those terms of this agreement
that require shareholder approval.
Upon exercise of the option, Coded shall immediately issue
to ISA an amount of Coded common shares on an "after-conversion"
basis (see paragraph 4.1) equal to 66.7% of outstanding common
shares. By way of example, ISA shall be issued 49,008,703 common
shares if there are outstanding on an "after-conversion" basis
73,441,005 shares of common stock on the date of the closing of
this transaction as shown in paragraph 4.1. This common stock
shall have one demand registration right with reasonable
registration costs to be borne by Coded. The terms of the
registration right will be at least as favorable as the terms of
the registration right agreement between Renaissance and Coded
entered into at the time of the original Debenture.
1.4 Contribution to Pay Bridge Loan. Upon signing of this
agreement, ISA shall place $400,000 into escrow at a United
States banking or trust institution selected by Renaissance in
the name of Coded to be released as a capital contribution to
Coded or returned as follows:
(a) If the shareholders decline to approve the transactions
described in this agreement that require shareholder approval
within sixty days (or as extended at ISA's sole option), then the
funds shall be returned to ISA immediately. Notwithstanding any
other provision of this agreement, if the shareholders decline to
so approve, then ISA shall be deemed to have been granted a three
year exclusive distributorship for Coded products for Mexico,
Central and South America without any performance requirements,
but otherwise with terms similar to distributorship agreements
that Coded presently has with others.
(b) If the shareholders approve the transactions
described in this agreement within sixty days (or as extended at
ISA's sole option) and ISA does not exercise the Option, then
$200,000 shall be released to Coded. Then remaining $200,000
shall be immediately returned to ISA.
(c) If the shareholders approve the transactions described
in this agreement within sixty days (or as extended at ISA's sole
option) and ISA exercises the Option, then $400,000 shall be
released to Coded.
Coded agrees the sum released to Coded will be used to pay down
the Bridge Loan. See paragraph 3.2.1. This provision will
constitute irrevocable instructions to the escrow holder.
2.0 Post Option Exercise Arrangements between ISA and Coded.
2.1 ISA Orders to Coded. During the 18 month period
commencing on the date of this agreement and provided the Option
is exercised, ISA will cause to be placed with Coded, orders for
at least $10 million. Such orders shall be negotiated at arms
length with terms comparable to Coded's customary terms, prices
and conditions offered to its most favored customer, agent or
dealer similarly situated in any part of the world.
2.2 Escrow of Stock. ISA shall place 24 million shares of
common stock received through exercise of the Option into an
escrow account. During such time as the shares are held in
escrow, ISA shall have the right to vote all shares and will
enjoy any other benefits derived from the beneficial ownership of
such shares including dividends. In the event ISA does not cause
to be placed with Coded over an 18 month period beginning on the
date of execution of this agreement (and provided the Option is
exercised), orders for $10,000,000 (which includes the initial
$1.0 million order referred to in paragraph 1.1 above) with
terms and conditions as described in paragraph 2.1 above, then
any shares remaining in escrow shall be transferred to Coded
treasury and retired. The number of shares to be transferred to
Coded shall be equal to an amount calculated by multiplying the
difference between $10 million in orders and the actual amount of
orders placed with Coded over the 18 month period, times 2.4. By
way of example, if $8.5 million in orders are placed or caused to
be placed by ISA over the eighteen month period, then Coded shall
receive and retire 3.6 million shares from the escrow. During
the 18 month period ISA shall receive shares certificates on an
as earned basis from the escrow with distribution of share
certificates to occur quarterly.
2.3 ISA Loan to Coded. At the transaction closing, ISA
shall advance cash of $1,000,000 to Coded in exchange for a
secured promissory note. The promissory note shall have a
maturity date of 12 months, with an interest rate of 6%, interest
payable quarterly. The promissory note shall be collateralized
by a senior security interest in the assets of Coded and its
subsidiaries Decom Systems Inc. and Coded Mobile Communications.
The amount of the funds advanced may be increased from time to
time at the sole discretion of ISA and such advance will be
reflected in the secured promissory note. ISA shall have the
right to convert the entire amount of the initial $1.0 million
loan to common stock at the conversion rate of $0.25 to one share
of common. This conversion right will be protected from dilution
as follows:
Split up or Combination of Shares:
In case issued and outstanding shares of Common
Stock shall be subdivided or split up into a
greater number of shares of Common Stock, the
Conversion Price shall be proportionally
decreased, and in the case issued and outstanding
shares of Common Stock shall be combined into a
smaller number of shares of Common Stock, the
Conversion Price shall be proportionately
increased, such increase or decrease, as the case
may be, becoming effective at the time of record
of the split-up or combination, as the case may
be.
Adjustment for Mergers, Consolidations, Etc.:
(I) In case of any capital reorganization,
reclassification of the stock of Borrower (other
than a change in par value or as a result of a
stock dividend, subdivision, split up or
combination of shares), or consolidation or merger
of Borrower with or into another person or entity
(other than a consolidation or merger in which
Borrower is the continuing corporation and which
does not result in any change in the Common Stock)
or of the sale, exchange, lease, transfer or other
disposition of all or substantially all of the
properties and assets of Borrower as an entity or
the participation by Borrower in share exchange as
the corporation the stock of which is to be
acquired, this shall be convertible into kind and
number of shares of stock or other securities or
property of Borrower (or of the corporation
resulting from such consolidation or surviving
such merger or to which such properties and assets
shall have been sold, exchanged, leased,
transferred or otherwise disposed, or which was
the corporation whose securities were exchanged
for those of Borrower), to which the holder herein
would have been entitled to receive if the Holder
owned the Common Stock issuable upon conversion of
this instrument immediately prior to the
occurrence of such event. The provisions of these
foregoing sentence shall similarly apply to
successive organizations, reclassifications,
consolidations, mergers, sales, exchanges, leases,
transfers or other dispositions or other share
exchanges.
2.4 Board. After the Option is exercised Coded shall
cooperate to cause ISA to have the right to appoint a majority of
the members of the Coded Board of Directors, including the
Chairman of the Board.
2.5 Exclusive Distributorship. Provided ISA provides
orders of at least $10 million during the eighteen month period
following the execution of this agreement then ISA's appointment
pursuant to paragraph 1.3 as the exclusive distributor for Coded
in Mexico, Central and South America shall become an exclusive
distributorship for an additional three year period with
continuing three year extensions to ISA provided ISA's
performance has been reasonably satisfactory. While ISA is the
exclusive distributor for Coded in these areas ISA can not sell
products competitive to the Coded product line. This exclusive
distributorship shall be on customary terms similar to existing
distributorship agreements that Coded presently has with others.
Should a dispute arise as to what are customary terms, it shall
be settled by arbitration.
3.0 Modification of Senior Secured Debt Positions Upon
Exercise of the Option.
Should ISA decide, in its sole discretion, that a
restructure of the trade payable and other debt of Coded is
feasible, secures enforceable written agreements evidencing
reductions in those debts and it exercises the Option, then
Renaissance and the Bridge Lenders shall be deemed to have
immediately modified their positions with Coded as follows:
3.1 Restructuring of $4.0 Million Debenture
3.1.1 Amendment of Debenture. Upon exercise of the
Option, Renaissance, ISA and Coded agree that Renaissance will
amend the $4.0 million principal amount, 12% Convertible
Debenture, and all interest accrued and payable thereon through
the date of execution of this agreement, totaling $4.8 million,
for a 6% debenture convertible as set forth below into Series B
Preferred Stock of Coded.
3.1.2 Terms of New Debenture. The amended debenture
shall include the following terms and conditions and otherwise be
in the specific form as agreed upon and distributed to
Renaissance, ISA and Coded which is attached hereto as Exhibit A;
(a) principal amount of $4.8 million;
(b) Interest to accrue at 6% per annum, payable semi-
annually with interest to be paid 50% in the common stock of
Coded and 50% in cash;
(c) maturity date to 7 years from the Transaction closing
date;
(d) collateralized by existing security interests in
assets of Coded and its Coded Mobile Communications and Decom
Systems subsidiaries such security interest in the assets to be
subordinated to existing senior debt, future working capital
debt, the Bridge Lenders as set forth herein and the ISA
promissory note described herein.
3.1.3 Conversion Right. The amended debenture shall
be converted into Series B Preferred Stock under the following
conditions:
(a) at any time that the value of the shares of common
stock to be issued upon the conversion of Series B Preferred
Stock is equal to 70% or more of the principal amount of the 6%
debenture ($3.36 million if the principal amount of the 6%
debenture is $4.8 million) or
(b) at a time prior to the Coded common stock being
listed for trading on the NASDAQ SmallCap Market or National
Market System and Coded shareholders equity, under generally
accepted accounting principals ( GAAP ), shall equal or exceed
$3.0 million, including the conversion of the 6% debenture into
common or preferred stock.
(c) Minimum Valuation. ISA agrees that Renaissance
shall be guaranteed against a market decline in the underlying
value of the 7,344,101 Coded common shares so as to maintain a
minimum valuation of $3.36 million dollars. Therefore, it is
agreed that if at the end of three years from the date of
closing, the underlying Coded common stock market value of the
Series B Preferred Stock is less than $3.36 million, then ISA
will convey to Renaissance up to a maximum of 7,344,000 shares of
Coded common stock so as to compensate (as far as that number of
shares goes) for the market value deficit below $3.36 million.
To assure performance, ISA shall concurrently with the
conversion of the Renaissance convertible debenture into Series B
Preferred Stock, escrow 7,344,000 shares of Coded common owned by
ISA with an independent party. ISA shall have the right to vote
all shares and will enjoy any other benefits derived from the
beneficial ownership of such shares including dividends.
Renaissance agrees that Coded may require the conversion of the
Debenture into Series B Preferred Stock any time after August 1,
1996 if either of the following two conditions occur:
Coded's net worth equals or exceeds $1.0 million with no more
than $500,000 of that net worth attributable to reversal of
balance sheet reserves; or
at Renaissance's option Coded's net worth equals or
exceeds $500,000 with no reversal of balance sheet reserves.
Net worth as used in this paragraph shall not include any
goodwill arising on the balance sheet subsequent to the Closing
of this transaction and shall treat the convertible debenture as
converted and, thus, as equity.
(d) The Series B Preferred Stock is convertible into
7,344,101 shares of Coded common stock. With respect to Series B
Preferred Stock, it is callable by Coded at any time after the
value of the shares of common stock into which the Series B
Preferred Stock is convertible is first equal to or more than 1.5
times the liquidation preference of the Series B Preferred Stock.
Value per share shall be determined by the average of the bid
price of Coded common stock for the 20 trading days following the
filing of a Coded 10Q or 10K, as quoted by the NASD, NASDAQ or
other applicable over-the-counter market or applicable stock
exchange.
(e) This conversion right will be protected from
dilution as follows:
Split up or Combination of Shares:
In case issued and outstanding shares of Common
Stock shall be subdivided or split up into a
greater number of shares of Common Stock, the
Conversion Price shall be proportionally
decreased, and in the case issued and outstanding
shares of Common Stock shall be combined into a
smaller number of shares of Common Stock, the
Conversion Price shall be proportionately
increased, such increase or decrease, as the case
may be, becoming effective at the time of record
of the split-up or combination, as the case may
be.
Adjustment for Mergers, Consolidations, Etc.:
In case of any capital reorganization,
reclassification of the stock of Borrower (other
than a change in par value or as a result of a
stock dividend, subdivision, split up or
combination of shares), or consolidation or merger
of Borrower with or into another person or entity
(other than a consolidation or merger in which
Borrower is the continuing corporation and which
does not result in any change in the Common Stock)
or of the sale, exchange, lease, transfer or other
disposition of all or substantially all of the
properties and assets of Borrower as an entity or
the participation by Borrower in share exchange as
the corporation the stock of which is to be
acquired, this Debenture shall be convertible into
kind and number of shares of stock or other
securities or property of Borrower (or of the
corporation resulting from such consolidation or
surviving such merger or to which such properties
and assets shall have been sold, exchanged,
leased, transferred or otherwise disposed, or
which was the corporation whose securities were
exchanged for those of Borrower), to which the
holder of the Debenture would have been entitled
to receive if the Holder owned the Common Stock
issuable upon conversion of the Debenture
immediately prior to the occurrence of such event.
The provisions of these foregoing sentence shall
similarly apply to successive organizations,
reclassifications, consolidations, mergers, sales,
exchanges, leases, transfers or other dispositions
or other share exchanges.
3.1.4 Non Conversion. Notwithstanding the above,
the 6% debenture will not be automatically converted into Series
B Preferred Stock until such time as not more than $1.0 million
in past due and disputed vendor claims shall be outstanding.
3.1.5 Terms of Series B Preferred The Series B
Preferred Stock shall include the following terms and conditions:
(a) liquidation preference in the amount of $4.8 million
or the principal amount of the 6% debenture if lower;
(b) dividend rate of 6%, cumulative, payable
semi-annually, 50% in common stock and 50% in cash;
(c) no dividend shall be declared or accrue after such
time that the value of the shares of common stock into which the
Series B Preferred Stock is convertible is first equal to or more
than 1.5 times the liquidation preference of the Series B
Preferred Stock;
(d) convertible into shares of Coded common stock in an
amount equal to 10% of the outstanding common shares, calculated
on an "after-conversion" basis as shown specifically in section
4.1 (by way of example, a total of 7,344,101 common shares
assuming that the "after-conversion" number of outstanding common
shares is equal to 73,441,005 shares at the time of the
transaction closing date); and
(e) the common shares underlying the Series B Preferred
Stock shall have one demand registration right, with reasonable
registration costs to be borne by Coded.
For purposes of this Agreement, value per share shall be
determined by the average of the bid price of Coded common stock
for the 20 trading days following the filing of a Coded 10Q or
10K, as quoted by the NASD, NASDAQ or other applicable
over-the-counter market or applicable stock exchange.
3.1.6 Appointment of Director. Renaissance will
have the right to appoint one director to the Coded Board of
Directors or to have one person attend board meetings as an
advisory member, until its preferred stock is converted to
common. It is the intent of Coded to initially have a five (5)
person Board of Directors.
3.2 Restructuring of $1.8 Million Bridge Loan
3.2.1 Restructure. The Bridge Lenders, ISA and Coded
agree that upon exercise of the Option, the $1.8 million
principal amount Bridge Loan shall be deemed to be restructured
such that in lieu of all existing rights against Coded, Bridge
Lenders accept the following:
(a) principal in the amount of $400,000 shall be paid when
all shareholder approvals have been secured for the transactions
described in this agreement. This will be paid from escrowed
funds described in paragraph 1.4;
(b) principal amount of $600,000 payable with 6 percent
annual interest payable quarterly shall be all due one year from
the transaction closing date. The existing Bridge Lenders
security interest in the assets of Coded, including the interest
in the assets of Decom Systems, Inc. and Coded Mobile
Communications, Inc. shall continue as it presently exists to
secure this $600,000 debt, except the Bridge Lenders shall upon
Option exercise subordinate its security interest in the accounts
receivable of Coded Communications Corporation and Mobile Data
Communications, Inc. to future working capital debt. The
security for the $1.0 million loan to Coded from ISA shall be
junior to the security for this $600,000 loan. If a sale of
Decom should occur earlier than the one year date, then the net
cash proceeds, after expenses of sale, will be applied to the
obligation up to the then unpaid balance. This would also be
convertible to common stock of Coded at the conversion rate of
$0.25 to one share of common. This conversion right will be
protected from dilution as follows:
Split up or Combination of Shares:
In case issued and outstanding shares of Common
Stock shall be subdivided or split up into a
greater number of shares of Common Stock, the
Conversion Price shall be proportionally
decreased, and in the case issued and outstanding
shares of Common Stock shall be combined into a
smaller number of shares of Common Stock, the
Conversion Price shall be proportionately
increased, such increase or decrease, as the case
may be, becoming effective at the time of record
of the split-up or combination, as the case may
be.
Adjustment for Mergers, Consolidations, Etc.:
In case of any capital reorganization,
reclassification of the stock of Borrower (other
than a change in par value or as a result of a
stock dividend, subdivision, split up or
combination of shares), or consolidation or merger
of Borrower with or into another person or entity
(other than a consolidation or merger in which
Borrower is the continuing corporation and which
does not result in any change in the Common Stock)
or of the sale, exchange, lease, transfer or other
disposition of all or substantially all of the
properties and assets of Borrower as an entity or
the participation by Borrower in share exchange as
the corporation the stock of which is to be
acquired, this shall be convertible into kind and
number of shares of stock or other securities or
property of Borrower (or of the corporation
resulting from such consolidation or surviving
such merger or to which such properties and assets
shall have been sold, exchanged, leased,
transferred or otherwise disposed, or which was
the corporation whose securities were exchanged
for those of Borrower), to which the holder herein
would have been entitled to receive if the Holder
owned the Common Stock issuable upon conversion of
this instrument immediately prior to the
occurrence of such event. The provisions of these
foregoing sentence shall similarly apply to
successive organizations, reclassifications,
consolidations, mergers, sales, exchanges, leases,
transfers or other dispositions or other share
exchanges.
(c) principal amount of $800,000 to be converted into
Series A Preferred Stock, first position liquidation preference
of $800,000, dividend rate of 8% payable semi-annually, payment
to be made 50% in common stock and 50% in cash. Series A
Preferred Stock is to be convertible into Coded common stock in
an amount equal to 2,400,000 shares. With respect to Series A
Preferred Stock, it is callable by Coded at any time after the
value of the shares of common stock into which the Series A
Preferred Stock is convertible is first equal to or more than 1.5
times the liquidation preference of the Series A Preferred Stock.
Value per share shall be determined by the average of the bid
price of Coded common stock for the 20 trading days following the
filing of a Coded 10Q or 10K, as quoted by the NASD, NASDAQ or
other applicable over-the-counter market or applicable stock
exchange.
(d) All rights under the Share Purchase Warrant
Certificate or any other rights other that set forth herein to
acquire stock rights cease to exist upon exercise of the Option
by ISA.
3.2.2 Distribution to Bridge Lenders. All cash
payments and shares of Series A Preferred Stock shall be
distributed by Coded to the Bridge Lenders pro-rata based upon
the principal amount of the Bridge Loan, or in such other amounts
and manner as the Bridge Loan lenders shall mutually agree
amongst themselves.
4.0 Other Terms and Conditions
4.1 Post Transaction Stock Ownership. The respective
"after-conversion" common stock ownership interest of Coded,
assuming the closing of this transaction, will be the following:
<TABLE>
<S> <C> <C>
Common shares (outstanding March 1, 1996) 14,688,201 20.0%
ISA (including escrowed shares) 49,008,703 66.7%
Renaissance (for $4.8 million
Series B Preferred) 7,344,101 10.0%
Bridge Loan lenders
(for $0.8 million Series A Preferred) 2,400,000 3.3%
73,441,005 100.0%
</TABLE>
4.2 Contracts and Instruments to Implement Agreement.
The parties anticipate that Coded shall remain a publicly-held
Delaware corporation, and that the contracts and instruments
prepared to effect the terms of this agreement will contain
terms, conditions and obligations requiring compliance by all
parties with applicable United States and State securities laws
and regulations. Coded's shareholder approval will be required
for certain provisions of the final transaction which the board
of Coded will use its best efforts to secure as soon as possible.
Coded represents and warrants that to the best of its knowledge
there is no provision of the federal or state securities laws
that would prevent them from carrying out the terms of this
agreement.
4.3 Bonus Shares. Coded shall cause to be issued and
held in escrow for the benefit of Renaissance and the Bridge
Lenders, 3.0 million authorized common shares to be delivered to
Renaissance and the Bridge Lenders upon exercise of the Option by
ISA as follows:
(a) one million shares when Coded common stock is trading
at or above $0.25 per share, distributed as follows:
200,000 pro rata to the holders of Series A Preferred Stock
800,000 to Renaissance;
(b) one million shares when Coded common stock is trading at
or above $0.50 per share distributed as follows:
200,000 pro rata to the holders of Series A Preferred stock
800,000 to Renaissance;
(c) one million shares when Coded common stock is trading at
or above $1.00 per share distributed as follows:
200,000 pro rata to the holders of Series A Preferred Shares
800,000 to Renaissance;
For purposes of this Agreement, Coded value per share shall be
determined by the average of the bid price of Coded common stock
for the 20 trading days following the filing of a Coded 10Q or
10K, as quoted by the NASD, NASDAQ or other applicable over-the-
counter market or stock exchange. The issuance of these shares
will dilute each of those shown on the table in 4.1 above.
4.4 Stock Option Plans. ISA and Coded intend to install
a stock option plan for the benefit and incentive of the
employees and management of Coded . The options available under
the Plan shall not exceed fifteen percent of the total
outstanding common stock of Coded, counting all conversion rights
to acquire common stock as if exercised. Options eventually
exercised, if any, under the stock option plan shall be dilutive
of the shareholders then existing.
4.5 Authorized Shares. The parties understand that
certain of the share issuances contemplated herein are subject to
shareholder approval of the increase in the authorized shares.
If the shareholders fail to approve such increase ISA, may, at
its sole option, withdraw from this agreement and have no
obligation to any party.
4.6 Disclosure of Employment Agreements. ISA and the
senior management of Coded shall immediately disclose to
Renaissance any pending oral or written agreements concerning
compensation or other employment arrangements that may go into
effect during the Option period or at exercise of the Option.
After exercise of the Option Renaissance shall be provided with
reports and information consistent with its representation on the
board of directors.
4.7 Mutual Agreement. During the Option period
Renaissance shall not commence foreclosure under any of its
security agreements with Coded without first securing the written
consent of ISA. Under the terms of this agreement ISA cannot
foreclose without Renaissance's written agreement.
4.8 Mutual Agreement. During the Option period the Bridge
Lenders shall not commence foreclosure under any of its security
agreements with Coded without first securing the written consent
of ISA. Under the terms of this agreement ISA cannot foreclose
without the Bridge Lenders written agreement.
4.9 Closing. The Closing date is hereby defined to be as
soon as possible but no later than the tenth day following
execution and delivery by fax of a writing evidencing ISA's
approval of the debt restructuring accomplished and exercise of
the Option.
4.10 Time is of the Essence. The parties agree to use their
best efforts to close the transaction contemplated by this
Agreement in a timely manner with due haste.
4.11 Post Option Exercise Board of Directors. Upon exercise
of the ISA Option, the authorized number of Coded directors will
be changed by resolution of the board to five members. Then the
present members of the board of directors, except Jack Robinson,
shall resign seriatim so that ISA may appoint three directors and
Renaissance may appoint one director. Should Jack Robinson
resign or be removed for any reason from the board of directors,
then a committee composed of one representative of ISA and one
representative of Renaissance shall submit a replacement nominee
to the board of directors.
5.0 Important Miscellaneous Provisions
Each of the parties hereto has read and agrees to the
important miscellaneous provisions which follows the signatory
page of this contract.
6.0 Authority as Signatories
6.1 The individuals executing this Agreement for and on
behalf of the parties hereto hereby warrant and represent that
they are duly authorized to enter into this Agreement for and on
behalf of said parties by a resolution of the Board of Directors,
or other governing body, of the respective parties.
6.2 This Agreement may be signed in counterparts and when so
signed shall be fully enforceable as if each party signed one
agreement.
IN WITNESS WHEREOF, this Agreement is executed by the
parties effective as of May 1, 1996.
Grupo Information, Satellites & Advertising, S.A. de C.V.
By: /s/ Hugo R. Camou
Its: President
Dated: May 1, 1996
Coded Communications Corporation
By: /s/ John A. Robinson, Jr.
Its: President
Dated: May 1,1996
Renaissance Capital Partners II LTD.
(as Bridge Lender and as Debenture Holder)
By: /s/ Vance Arnold
Its: President
Dated: April 19, 1996
Bridge Lender
JERSEY INVEST, LTD.
By: /s/ James Curtis
Its: President & CEO
Dated: May 2, 1996
Bridge Lender
STEWART LEASING COMPANY
By: /s/ JoAnna McMichael
Its: Vice-President, Secretary
Dated: May 2, 1996
Bridge Lender
MINDFUL PARTNERS, L.P.
By: /s/ Stuart Rudick
Its: General Partner
Dated: May 2, 1996
Bridge Lender
STUART L. RUDICK IRA
By: /s/ Stuart Rudick
Its
Dated: May 2, 1996
Bridge Lender
MAHROOK DRIVER
By: /s/ Mahrookh Driver
Its:
Dated: May 3, 1996
Bridge Lender
HERMAN HODGES
By: /s/ Herman Hodges
Its:__________________________
Dated: May 2, 1996
IMPORTANT MISCELLANEOUS PROVISIONS
Entire Agreement
This Agreement constitutes the entire Agreement between the
parties on the subject matter hereof and supersedes all previous
discussions, promises, representations or agreements respecting
the subject matter contained herein, except the parties
acknowledge the continuing existence of security agreements and
registration rights agreements. There are no representations,
agreements, arrangements, promises or understandings, oral or
written, between and among the Parties relating to the subject
matter of this Agreement that are not fully expressed herein. No
alteration or modification of this Agreement shall be valid
unless agreed to in writing and duly signed by both the parties.
This Agreement was drafted by representatives of both parties and
shall not be construed against either party on the basis of that
party being the drafter of the Agreement.
Amendments
The provisions of this Agreement may be amended by the written
consent of the Parties. Any amendment of this Agreement shall be
in writing, dated, and executed by all Parties. If any conflict
arises between the provisions of any amendment and the original
Agreement as previously amended, the most recent provisions shall
control.
Successors
Subject to the restrictions against assignment contained herein,
this Agreement shall inure to the benefit of and shall be binding
upon the assigns, successors in interest, personal
representatives, estates, theirs, and legatees of each of the
parties hereto.
Governing Law; Forum; Arbitration
All matters affecting the interpretation, form, validity,
enforcement and performance of this Agreement shall be decided
under the laws of the State of California and in a forum located
in San Diego County, California. This forum selection and choice
of law selection are material considerations for entering into
this contract. Any and all disputes concerning the rights and
obligations of the parties hereto except claims of monetary
default or misrepresentation or fraud in the inducement but
including any other claimed breach shall be resolved by binding
arbitration under the rules of the American Arbitration
Association and if international problems are present using the
rules of the International Chamber of Commerce. The parties shall
have the right to conduct full discovery, as that term is
commonly used under California Law, in the arbitration. The
decision of the arbitrator(s) shall be final and binding upon the
parties without right of appeal.
Waiver and Estoppel
The failure of either party hereto to enforce, or the delay by
either party in enforcing, any of its rights under this Agreement
shall not be deemed a continuing waiver or a modification hereof
and either party may, within the time provided by applicable law,
commence appropriate legal proceedings to enforce any or all of
such rights. Only an admitted oral representation (or promise) or
a writing clearly and unequivocally expressing either a waiver of
a known right or a promise not to enforce a particular provision
in the future shall be sufficient to prevent any party from
taking any action sanctioned or allowed by this agreement. No
party will be deemed to be estopped from taking any action
sanctioned by this agreement on account of any other alleged
conduct.
Severability
In case any of the provisions contained in this Agreement should
be held invalid, illegal or unenforceable in any respect, then
the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby
unless the provision was a material consideration inducing one or
both of the parties to enter into this agreement. In such a case
the parties hereto agree to attempt to negotiate a substitution
for the provision held invalid, illegal or unenforceable. Should
that effort fail, then the matter shall be referred to
arbitration and the arbitrator is empowered to amend or modify
any of the terms of this agreement to compensate for the loss of
the provision held invalid, illegal or unenforceable.
Representations and Warranties.
The parties hereto, and each of them, represent and warrant to
each other and agree with each other, as follows:
(a) Each of the parties hereto has had the opportunity
to receive independent legal advice from attorneys of its, or his
own choice, with respect to the advisability of entering into
this contract and, prior to the execution of this Agreement
(b) In negotiating this Agreement, each party and its
or his attorneys have made various statements and representations
to other parties and their attorneys. Nevertheless, each party
specifically does not rely upon any statement, representation,
legal opinion, or promise of any other party in executing this
Agreement, except as expressly stated in this Agreement
(c) There have been no other agreements or
understandings between the parties hereto concerning this
restructuring, except as stated in this Agreement
(d) Each party, together with its or his attorneys,
has had the opportunity to make such investigation of the facts
and of the law pertaining to this Agreement, and of all the
matters pertaining thereto, as it or he deems necessary.
(e) The terms of this Agreement are contractual, not a
mere recital.
(f) This Agreement has been carefully read by, the
contents hereof are known and understood by, and it is signed
freely by each person executing this Agreement.
(g) Each party hereto agrees that such party will not
take any action which would interfere with the performance of
this Agreement by the other party hereto or which would adversely
affect any of the rights provided for herein.
(h) The parties each represent and warrant that he has the
right to grant the rights granted to the other parties in this
contract and represents that no portion of the rights granted
herein has been assigned or transferred or given as security to a
person, firm or entity which is not a party to this agreement.
In the event that any claim, demand or suit shall be made or
instigated against any party because of any such purported
assignment, transfer or grant of security interest, each party
hereto as the case may be hereby indemnifies and holds the other
free and harmless from and against any such claim or demand.
Subsequent Attorneys' Fees.
(a) In the event that any action, suit, or other
proceeding is instituted to remedy, prevent, or obtain relief
from a breach of this Agreement, or arising out of a breach of
this Agreement, the prevailing party shall recover all of such
party's attorneys' fees incurred in each and every such action,
suit, or other proceeding, including any and all appeals or
petitions therefrom.
(b) As used herein, attorneys' fees shall be deemed to
mean the full and actual cost of any legal services actually
performed in connection with the matters involved, calculated on
the basis of the usual fees charged by the attorneys performing
such services and shall not be limited to "reasonable attorneys'
fees" as defined in any statute or rule of court.
AGREEMENT
This Agreement is entered into as of July 17, 1996, by and
among Grupo Information, Satellites & Advertising, S.A. de C.V.
("ISA"), Renaissance Capital Partners II Limited ("RenCap"), and
Coded Communications Corporation, a California corporation
("Coded"), each of whom agree as follows:
1. Recitals. This Agreement is entered into based on the
following essential facts, the accuracy of which the parties
acknowledge:
2. Coded is suffering severe cash flow problems and needs
financing for working capital and the retirement of debt. In an
attempt to satisfy its financial needs, Coded entered into the
Mutual Agreement of Terms and Conditions as of May 1, 1996, with
ISA, RenCap, and others (the "Multi-Party Agreement").
3. Because of the delays in closing the transactions
contemplated by the Multi-Party Agreement and in restructuring
the debt of Coded, ISA's relationship with Coded has become
strained and Coded 's potential business opportunities in Mexico
and Latin America are in jeopardy if it does not soon provide its
products and services.
4. To help meet Coded's needs, ISA is willing to
immediately make the $1,000,000.00 loan to Coded described in
Section 2.3 of the Multi-Party Agreement (the "Loan"), and to
concurrently convert the Loan into equity in accordance with the
Multi-Party Agreement. By the conversion, Coded will avoid the
burden of additional debt, and improve its liquidity and capital
position.
5. ISA additionally is willing to accelerate its purchase
orders described in the Multi-Party Agreement (to which ISA is
not required to make). In accordance with this Agreement, ISA
will place $1,000,000.00 in purchase orders with Coded (along
with a $250,000.00 deposit in accordance with Coded's standard
international terms of sale), thereby raising the amount of its
purchase orders with Coded to $2,000,000.00 (which is
approximately 20 percent of its total order requirement under the
Multi-Party Agreement). The parties intend that ISA receive Five
Million of the approximately Forty-Nine Million shares to which
ISA is entitled under the Multi-Party Agreement (which represents
about ten percent of the shares released to ISA on account of
ISA's potential purchase orders).
6. The parties intend that ISA accelerate an additional
$1,000,000.00 of purchase orders to Coded (along with an
additional $250,000.00 advance in accordance with Coded's
standard international terms of sale), on which Coded is expected
to realize a gross margin of $450,000.00, in exchange for the
issuance to ISA of an One Million shares of Coded's stock.
7. Upon consummation of this Agreement, Coded will have
received $3,000,000.00 of the $10,000,000.00 (i.e., Thirty
Percent) worth of orders to which ISA may ultimately be committed
under the Multi-Party Agreement (which includes $1,000,000.00 of
ISA's orders placed with Coded before the date of this
Agreement), along with total deposits on such orders in the
amount of $1,000,000.00, as well as $1,000,000.00 of additional
equity; and ISA will own Ten Million shares of Coded's common
stock.
8. ISA Orders to Coded.
9. Acceleration of Orders Under Multi-Party Agreement. On
or before July 24, 1996, ISA shall place with Coded a binding
purchase order for at least One Million Dollars (US $1,000,000)
worth of Coded's goods and services, and shall deposit Two
Hundred Fifty Thousand Dollars (US $250,000) with Coded towards
the purchase order. The purchase order will be made pursuant to
the Multi-Party Agreement, and the order will be credited towards
the purchase orders required by ISA under Section 2.1 of the
Multi-Party Agreement. Because ISA is accelerating the purchase
orders to Coded, promptly on Coded's receipt of the orders
described in this paragraph, Coded shall issue ISA or its
assignee Five Million shares of Coded's common stock. Such
shares will be credited towards the stock to be issued to ISA
under Section 1.3 of the Multi-Party Agreement (i.e., Forty-Four
Million Eight Thousand Seven Hundred and Three [44,008,703]
shares of Coded's common stock will remain subject to the Option
described in the Multi-Party Agreement). The Shares will be
issued in the name of ISA or its permitted assignee, in the form
of five separate certificates, each in the amount of One Million
shares, and ISA or its assignee will be entitled to one demand
registration right of the same nature to which ISA is entitled in
connection with the stock it receives under the Multi-Party
Agreement.
10. Additional Orders for Additional Shares. On or before
July 24, 1996, ISA shall place with Coded a binding purchase
order for an additional One Million Dollars (US $1,000,000) worth
of Coded's goods and services and shall deposit Two Hundred Fifty
Thousand Dollars (US $250,000) with Coded towards the purchase
order. The purchase order will be credited towards the purchase
orders referenced in the Multi-Party Agreement. In consideration
of, and promptly on receipt of, the additional purchase order and
deposit described in the preceding sentence, Coded shall issue
ISA or its assignee One Million shares of Coded's common stock.
Such shares do not apply to the stock to be issued to ISA under
Section 1.3 of the Multi-Party Agreement. The shares will be
issued in the form of a single certificate in the name of ISA or
its permitted assignee, and ISA or its assignee will be entitled
to one demand registration right of the same nature to which ISA
is entitled in connection with the stock it receives under the
Multi-Party Agreement.
11. Production of ISA Orders. Ing. Fernando Pliego, a
representative of ISA, may inspect, monitor and coordinate
Coded's production and delivery of products and services to ISA.
Coded shall reimburse ISA Ten Thousand Dollars (US $10,000) per
month for ISA's costs of retaining Mr. Pliego until Coded
completes the products and services under the purchase orders
made in accordance with Section 1.2 above. Mr. Pliego will be
granted access to the operations of Coded as reasonably necessary
to inspect, monitor and coordinate such orders, except that Mr.
Pliego will not be provided access to any areas, documents, or
information relating to Coded's (or its subsidiaries') operations
pursuant to contracts with the United States Department of
Defense (the "DOD") or to any areas, documents or information
relating to material deemed classified by the DOD. Mr. Pliego
will have no right to control any aspect of Coded's (or any of
Coded's subsidiaries') operations and in no way may Mr. Pliego be
deemed an agent or employee of Coded or any subsidiary of Coded.
ISA is solely responsible for Mr. Pliego's employment and
actions.
12. Funding of ISA Loan and Exercise of Conversion
Election. ISA shall make the Loan on or before July 24, 1996.
ISA elects that the Loan immediately be converted to shares of
Coded's common stock in accordance with Section 2.3 of the Multi-
Party Agreement, so that immediately on Coded's receipt of the
Loan funds: (a) Coded shall issue ISA the shares of Coded's
common stock required under the conversion provisions of Section
2.3 of the Multi-Party Agreement, (i.e., four million shares);
and (b) the Loan is extinguished and Coded has no repayment
obligation in connection with the Loan funds.
13. No Shareholder Approval Required. This Agreement is
effective immediately on mutual execution by ISA and Coded and no
approval by Coded's shareholders is required. The enforceability
of this Agreement is unaffected by any approval or disapproval by
Coded's shareholders of the transactions contemplated by the
Multi-Party Agreement.
14. ISA's Rights as Shareholder. Upon ISA's or its
assignee's receipt of the shares issued to it under this
Agreement, ISA will own all legal and beneficial right, title and
interest in and to the shares, subject to the rights of no other
person or entity, and ISA will have all rights of a common-stock
shareholder in Coded, including the right to vote its shares.
15. Waiver of Conversion Price Reduction Under Debenture.
RenCap waives the provisions of Paragraph 5(b)(i) and (ii) of the
Coded 12% Convertible Debentures as such provisions would apply
to the issuance of Coded's shares under this Agreement,
notwithstanding the fact that the shares being issued to ISA in
connection with this Agreement are at a value per share less than
the conversion price set forth in the Coded 12% Convertible
Debentures.
16. Miscellaneous.
17. Governing Law, Venue and Jurisdiction. This Agreement
is governed by and construed in accordance with the laws of the
State of California, irrespective of California's choice-of-law
principles. All actions and proceedings arising in connection
with this Agreement must be tried and litigated exclusively in
the State and Federal courts located in the County of San Diego,
State of California, which courts have personal jurisdiction and
venue over each of the parties to this Agreement for the purpose
of adjudicating all matters arising out of or related to this
Agreement. Each party authorizes and accepts service of process
sufficient for personal jurisdiction in any action against it as
contemplated by this paragraph by registered or certified mail,
return receipt requested, postage prepaid, to its address for the
giving of notices set forth in this Agreement.
18. Further Assurances. Each party to this Agreement shall
execute and deliver all instruments and documents and take all
actions as may be reasonably required or appropriate to carry out
the purposes of this Agreement.
19. Counterparts. This Agreement may be executed in
counterparts, each of which is deemed an original and all of
which together constitute one document.
20. Time of Essence. Time and strict and punctual
performance are of the essence with respect to each provision of
this Agreement.
21. Attorney's Fees. The prevailing party(ies) in any
litigation, arbitration, mediation, bankruptcy, insolvency or
other proceeding ("Proceeding") relating to the enforcement or
interpretation of this Agreement may recover from the
unsuccessful party(ies) all costs, expenses, and actual
attorney's fees (including expert witness and other consultants'
fees and costs) relating to or arising out of (a) the Proceeding
(whether or not the Proceeding proceeds to judgment), and (b) any
post-judgment or post-award proceeding including, without
limitation, one to enforce or collect any judgment or award
resulting from the Proceeding. All such judgments and awards
shall contain a specific provision for the recovery of all such
subsequently incurred costs, expenses, and actual attorney's
fees.
22. Modification. This Agreement may be modified only by a
contract in writing executed by the party to this Agreement
against whom enforcement of the modification is sought.
23. Prior Understandings. This Agreement and all documents
specifically referred to and executed in connection with this
Agreement: (a) contain the entire and final agreement of the
parties to this Agreement with respect to the subject matter of
this Agreement, and (b) supersede all negotiations, stipulations,
understandings, agreements, representations and warranties, if
any, with respect to such subject matter, which precede or
accompany the execution of this Agreement.
24. Partial Invalidity. Each provision of this Agreement
is valid and enforceable to the fullest extent permitted by law.
If any provision of this Agreement (or the application of such
provision to any person or circumstance) is or becomes invalid or
unenforceable, the remainder of this Agreement, and the
application of such provision to persons or circumstances other
than those as to which it is held invalid or unenforceable, are
not affected by such invalidity or unenforceability.
25. Successors-in-Interest and Assigns. This Agreement is
binding on and inures to the benefit of the successors-in-
interest and assigns of each party to this Agreement.
CODED COMMUNICATIONS CORPORATION, a California corporation
By:/s/ John Robinson
John Robinson, President and Chief Executive Officer
GRUPO INFORMATION, SATELLITES & ADVERTISING, S.A. de C.V.
By:/s/ Hugo Camou
Hugo Camou, President
RENAISSANCE CAPITAL PARTNERS II LTD
By: Renaissance Capital Group, Inc., its Managing General
Partner
By: /s/ Gene Roelke,
Gene Roelke, Executive Vice-President
SS:70801.7:58002.015
