UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
--------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-4433
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ARMATRON INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
Massachusetts 04-1052250
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 Main Street, Melrose MA 02176
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 321-2300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1
Par Value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirement for the past 90 days. Yes X No .
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
and Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of the Registrant's common stock outstanding on April
30, 1999 was 2,459,749.
ARMATRON INTERNATIONAL, INC.
----------------------------
File No. 1-4433
_________________
PAGE(S)
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PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
- ------ --------------------
Balance Sheet, March 31, 1999, 1998, and September 30, 1998 3
Consolidated Condensed Statements of Operations for the
three and six months ended March 31, 1999 and 1998 4
Consolidated Condensed Statements of Cash Flows for the
six months ended March 31, 1999 and 1998 5
Notes to Consolidated Condensed Financial Statements 6 - 13
Item 2
- ------
Management's Discussion and Analysis of Financial
Condition and Results of Operations 14 - 21
Item 3
- ------
Quantitative and Qualitative Disclosures about Market Risk 21
PART II - OTHER INFORMATION
Item 6
- ------
Exhibits and Reports on Form 8-K 21
SIGNATURES 22
EXHIBIT INDEX 22
ARMATRON INTERNATIONAL, INC.
Consolidated Balance Sheets
March 31, 1999 and 1998, and September 30, 1998
<TABLE>
<CAPTION>
(Unaudited)
March 31, (Audited)
---------------------------- September 30,
1999 1998 1998
---- ---- ----
<S> <S> <S> <S>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,254,000 $ 328,000 $ 2,677,000
Trade accounts receivable, net 2,437,000 2,637,000 1,799,000
Inventories 2,558,000 3,433,000 2,088,000
Deferred taxes 36,000 113,000 37,000
Prepaid and other current assets 500,000 248,000 141,000
---------------------------------------------
Total Current Assets 6,785,000 6,759,000 6,742,000
Property and equipment, net 404,000 540,000 449,000
Other assets 106,000 107,000 139,000
---------------------------------------------
Total Assets $ 7,295,000 $ 7,406,000 $ 7,330,000
=============================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Accounts payable $ 1,380,000 $ 1,390,000 $ 802,000
Other current liabilities 936,000 834,000 925,000
Interest payable to related parties 1,633,000 1,155,000 1,395,000
Current portion under capital lease obligations 20,000 19,000 21,000
---------------------------------------------
Total Current Liabilities 3,969,000 3,398,000 3,143,000
---------------------------------------------
Long-term debt, related parties 4,715,000 4,715,000 4,715,000
---------------------------------------------
Long-term capital lease obligations, net of current portion - 20,000 10,000
---------------------------------------------
Deferred rent, net of current portion 10,000 28,000 18,000
---------------------------------------------
Stockholders' Equity (Deficiency):
Common stock, par value $1 per share, 6,000,000 shares
authorized; 2,606,481 shares issued at March 31,
1999 and 1998 and September 30, 1998 2,606,000 2,606,000 2,606,000
Additional paid-in capital 6,770,000 6,770,000 6,770,000
Accumulated deficit (10,389,000) (9,745,000) (9,546,000)
---------------------------------------------
(1,013,000) (369,000) (170,000)
Less: Treasury stock at cost - 146,732 at March 31, 1999,
1998 and September 30, 1998 (386,000) (386,000) (386,000)
---------------------------------------------
Total Stockholders' Equity (Deficiency) (1,399,000) (755,000) (556,000)
---------------------------------------------
Total Liabilities and Stockholders' Equity (Deficiency) $ 7,295,000 $ 7,406,000 $ 7,330,000
=============================================
</TABLE>
The accompanying notes are an integral part of the consolidated
condensed financial statements.
ARMATRON INTERNATIONAL, INC.
Consolidated Condensed Statements of Operations
for the Three and Six Months Ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
(Unaudited)
Three Months Six Months
Ended March 31, Ended March 31,
------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $2,879,000 $3,197,000 $4,337,000 $4,412,000
Cost of products sold 2,346,000 2,446,000 3,916,000 3,845,000
Selling, general and administrative expenses 580,000 580,000 1,067,000 1,041,000
Interest expense-related parties 118,000 118,000 238,000 238,000
Interest expense-third parties 7,000 8,000 14,000 16,000
Other (income) expense - net (24,000) (13,000) (55,000) (30,000)
-------------------------------------------------------
Net income (loss) $ (148,000) $ 58,000 $ (843,000) $ (698,000)
=======================================================
Per Share:
Net income (loss) $ (.06) $ .02 $ (.34) $ (.28)
=======================================================
Weighted average number of
common shares outstanding 2,459,749 2,459,749 2,459,749 2,459,749
=======================================================
</TABLE>
The accompanying notes are an integral part of the consolidated
condensed financial statements.
ARMATRON INTERNATIONAL, INC.
Consolidated Condensed Statements of Cash Flows
for the Six Months ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
(Unaudited)
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (843,000) $ (698,000)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation and amortization 87,000 160,000
Amortization of deferred rent (8,000) (10,000)
Change in operating assets and liabilities (607,000) (130,000)
---------------------------
Net cash flow from (used for) operating activities (1,371,000) (678,000)
---------------------------
INVESTING ACTIVITIES
Payments for machinery and equipment (41,000) (111,000)
---------------------------
Net cash flow from (used for) investing activities (41,000) (111,000)
---------------------------
FINANCING ACTIVITIES
Payments on capital lease obligations (11,000) (9,000)
---------------------------
Net cash flow from (used for) financing activities (11,000) (9,000)
---------------------------
Net increase (decrease) in cash and cash equivalents (1,423,000) (798,000)
Cash and cash equivalents at beginning of period 2,677,000 1,126,000
---------------------------
Cash and cash equivalents at end of period $ 1,254,000 $ 328,000
===========================
</TABLE>
The accompanying notes are an integral part of the consolidated
condensed financial statements.
ARMATRON INTERNATIONAL, INC.
Notes to Consolidated Condensed Financial Statements (Unaudited)
1. Nature of Business
The Company operates principally in two segments, the Consumer Products
segment and the Industrial Products segment. There are no intercompany
sales between segments.
Operations in the Consumer Products segment involve the manufacture and
distribution of Flowtron Outdoor Products, which consist of insect control
devices including electronic bugkillers and biomisters, environmental
products including mulching leaf-eaters and compost bins, and storage and
handling products including plastic yard carts, plastic storage sheds and
doghouses which comprised 92%, 92% and 93% of the Company's sales for the
six months ended March 31, 1999 and 1998, and for the year ended September
30, 1998. These products undergo periodic model changes and product
improvements. The Company distributes its consumer products primarily to
major retailers throughout the United States, with some products
distributed under customer labels. Substantially all of this segment's
sales and accounts receivable relate to business activities with such
retailers.
The Industrial Products segment manufactures electronic obstacle avoidance
systems for transportation and automotive applications. These systems are
marketed under the trademark "Echovision". Echovision devices monitor back
blind spots and side blind spots to detect objects and alert operators to
potential hidden hazards, and feature intuitive audible warnings, visual
warnings, automatic activation, easy installation on any type vehicle and a
continuous system self-test.
2. Opinion of Management
In the opinion of management, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (including normal
recurring adjustments) necessary to present fairly the consolidated
financial position as of March 31, 1999 and 1998, and September 30, 1998,
and the consolidated statements of operations for the three and six months
ended March 31, 1999 and 1998 and the consolidated statements of cash flow
for the six months ended March 31, 1999 and 1998. These financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's Annual Report on Form 10-K, as
amended, for the year ended September 30, 1998. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted. The year-end balance sheet data was derived from
audited financial statements, but does not include disclosures required by
generally accepted accounting principles. The accompanying unaudited,
consolidated condensed financial statements are not necessarily indicative
of future trends or the Company's operations for the entire year.
3. Revenue Recognition
Revenue from product sales is recognized at the time the products are
shipped. Following industry trade practice, the Company's Consumer
Products segment offers extended payment terms for delivery of seasonal
items. Sales terms for the Company's Industrial Products segment are 30
days net. A provision is recorded for sales allowances and incentives
related to volume and program incentives offered to the Company's various
customers.
4. Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an
original maturity of less than three months to be cash equivalents. The
Company invests excess funds in short-term, interest-bearing United States
instruments. The Company has no requirements for compensating balances.
The Company maintains its cash in bank deposit accounts which, at times,
may exceed Federally insured limits and in deposit accounts at its
commercial finance company. The Company has not experienced any losses in
such accounts. The Company believes it is not exposed to any significant
credit risk on cash and cash equivalents.
5. Property and Equipment
Property and equipment are stated at cost. Depreciation is computed based
upon the estimated useful lives of the various assets using the straight-
line method with annual rates of depreciation of 10% to 33-1/3%.
Capitalized tooling costs are amortized over three years. Leasehold
improvements are amortized over the lesser of the term of the lease or the
estimated useful life of the related assets. Tooling and molding costs are
charged to a deferred cost account as incurred, prepaid tooling, until the
tooling or mold is completed. Upon completion the costs are transferred to
a property/equipment account. Maintenance and repairs are charged to
operations as incurred. Renewals and betterments that materially extend
the life of assets are capitalized and depreciated. Upon disposal, the
asset cost and related accumulated depreciation are removed from their
respective accounts. Any resulting gain or loss is reflected in earnings.
6. Use of Estimates
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
7. Market Risk
The Company is not subject to market risk associated with risk sensitive
instruments as the Company does not transact its sales in other than United
States dollars, does not invest in investments other than United States
instruments and has not entered into hedging transactions.
8. New Accounting Pronouncements
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" and SFAS No. 131 "Disclosure about Segments of an
Enterprise and Related Information." These pronouncements are effective
for fiscal years beginning after December 15, 1997. These new
pronouncements did not have a material effect on the Company's financial
statements.
In 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for Costs of Computer Software
Developed or Obtained for Internal Use." This pronouncement does not have
a material impact on the Company's business or results of operations.
9. Year 2000 Date Conversion
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, forecast production needs and the timing of raw material
purchases, send invoices, or engage in similar normal activities.
The Company has completed the analysis and evaluation phase of its Year
2000 project and has determined that it will be required to modify or
replace significant portions of its hardware and software so that its
computer systems will properly recognize dates beyond December 31, 1999.
The Company has also begun the process of upgrading and modernizing its
major information systems, including its operating and financial systems.
The replacement systems will be Year 2000 compliant. The Company began
using its new systems during the second quarter of fiscal 1999 and has not
experienced any significant difficulties with the systems. The Company
will utilize both internal and external resources to reprogram or replace,
and test the software for Year 2000 modifications. The Company plans to
complete its Year 2000 project no later than July 31, 1999. The total cost
of upgrading most of the Company's major operating and financial systems,
including the Year 2000 project, for fiscal years 1998 through 2000, is
estimated at $100,000 and is being funded through operating cash flows and
leasing arrangements. Of the total project cost, approximately $80,000 has
been expended and is attributable to the purchase of new software and
hardware. The remaining $20,000 will be expensed as incurred.
There can be no assurance the systems of other companies on which the
Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have material adverse effect on the Company.
The Company has been in communication with its major vendors to ensure
compatibility of systems. If such systems do not function properly the
Company could experience delays in receipt of its raw materials which would
result in delays in scheduled deliveries of shipments by the Company.
The Company expects to begin developing contingency plans to determine what
actions the Company will take if its trading partners are not Year 2000
compliant. The Company expects the contingency plan to be completed by the
end of the third quarter in fiscal 1999.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future
events including the continued availability of certain resources, third
party modification plans and other factors. However, there can be no
assurance that these estimates will be achieved and actual results could
differ materially from those plans. Specific factors that might cause such
material differences include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct
all relevant computer codes, and similar uncertainties.
10. Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of trade accounts
receivable. If any of the Company's major customers fail to pay the
Company on a timely basis, it could have a material adverse effect on the
Company's business, financial condition and results of operations. The
Company's export sales are not significant.
For the six months ended March 31, 1999, Sears, Roebuck and Co. and Home
Depot, Inc. accounted for approximately 36% and 14%, respectively, of the
Company's net sales. At March 31, 1999, Sears, Roebuck and Co. and Home
Depot, Inc. accounted for approximately 50% and 16%, respectively, of the
Company's trade accounts receivable balance.
For the year ended September 30, 1998, Sears, Roebuck and Co. and Home
Depot, Inc. accounted for approximately 29% and 11%, respectively, of the
Company's net sales. At September 30, 1998, Sears, Roebuck and Co. and
Home Depot, Inc. accounted for approximately 44% and 2%, respectively, of
the Company's trade accounts receivable balance.
For the six months ended March 31, 1998, Sears, Roebuck and Co. and Home
Depot, Inc. accounted for approximately 27% and 15%, respectively, of the
Company's net sales. At March 31, 1998, Sears, Roebuck and Co. and Home
Depot, Inc. accounted for approximately 40% and 14%, respectively, of the
Company's trade accounts receivable balance.
11. Supplemental Cash Flow Information
The Company's cash payments for interest and income taxes for the six
months ended March 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Interest paid - related parties $ - $ -
Interest paid - third parties $14,000 $16,000
Income taxes paid $ - $ -
</TABLE>
12. Major Suppliers
The Company had purchased its plastic storage sheds, yard carts, compost
bins, and doghouses from one supplier. In July 1998, the Company
transferred its production molds for yard carts to a new supplier. In
November 1998, the Company transferred its production mold for compost bins
and storage sheds to the same new supplier. The new supplier has begun
production runs for the yard carts, storage sheds and compost bins and has
not experienced any significant difficulties in meeting scheduled
deliveries. The suppliers manufacture the products in accordance with the
Company's designs and specifications. The Company believes that other
suppliers could provide the required products although comparable terms may
not be realized. A change in suppliers could cause a delay in scheduled
deliveries of products to the Company's customers and a possible loss of
revenue, which would adversely affect the Company's results of operations.
13. Inventories
Inventories are stated on a first-in, first-out (FIFO) basis at the lower
of cost or market. Inventories consisted of the following at:
<TABLE>
<CAPTION>
(Unaudited)
March 31, (Audited)
--------- September 30,
1999 1998 1998
---- ---- ----
<S> <C> <C> <C>
Raw Material, primarily purchased
components $1,612,000 $2,042,000 $1,338,000
Work in Process 45,000 25,000 29,000
Finished Goods 901,000 1,366,000 721,000
-----------------------------------------
$2,558,000 $3,433,000 $2,088,000
=========================================
</TABLE>
14. Other Assets
Other assets consisted of the following at:
<TABLE>
<CAPTION>
(Unaudited)
March 31, (Audited)
--------------------- September30,
1999 1998 1998
---- ---- ----
<S> <C> <C> <C>
Other receivable, net of current portion -- -- $ 33,000
Note receivable - employee, due under
terms of an annual renewal note,
interest payable monthly at an
annual rate of 6%, secured by a
second mortgage 100,000 100,000 100,000
Other 6,000 7,000 6,000
------------------------------------
$106,000 $107,000 $139,000
====================================
</TABLE>
15. Other Current Liabilities
Other current liabilities consisted of the following at:
<TABLE>
<CAPTION>
(Unaudited)
March 31, (Audited)
--------------------- September 30,
1999 1998 1998
---- ---- ----
<S> <C> <C> <C>
Retirement plan $313,000 $331,000 $313,000
Salaries, commissions and benefits 97,000 69,000 62,000
Sales allowances and incentives 60,000 139,000 109,000
Professional fees 111,000 67,000 205,000
Warranty costs 65,000 51,000 57,000
Advertising costs 121,000 84,000 103,000
Other 169,000 93,000 76,000
------------------------------------
$936,000 $834,000 $925,000
====================================
</TABLE>
16. Debt
Line of Credit with Related Parties
The Company has a $7,000,000 line of credit with a realty trust operated
for the benefit of the Company's principal shareholders. This line of
credit, with interest at 10%, requires monthly payments of interest only,
and is collateralized by all assets of the Company. Such collateral is
subordinate to the revolving line of credit agreement with the finance
company. In October 1998, the Company renewed this line of credit with the
realty trust operated for the benefit of the Company's principal
shareholders under the same terms and conditions and extended the maturity
date to October 1, 1999. The Company had $4,715,000 outstanding under this
line of credit at March 31, 1999 and 1998, and September 30, 1998.
Repayment of this line of credit is subordinate to the repayment of any and
all balances outstanding on the revolving line of credit from a commercial
finance company, which is further described below. At March 31, 1999,
interest payments of $1,633,000 associated with this line were in arrears
for the period November 1, 1995 to March 31, 1999. On November 24, 1998,
the Company received a waiver for the covenant violation as to the interest
payments. The waiver extends the due date as to interest payments until
September 30, 1999.
Note Payable
The Company has a revolving line of credit agreement with a commercial
finance company, Congress Financial Corporation, which permits combined
borrowings up to $3,500,000 in cash and letters of credit. This credit
agreement is collateralized by all assets of the Company and expires in
December 1999. The terms of this agreement include a borrowing limit which
fluctuates depending on the levels of accounts receivable and inventory
which collateralize the borrowings. The agreement contains various
covenants pertaining to maintenance of working capital, net worth,
restrictions on dividend distributions and other conditions. Interest on
amounts outstanding is payable on a monthly basis at an annual rate of 1
3/4% over the commercial base rate. The commercial base rate was 7.75% at
March 31, 1999. At March 31, 1999, the Company did not have borrowings
other than outstanding letters of credit amounting to approximately
$172,000. At March 31, 1999, pursuant to the borrowing formula under this
credit agreement approximately $1,436,000 was available.
17. Commitments and Contingencies
At March 31, 1999, the Company has commitments of $209,000 for the purchase
of capital expenditures, primarily tooling and dies used by the Company's
Industrial Products segment.
In January 1991, the California Department of Health Services issued a
Corrective Action Order (CAO) against the Company and a former subsidiary.
The CAO requires the Company and a former subsidiary to comply with a
Cleanup and Abatement Order that had been issued in 1990 against the
Company for soil contamination at the site of the former subsidiary. To
date, no determination has been made with regard to the extent of any
environmental damage and who may be liable. The Company does not believe,
based on the information available at this time, that the outcome of this
matter will have a material adverse effect on its financial position or
results of operations.
An action was filed in U.S. District Court, Central District of California
in late 1996 relating to the foreign arbitration award described below.
The Company was first joined as a party by the first amended petition filed
on March 3, 1997. The second amended petition was filed on June 27, 1997.
The action seeks confirmation and enforcement of a foreign arbitration
award in favor of Alsthom, currently and formerly Chantiers de L'Atlantique
("Alsthom"), and Assurances Generales de France ("AGF") (collectively
"Petitioners") against Respondents J.C. Carter Company, Inc. ("JCC III"),
the Company, Armatron-JCC, Inc., formerly known as J.C. Carter Company,
Inc. ("JCC II"), a former subsidiary of the Company, and ITT Corporation
and ITT Industries, Inc. (collectively "ITT"). The arbitration related to
certain cryogenic cargo pumps supplied in the 1970's by the J.C. Carter
Company Division of ITT ("JCC I") to Alsthom, which installed the pumps in
two liquid natural gas tanker ships, the Mourad Didouche and the Ramdane
Abane. The arbitration award was entered in favor of Alsthom and AGF, an
insurer subrogated to the rights of Alsthom, and against "J.C. Carter
Company" or "J.C. Carter Company, Inc." by the International Chamber of
Commerce in Paris in 1995. The amount of the award as to AGF is 62,431,000
French francs ("FF") and as to Alsthom is 5,469,000 FF (an aggregate of
approximately $7 million U.S. dollars at March 31, 1999), both with interest
from January 30, 1993 at the "French official rate."
Petitioners' operative pleading in the legal action, its Second Amended
Petition, seeks confirmation of the award against JCC III and, in addition,
seeks its confirmation and enforcement against the other Respondents,
including the Company, on the theories of fraudulent conveyance, collateral
estoppel and virtual representation, judicial estoppel and equitable
estoppel, and alter ego and/or successor liability relating to events
transpiring from 1983 through the completion of the foreign arbitration
proceeding in 1997. In 1983, the Company and ITT were parties to an asset
sale transaction involving the business and assets of JCC I. JCC II, a now
inactive California corporation, was formed at that time for purpose of
acquiring the assets and certain liabilities of JCC I and ceased
transacting business after the 1987 asset sale transaction with JCC III.
The Company answered the Second Amended Petition denying any liability,
asserting various affirmative defenses and cross-claims against ITT for
contractual indemnity and for equitable indemnity. ITT and JCC III have
cross-claimed against the Company.
At the present time the Company is unable to determine the outcome of the
claims asserted by and against the Company in the legal action because the
case is still at an early stage of discovery and because of the existence
of disputed issues of fact bearing on the outcome of those claims.
However, there can be no assurance that the outcome to the proceedings will
not have an adverse effect on the financial condition of the Company.
In November 1998, the Company was advised that it had been named as a
defendant in a lawsuit brought by a consumer of one of the Company's
products. The consumer claims that the product caused personal injury and
other damages. The Company believes that it has valid defenses. The Company
has insurance coverage for such claims and accrued its insurance deductible
amount in fiscal 1998 to cover the estimated defense costs associated with
this matter.
18. Related Party Transactions
The Company paid approximately $30,000 for legal services during the six
months ended March 31, 1999 and 1998 to a law firm to which a Director of
the Company is a member.
As further described in Note 16, the Company has a $7,000,000 line of
credit arrangement from a realty trust operated for the benefit of the
Company's principal shareholders.
19. Subsequent Event
On April 20, 1999, Housman Realty Trust (the "Trust") converted $2,000,100
of the principal amount of debt owed to it by the Company pursuant to a
Promissory Note dated January 11, 1990, as amended, in the original
principal sum of $7,000,000 into 6,667 shares of Series A Convertible
Preferred Stock, $100 par value per share (the "Preferred Stock") of the
Company. The Preferred Stock votes on an as converted basis with the
common stock, $1.00 par value per share (the "Common Stock") of the Company
and is convertible into 6,667,000 shares of Common Stock, which represents
the power to vote 73% of the shares of capital stock of the Company.
On April 21, 1999, the Board of Directors of the Company unanimously
approved a merger between the Company and Armatron Merger Corporation, a
newly formed Massachusetts corporation that was organized as a
nonsubstantive transitory vehicle to effect the following transactions
("MergerCo"), in which MergerCo will merge into the Company (the "Merger")
with the Company continuing as the surviving corporation (the "Surviving
Corporation"). In the Merger, (i) each outstanding share of Common Stock
will be converted into the right to receive $0.27 in cash (except that any
shares held by MergerCo or in the Company's treasury will be canceled and
any stockholder who properly dissents from the Merger will be entitled to
appraisal rights under Massachusetts law); (ii) each outstanding share of
common stock, $0.01 par value per share, of MergerCo (the "MergerCo Common
Stock") will be converted into one share of common stock, $.01 par value
per share, of the Surviving Corporation; and (iii) each outstanding share
of Series A Preferred Stock, $100 par value per share, of the Company will
be converted into one share of Series A Preferred Stock, $.01 par value per
share, of the Surviving Corporation.
Following the Merger, the Company will not list the common stock of the
Surviving Corporation on any national securities exchange or automated
quotation system and will delist the Company's Common Stock. If the Merger
is effected, it is anticipated that the Company will have fewer than 300
stockholders and will promptly request termination of registration under
Section 12(g) of the Securities Exchange Act of 1934.
Item 2. Management's Discussion and Analysis of Financial Conditions and
- --------------------------------------------------------------------------
Results of Operations
- ---------------------
OVERVIEW
The Company operates principally in two segments, the Consumer Products
segment and the Industrial Products segment. Operations in the Consumer
Products segment involve the manufacture and distribution of Flowtron leaf-
eaters, bugkillers, yard carts, compost bins, biomisters, storage sheds and
doghouses which comprised 92%, 92% and 93% of the Company's sales for the
six months ended March 31, 1999 and 1998 and for the year ended September
30, 1998, respectively. The Company distributes its consumer products
primarily to major retailers throughout the United States, with some
products distributed under customer labels. Substantially all of this
segment's sales and accounts receivable relates to business activities with
such retailers. The Industrial Products segment manufactures electronic
obstacle avoidance systems for transportation and automotive applications
and markets these systems under the trademark "Echovision". Production of
these systems began in fiscal 1996. There are no intercompany sales
between segments. For the six months ended March 31, 1999, Sears Roebuck
and Co. and Home Depot, Inc. accounted for approximately 36% and 14%,
respectively, of the Company's net sales. At March 31, 1999, Sears Roebuck
and Co. and Home Depot, Inc. accounted for approximately 50% and 16%,
respectively, of the Company's trade accounts receivable balance. If any
of the Company's major customers fail to pay the Company on a timely basis,
it could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company had purchased
its plastic storage sheds, yard carts, compost bins, and doghouses from one
supplier. In July 1998, the Company transferred its production molds for
its yard carts to another supplier and, in November 1998, the Company
transferred its production molds for its storage sheds and compost bins to
this new supplier. The new supplier is producing yard carts, storage sheds
and compost bins and has not experienced any significant difficulties in
meeting scheduled deliveries. The suppliers manufacture these products in
accordance with the Company's designs and specifications. The Company
believes that other suppliers could provide the required products although
comparable terms may not be realized. A change in suppliers could cause a
delay in scheduled deliveries of products to the Company's customers and a
possible loss of revenue, which would adversely affect the Company's
results of operations.
On April 20, 1999, Housman Realty Trust (the "Trust") converted $2,000,100
of the principal amount of debt owed to it by the Company pursuant to a
Promissory Note dated January 11, 1990, as amended, in the original
principal sum of $7,000,000 into 6,667 shares of Series A Convertible
Preferred Stock, $100 par value per share (the "Preferred Stock") of the
Company. The Preferred Stock votes on an as converted basis with the
common stock, $1.00 par value per share (the "Common Stock") of the Company
and is convertible into 6,667,000 shares of Common Stock, which represents
the power to vote 73% of the shares of capital stock of the Company.
On April 21, 1999, the Board of Directors of the Company unanimously
approved a merger between the Company and Armatron Merger Corporation, a
newly formed Massachusetts corporation that was organized as a
nonsubstantive transitory vehicle to effect the following transactions
("MergerCo"), in which MergerCo will merge into the Company (the "Merger")
with the Company continuing as the surviving corporation (the "Surviving
Corporation"). In the Merger, (i) each outstanding share of Common Stock
will be converted into the right to receive $0.27 in cash (except that any
shares held by MergerCo or in the Company's treasury will be canceled and
any stockholder who properly dissents from the Merger will be entitled to
appraisal rights under Massachusetts law); (ii) each outstanding share of
common stock, $0.01 par value per share, of MergerCo (the "MergerCo Common
Stock") will be converted into one share of common stock, $.01 par value
per share, of the Surviving Corporation; and (iii) each outstanding share
of Series A Preferred Stock, $100 par value per share, of the Company will
be converted into one share of Series A Preferred Stock, $.01 par value per
share, of the Surviving Corporation.
Following the Merger, the Company will not list the common stock of the
Surviving Corporation on any national securities exchange or automated
quotation system and will delist the Company's Common Stock. If the Merger
is effected, it is anticipated that the Company will have fewer than 300
stockholders and will promptly request termination of registration under
Section 12(g) of the Securities Exchange Act of 1934.
FORWARD-LOOKING STATEMENTS
Management's discussion and analysis of the results of operations and
financial conditions and other sections of this report contain forward-
looking statements about its prospects for the future. Such statements are
subject to certain risks and uncertainties, which could cause actual
results to differ materially from those projected. Such risks and
uncertainties include, but are not limited to the following:
* The Company's consumer products business is cyclical and is affected
by weather and some of the same economic factors that affects the
consumer and lawn and garden industries generally, including interest
rates, the availability of financing and general economic conditions.
In addition, the lawn and garden products manufacturing business is
highly competitive. Actions of competitors, including changes in
pricing, or slowing demand for lawn and garden products due to
general or industry economic conditions or the amount of inclement
weather could result in decreased demand for the Company's products,
lower prices received or reduced utilization of plant facilities.
* Increased costs of raw materials can result in reduced margins, as
can higher transportation and shipping costs. Historically, the
Company has been able to pass some of the higher raw material and
transportation costs through to the customer. Should the Company be
unable to recover higher raw material and transportation costs from
price increases of its products, operating results could be adversely
affected.
* If progress in manufacturing of products is slower than anticipated
or if demand for products produced does not meet current
expectations, operating results could be adversely affected.
* If the Company is not successful in strengthening its relationship
with its customers, growing sales at targeted accounts, and expanding
geographically, operating results could be adversely affected.
* If the Company loses any of its major customers, operating results
could be adversely affected.
YEAR 2000 DATE CONVERSION
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, forecast production needs and the timing of raw material
purchases, send invoices, or engage in similar normal activities.
The Company has completed the analysis and evaluation phase of it Year 2000
project and has determined that it will be required to modify or replace
significant portions of its hardware and software so that its computer
systems will properly utilize dates beyond December 31, 1999. The Company
has also begun the process of upgrading and modernizing its major
information systems, including its operating and financial systems. The
replacement systems will be Year 2000 compliant. The Company began using
its new systems during the second quarter of fiscal 1999 and has not
experienced any significant difficulties with the systems. The Company
will utilize both internal and external resources to reprogram or replace,
and test the software for Year 2000 modifications. The Company plans to
complete its Year 2000 project no later than July 31, 1999. The total cost
of upgrading most of the Company's major operating and financial systems,
including the Year 2000 project, for fiscal years 1998 through 2000, is
estimated at $100,000 and is being funded through operating cash flows and
leasing arrangements. Of the total project cost, approximately $80,000 has
been expended and is attributable to the purchase of new software and
hardware. The remaining $20,000 will be expensed as incurred.
There can be no assurance the systems of other companies on which the
Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have material advise effect on the Company.
The Company has been in communication with its major vendors to ensure
compatibility of systems. If such systems do not function properly the
Company could experience delays in receipt of its raw materials which would
result in delays in scheduled deliveries of shipments by the Company.
The Company expects to begin developing contingency plans to determine what
actions the Company will take if its trading partners are not Year 2000
compliant. The Company expects the contingency plan to be completed by the
end of the third quarter in fiscal 1999.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future
events including the continued availability of certain resources, third
party modification plans and other factors. However, there can be no
assurance that these estimates will be achieved and actual results could
differ materially from those plans. Specific factors that might cause such
material differences include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct
all relevant computer codes, and similar uncertainties.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are for operating expenses,
including labor costs, raw material purchases and funding of accounts
receivable. Historically, the Company's sources of cash have been
borrowings from banks and finance companies and notes from related parties.
During the six months ended March 31, 1999, operating activities used
$1,371,000 of cash primarily due to the net loss of $843,000, the increases
in accounts receivable of $638,000, inventories of $470,000 and prepaid and
other current assets of $359,000, offset by the increases in accounts
payable of $578,000 and interest payable to related parties of $238,000.
The Company Consumer Products segment is subject to seasonal fluctuations.
The Company manufactures its products primarily in the first three quarters
of its fiscal year with most product shipments occurring in the third and
fourth quarters of the Company's fiscal year. Due to the timing of
production and shipment of the Company's products, it is common for the
Company's accounts receivable to increase during the first six months of
the fiscal year as sales during these six months generally have been made
pursuant to extended payment terms. Inventories are also built up during
the first six months of the fiscal year so that the Company will have the
necessary products available for timely shipment to its customers during
the Company's third and fourth quarters. In addition, accounts payable
increase during the first six months of the fiscal year due to the
increased purchasing activities of the Company in support of its inventory
buildup.
The increase in prepaid and other current assets was primarily due to
increased deposits for tooling, molds and materials used in production.
Other current liabilities increased $104,000 to $936,000 at March 31, 1999
as compared to $834,000 at March 31, 1998. Accrued professional fees
increased approximately $44,000 primarily due to estimated legal defense
costs associated with product liabilities, accrued advertising increased
$37,000, and sales allowances and incentives decreased $79,000 due to less
incentives being offered by the Company during the six months ended March
31, 1999 as compared to the same period of the prior year.
The Company has a $3,500,000 revolving line of credit agreement with a
commercial finance company. This credit agreement is collateralized by all
assets of the Company and expires in December 1999. The terms of this
agreement include a borrowing limit which fluctuates depending on the
levels of accounts receivable and inventory which collateralize the
borrowings. The agreement contains various covenants pertaining to
maintenance of working capital, net worth, restrictions on dividend
distributions and other conditions. Interest on amounts outstanding is
payable at 1 3/4% over the commercial base rate. The commercial base rate
was 7.75% at March 31, 1999. At March 31, 1999, the Company did not have
borrowings other than outstanding letters of credit amounting to approximately
$172,000. Pursuant to the borrowing formula under this credit agreement
approximately $1,436,000 was available.
The Company has a $7,000,000 line of credit with a realty trust operated
for the benefit of the Company's principal shareholders. This line of
credit, with interest at 10%, requires monthly payments of interest only,
and is collateralized by all assets of the Company. Such collateral is
subordinate to the revolving line of credit agreement with the finance
company. The Company had $4,715,000 outstanding under this line of credit
at March 31, 1999 and 1998. Repayment of this line of credit is
subordinate to the repayment of any and all balances outstanding on the
revolving line of credit from the commercial finance company. At March 31,
1999, interest payments of $1,633,000 associated with this line were in
arrears for the period November 1, 1995 to March 31, 1999. On November 24,
1998, the Company received a waiver for the covenant violation as to the
interest payments. The waiver extends the due date as to the interest
payments until September 30, 1999.
Sales terms for the Industrial Products segment are 30 days net. Following
industry trade practice, the Consumer Products segment offers extended
payment terms for delivery of seasonal product items such as the
bugkillers, electric leaf-eater, biomister, compost bin, yard carts and
storage sheds, resulting in fluctuating requirements for working capital.
In January 1991, the California Department of Health Services issued a
corrective action order (CAO) against the Company and a former subsidiary
to comply with a Cleanup and Abatement order which had been issued in 1990.
The CAO requires the Company and a former subsidiary to comply with a
cleanup and abatement order that had been issued in 1990 against the
Company for soil contamination at the site of the former subsidiary. To
date, no determination has been made with regard to the extent of any
environmental damage and who may be liable. The Company does not believe,
based upon the information available at this time, that the outcome of this
matter will have a material adverse effect on its financial position or
results of operations.
An action was filed in U.S. District Court, Central District of California
in late 1996 relating to the foreign arbitration award described below.
The Company was first joined as a party by the first amended petition filed
on March 3, 1997. The second amended petition was filed on June 27, 1997.
The action seeks confirmation and enforcement of a foreign arbitration
award in favor of Alsthom, currently and formerly Chantiers de L'Atlantique
("Alsthom"), and Assurances Generales de France ("AGF") (collectively
"Petitioners") against Respondents J.C. Carter Company, Inc. ("JCC III"),
the Company, Armatron-JCC, Inc., formerly known as J.C. Carter Company,
Inc. ("JCC II"), a former subsidiary of the Company, and ITT Corporation
and ITT Industries, Inc. (collectively "ITT"). The arbitration related to
certain cryogenic cargo pumps supplied in the 1970's by the J.C. Carter
Company Division of ITT ("JCC I") to Alsthom, which installed the pumps in
two liquid natural gas tanker ships, the Mourad Didouche and the Ramdane
Abane. The arbitration award was entered in favor of Alsthom and AGF, an
insurer subrogated to the rights of Alsthom, and against "J.C. Carter
Company" or "J.C. Carter Company, Inc." by the International Chamber of
Commerce in Paris in 1995. The amount of the award as to AGF is 62,431,000
French francs ("FF") and as to Alsthom is 5,469,000 FF (an aggregate of
approximately $7 million U.S. dollars at March 31, 1999), both with interest
from January 30, 1993 at the "French official rate."
Petitioners' operative pleading in the legal action, its Second Amended
Petition, seeks confirmation of the award against JCC III and, in addition,
seeks its confirmation and enforcement against the other Respondents,
including the Company, on the theories of fraudulent conveyance, collateral
estoppel and virtual representation, judicial estoppel and equitable
estoppel, and alter ego and/or successor liability relating to events
transpiring from 1983 through the completion of the foreign arbitration
proceeding in 1997. In 1983, the Company and ITT were parties to an asset
sale transaction involving the business and assets of JCC I. JCC II, a now
inactive California corporation, was formed at that time for purpose of
acquiring the assets and certain liabilities of JCC I and ceased
transacting business after the 1987 asset sale transaction with JCC III.
The Company answered the Second Amended Petition denying any liability,
asserting various affirmative defenses and cross-claims against ITT for
contractual indemnity and for equitable indemnity. ITT and JCC III have
cross-claimed against the Company.
At the present time the Company is unable to determine the outcome of the
claims asserted by and against the Company in the legal action because the
case is still at an early stage of discovery and because of the existence
of disputed issues of fact bearing on the outcome of those claims.
However, there can be no assurance that the outcome to the proceedings will
not have an adverse effect on the financial condition of the Company.
In November 1998, the Company was advised that it had been named as a
defendant in a lawsuit brought by a consumer of one of the Company's
products. The consumer claims that the product caused personal injury and
other damages. The Company believes that it has valid defenses. The Company
has insurance coverage for such claims and has accrued its insurance
deductible amount in fiscal 1998 to cover the estimated defense costs
associated with this matter.
During the six months ended March 31, 1999, the Company made cash
investments of $41,000 in capital expenditures primarily for tooling and
dies used in production and manufacturing equipment. At March 31, 1999,
the Company has commitments of approximately $209,000 for the purchase of
capital expenditures, primarily for tooling and dies used by the Company's
Industrial Products segment.
The Company believes that its present working capital, credit arrangements
with a commercial finance company and related parties, and other sources of
financing will be sufficient to finance its seasonal borrowing needs,
operations and investment in capital expenditures in fiscal 1999. Other
sources of financing, provided by the Company's principal stockholder, are
available to finance any working capital deficiencies.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999
- ---------------------------------
The results of consolidated operations for the three months ended March 31,
1999 resulted in a net loss of $148,000, or $.06 per share, as compared
with net income of $58,000, or $.02 per share, for the three months ended
March 31, 1998.
Sales decreased $318,000, or 9.9%, to $2,879,000 for the three months
ended March 31, 1999, as compared to $3,197,000 for the corresponding
period in the previous year. The decrease in sales was attributable to a
8.2% decrease in sales of Company's Consumer Products and a 42.5% decrease
in sales of Company's Industrial Products.
Operating profit is the result of deducting operating expenses excluding
interest expense, general corporate expenses, and income taxes from total
revenue.
Sales and operating profit for the Consumer Products segment for the three
months ended March 31, 1999 were approximately $2,783,000 and $222,000,
respectively, as compared to $3,030,000 and $356,000, respectively, for the
three months ended March 31, 1998. Sales decreased $247,000, or 8,2%,
primarily due to decreased sales of bugkiller products as customers delayed
deliveries and orders. Product lines within the Consumer Products segment
are subject to seasonal fluctuations, with most shipments occurring in the
spring and summer seasons. The Company anticipates that sales of the
Consumer Products segment will continue at approximately the same levels as
those in fiscal 1998.
Sales and operating loss for the Industrial Products segment for the three
months ended March 31, 1999 were $96,000 and $74,000, respectively, as
compared to sales of $167,000 and operating loss of $1,000, for the three
months ended March 31, 1998. The decrease in net sales for the Industrial
Products segment of $71,000, or 42.5%, was due to reduced shipments of the
Company's Echovision systems to this segment's major customer. This
customer had an agreement that ended in December 1998 to supply delivery
vehicles equipped with Echovision systems to a major package delivery
company. In February 1999 the customer entered into a new agreement to
supply delivery vehicles equipped with Echovision systems to the major
package delivery company. The Company experienced a significant reduction
in net sales during the three months ended March 31, 1999 due to the
customer delaying acceptance of Echovision systems. The Company
anticipates that sales of the Industrial Products will approximate the same
levels as those of fiscal 1998.
Selling, general and administrative expenses were $580,000 for both the
three months ended March 31, 1999 and 1998. Selling, general and
administrative expenses, as a percentage of sales, were 20.1% during the
three months ended March 31, 1999 as compared to 18.1% during the three
months ended March 31, 1998. The increase in the percentage was due to the
expenses remaining unchanged as the sales decreased.
Additional tax benefits from losses on operations during the three months
ended March 31, 1999 were offset by changes to the related valuation
allowance.
Six Months Ended March 31, 1999
- -------------------------------
The results of consolidated operations for the six months ended March 31,
1999 resulted in a net loss of $843,000, or $.34 per share, as compared
with net loss of $698,000, or $.28 per share, for the six months ended
March 31, 1998.
Sales decreased $75,000, or 1.7%, to $4,337,000 for the six months ended
March 31, 1999, as compared to $4,412,000 for the corresponding period in
the previous year. The decrease in sales was attributable to a 1.2%
decrease in sales of Consumer Products and a 7.1% decrease in sales of
Industrial Products.
Operating profit is the result of deducting operating expenses excluding
interest expense, general corporate expenses, and income taxes from total
revenue.
Sales and operating loss for the Consumer Products segment for the six
months ended March 31, 1999 were approximately $3,984,000 and $213,000,
respectively, as compared to $4,032,000 and $116,000, respectively, for the
six months ended March 31, 1998. Sales decreased $48,000, or 1.2%,
primarily due to decreased sales of bugkiller products. Product lines
within the Consumer Products segment are subject to seasonal fluctuations,
with most shipments occurring in the spring and summer seasons. The
Company anticipates that sales of the Consumer Products segment will
continue at approximately the same levels as those in fiscal 1998.
Sales and operating loss for the Industrial Products segment for the six
months ended March 31, 1999 were $353,000 and $53,000, respectively, as
compared to sales of $380,000 and operating loss of $4,000, for the six
months ended March 31, 1998. The decrease in net sales for the Industrial
Products segment of $27,000, or 7.1%, was primarily due to reduced
shipments of the Company's Echovision systems to this segment's major
customer. This customer had an agreement that ended in December 1998 to
supply delivery vehicles equipped with Echovision systems to a major
package delivery company. In February 1999 the customer entered into a new
agreement to supply delivery vehicles equipped with Echovision systems to
the major package delivery company. The Company experienced a reduction in
net sales during the six months ended March 31, 1999 due to the customer
delaying acceptance of Echovision systems The Company anticipates that
sales of the Industrial Products will approximate the same levels as those
of fiscal 1998.
Selling, general and administrative expenses increased $26,000, or 2.5%, to
$1,067,000 for the six months ended March 31, 1999, as compared to
$1,041,000 for the six months ended March 31, 1998. Selling, general and
administrative expenses, as a percentage of sales, were 24.6% during the
six months ended March 31, 1999 as compared to 23.6% during the six months
ended March 31, 1998.
Additional tax benefits from losses on operations during the six months
ended March 31, 1999 were offset by changes to the related valuation
allowance.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- -------------------------------------------------------------------
The Company is not subject to market risk associated with risk sensitive
instruments as the Company does not transact its sales in other than United
States dollars, does not invest in investments other than United States
instruments and has not entered into hedging transactions.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
3(i) - Certificate of Vote of Directors Establishing the Series A
Preferred Stock
27 - Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K filed on April 22, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ARMATRON INTERNATIONAL, INC.
May 12, 1999 By: /s/ Charles J. Housman
-----------------------
Charles J. Housman
Chairman of the Board,
President and Director
Chief Executive, Financial
and Accounting Officer
EXHIBIT INDEX
Exhibit 3(i) Certificate of Vote of Directors Establishing the Series A
Preferred Stock
Exhibit 27 Financial Data Schedule
Exhibit 3(i)
FEDERAL INDENTIFICATION
Examiner NO. 04-1052250
The Commonwealth of Massachusetts
William Francis Galvin
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
CERTIFICATE OF VOTE OF DIRECTORS
ESTABLISHING A CLASS OR SERIES OF STOCK
(General Laws, Chapter 156B, Section 26)
We, Charles J. Housman, *President/Vice President(crossed out),
---------------------
and Malcolm D. Finks, *Clerk/Assistant Clerk(crossed out),
-------------------
of Armatron International, Inc.
------------------------------
(Exact name of corporation)
located at: 2 Main Street, Melrose, MA 02176
----------------------------------
(Street Address of corporation in Massachusetts)
do hereby certify that by unanimous written consent of the directors of the
corporation dated April 16, 1999, the following vote establishing and
designating a class or series of stock and determining the relative rights
and preferences thereof was duly adopted:
That pursuant to the authority expressly granted to and vested in the Board
of Directors of the Corporation by the provisions of the Restated Articles
of Organization of the Corporation, the Board of Directors of the
Corporation deems it advisable to amend the Restated Articles of
Organization of the Corporation, so as to designate 6,667 shares of
Preferred Stock, $100.00 par value per share, of the Corporation as Series
A Preferred Stock (the "Series A Preferred Stock"), such Series A Preferred
Stock to have the rights preferences, powers, qualification and
restrictions substantially as set forth in the Certificate of Vote of
Directors establishing the Series A Preferred Stock attached hereto as
Exhibit A, with such changes thereto as the President of the Corporation
shall authorize and approve.
That, the appropriate officers of the Corporation be, and they hereby are,
authorized and directed to execute and file with the Secretary of State of
the Commonwealth of Massachusetts the Certificate of Vote of Directors
establishing the Series A Preferred Stock.
* Delete the inapplicable words.
Note: Votes for which the space provided above is not sufficient should be
provided on one side of separate 8 1/2 x 11 sheets of white paper,
numbered 2A, 2B, etc. with a left margin of at least 1 inch.
SIGNED UNDER THE PENALTIES OF PERJURY, this 16th day of April, 1999.
------ -------------
/s/ Charles J. Housman, *President/Vice President(crossed out)
- -----------------------
Charles J. Housman
/s/ Malcolm D. Finks, *Clerk/Assistant Clerk(crossed out)
- -----------------------
Malcolm D. Finks
* Delete the inapplicable words.
THE COMMONWEALTH OF MASSACHUSETTS
CERTIFICATE OF VOTE OF DIRECTORS
ESTABLISHING A SERIES OF A CLASS OF STOCK
(General Laws, Chapter 156B, Section 26)
=============================
I hereby approve the within Certificate of Vote of Directors and, the
filing fee in the amount of $______________ having been paid,
said certificate is deemed to have been filed with me this _________
day of ___________, 19__.
Effective date:__________________________
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
Photocopy of document to be sent to:
Malcolm D. Finks
Bass Doherty & Finks, P.C.
40 Soldiers Field Place
Boston, MA 02135-1104
Telephone: (617) 787-5551
Exhibit A
1. Number, Designation and Rank.
-----------------------------
(a) This series shall consist of 6,667 preferred shares in the
Corporation and shall be designated the Series A Preferred Stock ("Series
A Preferred Stock").
(b) The Series A Preferred Stock shall, with respect to dividend
rights and rights on liquidation rank prior to all classes or series of
equity securities of the Corporation, including the Common Stock.
2. Definitions.
------------
For purposes of this Certificate of Vote of Directors, "Junior Shares"
shall mean all Common Stock and any other shares of capital stock of the
Corporation other than the Series A Preferred Stock.
3. Dividends Rights of Preferred.
------------------------------
The holders of the Series A Preferred Stock shall be entitled to
receive, out of any assets at the time legally available therefor, dividends
per share in cash at the rate of 10% per annum multiplied by $2,000,100 (as
adjusted for any stock dividends, stock splits, recapitalizations,
consolidations or the like), payable in preference and priority to any
payment of any dividend on Junior Shares. The right to such dividends shall
be cumulative and shall accrue and compound on a daily basis, regardless of
whether the Board of Directors has declared a dividend payment or whether
there are any profits, surplus or other funds of the Corporation available
for dividends, beginning on the date this Certificate of Vote is executed
(the "Original Issuance Date"). Dividends shall be payable quarterly on the
last day of each March, June, September and December. All cash payments of
dividends with respect to the Series A Preferred Stock shall be made in such
coin or currency of the United States of America as at the time of payment
shall be legal tender for the payment of public and private debts. If at any
time the Corporation pays less than the total amount of accumulated and
unpaid dividends with respect to the Series A Preferred Stock because there
exists no funds at the time legally available therefor, such payment shall be
distributed ratably among the holders of the Series A Preferred Stock based
upon the number of shares of Series A Preferred Stock held by each such
holder and any accumulated and unpaid dividends shall be payable at the end
of the next succeeding quarter in which such funds are legally available, on
the basis set forth above, after the dividends to be paid in that quarter
have been paid. No dividends shall be paid on any Junior Shares unless (i)
the stated dividend provided for in the first sentence of this Paragraph 3
shall theretofore have been declared and paid in full on all shares of Series
A Preferred Stock then outstanding, and (ii) a dividend equal to the dividend
declared on such Junior Shares is paid with respect to all outstanding shares
of Series A Preferred Stock in an amount for each such share of Series A
Preferred Stock equal to the aggregate amount of such dividends for all
Junior Shares into which each such share of Series A Preferred Stock could
then be converted.
In the event that any dividend declared pursuant to the preceding
paragraph on any shares of the Series A Preferred Stock shall remain unpaid
at the time of any conversion of such Series A Preferred Stock pursuant to
Paragraph 5 hereof, then, notwithstanding such conversion, such dividends
shall be paid by the Corporation, in cash, in full, as promptly as possible
after the effectiveness of such conversion, whenever funds are legally
available therefor.
4. Liquidation Preference.
------------------------
(a) In the event of any liquidation, dissolution or winding up of the
Corporation, either voluntary or involuntary, the holders of the Series A
Preferred Stock shall be entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of the Corporation to the
holders of the Junior Shares by reason of their ownership thereof, the amount
per share of (i) $300, plus (ii) all accumulated and unpaid dividends on the
Series A Preferred Stock to the date of payment of such liquidation amount
(both as adjusted for any stock dividends, stock splits, recapitalizations,
consolidations or the like). If, upon the occurrence of such event, the
assets and funds thus distributed among the holders of the Series A Preferred
Stock shall be insufficient to permit the payment to such holders of the full
preferential amount aforesaid, then the entire assets and funds of the
Corporation legally available for distribution shall be distributed ratably
among the holders of the Series A Preferred Stock based upon the number of
shares of Series A Preferred Stock held by each such holder. After payment
has been made to the holders of the Series A Preferred Stock of the full
amounts to which they shall be entitled as aforesaid, all remaining assets
and funds of the Corporation shall be distributed in like amounts per share
on an as converted basis among the holders of the Junior Shares.
(b) For purposes of this Paragraph 4, a liquidation, dissolution or
winding up of the Corporation shall be deemed to be occasioned by, or to
include, the Corporation's sale of all or substantially all of its assets or
the acquisition of this Corporation by another entity by means of merger or
consolidation resulting in the exchange of the outstanding shares of this
Corporation for securities or consideration issued, or caused to be issued,
by the acquiring entity or its subsidiary, if the stockholders of this
Corporation hold less than 50% of the outstanding voting equity securities of
such acquiring entity or its subsidiary.
(c) In the event the Corporation shall propose to take any action of
the types described in subparagraphs (a) or (b) of this Paragraph 4, the
Corporation shall, within ten (10) days after the date the Board of Directors
approves such action, or twenty (20) days prior to any stockholders' meeting
called to approve such action, whichever is earlier, give each holder of
shares of Series A Preferred Stock initial written notice of the proposed
action. Such initial written notice shall describe the material terms and
conditions of such proposed action, including a description of the stock,
cash and property to be received by the holders of shares of Series A
Preferred Stock upon consummation of the proposed action and the date of
delivery thereof. If any material change in the facts set forth in the
initial notice shall occur, the Corporation shall promptly give written
notice to each holder of shares of Series A Preferred Stock of such material
change.
(d) The Corporation shall not consummate any proposed action of the
types described in subparagraphs (a) or (b) of this Paragraph 4 before the
expiration of thirty (30) days after the mailing of the initial notice or
twenty (20) days after the mailing of any subsequent written notice,
whichever is later; provided that any such 30-day or 20-day period may be
shortened upon the written consent of the holders of sixty-six and two-thirds
(66 2/3) of the outstanding shares of Series A Preferred Stock.
(e) In the event the Corporation shall propose to take any action of
the types described in subparagraphs (a) or (b) of this Paragraph 4 that will
involve the distribution of assets other than cash, the Board of Directors
shall make a good faith appraisal of the value of the assets to be
distributed to the holders of shares of Series A Preferred Stock. The
Corporation shall give prompt written notice to each holder of shares of
Series A Preferred Stock of such valuation. All notices pursuant to this
Paragraph 4 shall be deemed given upon personal delivery or upon deposit in a
United States Post Office by registered or certified mail.
5. Conversion.
-----------
The holders of the Series A Preferred Stock shall have conversion
rights as follows (the "Conversion Rights"):
(a) Right to Convert and Automatic Conversion.
------------------------------------------
(i) Each share of Series A Preferred Stock shall be convertible,
at the option of the holder thereof, at the office of the Corporation
or any transfer agent for the Series A Preferred Stock, into fully paid
and nonassessable shares of Common Stock at the Conversion Rate (as
hereinafter defined) in effect at the time of conversion. The number
of shares of Common Stock into which each share of Series A Preferred
Stock may be converted is hereinafter referred to as the "Conversion
Rate." The initial Conversion Rate shall each be 1,000, and such
Conversion Rate shall be subject to the adjustments described below.
The amount obtained by dividing $300 by the Conversion Rate shall be
called the "Conversion Price."
(ii) Each share of Series A Preferred Stock shall automatically
be converted into shares of Common Stock at the then effective
Conversion Rate in the event of (a) the conversion of 75% of all
outstanding shares of Series A Preferred Stock into Common Stock,
effective upon such conversion, or (b) the closing of a firm commitment
underwritten public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended, covering the
offer and sale of Common Stock for the account of the Corporation to
the public (other than a registration statement with respect to
employee stock option or purchase plans). In the event of such an
offering, the person(s) entitled to receive the Common Stock issuable
upon such conversion of the Series A Preferred Stock shall not be
deemed to have converted such Preferred Stock until immediately prior
to the closing of such sale of securities.
(iii) No fractional shares of Common Stock shall be issued upon
conversion of the Series A Preferred Stock. Any shares of Series A
Preferred Stock surrendered by a stockholder for conversion which would
otherwise result (after aggregation of all shares surrendered by such
stockholder for conversion) in a fractional share of Common Stock shall
be redeemed for an amount per share payable in cash equal to the
current market price of such fractional share as determined in good
faith by the Board of Directors of the Corporation, payable as promptly
as possible whenever funds are legally available therefor.
(b) Mechanics of Conversion. Before any holder of Series A Preferred
Stock shall be entitled to convert the same into shares of Common Stock, he
shall surrender the certificate or certificates therefor, duly endorsed, at
the principal office of the Corporation or of any transfer agent for the
Series A Preferred Stock, and shall give written notice to the Corporation at
such office that he elects to convert the same and shall state therein the
name or names in which he wishes the certificate or certificates for shares
of Common Stock to be issued. The Corporation shall, as soon as practicable
thereafter, issue and deliver at such office to such holder of Series A
Preferred Stock, or to his nominee or nominees (i) a certificate or
certificates for the number of shares of Common Stock to which he shall be
entitled as aforesaid, plus (ii) all accumulated and unpaid dividends on the
converted Series A Preferred Stock to the date of such conversion. Except as
set forth in subparagraph 5(a)(ii) above, such conversion shall be deemed to
have been made immediately prior to the close of business on the date of such
surrender of the shares of Series A Preferred Stock to be converted, and the
person or persons entitled to receive the shares of Common Stock issuable
upon such conversion shall be treated for all purposes as the record holder
or holders of such shares of Common Stock on such date.
(c) Adjustment for Combinations or Consolidations; Reorganizations,
Reclassification, Exchange and Substitution.
(i) In the event the Corporation at any time or from time to
time after the Original Issue Date effects a subdivision or combination
of its outstanding Common Stock into a greater or lesser number of
shares without a proportionate and corresponding subdivision or
combination of its outstanding Series A Preferred Stock, then and in
each such event the Conversion Rate shall be increased or decreased
proportionately.
(ii) If the Common Stock issuable upon conversion of the Series
A Preferred Stock shall be changed into the same or a different number
of shares of any other class or classes of stock or other securities or
property, whether by reorganization (unless such reorganization is
deemed a liquidation under subparagraph 4(b) hereof), reclassification
or otherwise (other than a subdivision or combination of shares
provided for above), then the Conversion Rate then in effect shall,
concurrently with the effectiveness of such reorganization or
reclassification, be proportionately adjusted such that the Series A
Preferred Stock shall be convertible into, in lieu of the number of
shares of Common Stock which the holders would otherwise have been
entitled to receive, a number of shares of such other class or classes
of stock or other securities or property equivalent to the number of
shares of Common Stock that would have been subject to receipt by the
holders upon conversion of the Series A Preferred Stock immediately
before such event; and, in any such case, appropriate adjustment (as
determined by the Board) shall be made in the application of the
provisions herein set forth with respect to the rights and interests
thereafter of the holders of the Series A Preferred Stock, to the end
that the provisions set forth herein (including provisions with respect
to change in and other adjustments of the Conversion Rate) shall
thereafter be applicable, as nearly as reasonably may be, in relation
to any shares of stock or other property thereafter deliverable
upon the conversion of the Series A Preferred Stock.
(d) Adjustment for Dividends, Distributions and Common Stock
Equivalents. In the event the Corporation at any time or from time to time
after the Original Issue Date shall make or issue, or fix a record date for
the determination of holders of Common Stock or any series of Preferred Stock
entitled to receive a dividend or other distribution to be made only to such
holders of Common Stock or any series of Preferred Stock or any combination
of Common Stock or series of Preferred Stock, but not to all series of
Preferred Stock on a pro rata basis, payable in additional shares of Common
Stock, or other securities or rights convertible into or entitling the holder
thereof to receive additional shares of Common Stock, directly or indirectly
(hereinafter referred to as "Common Stock Equivalents"), without payment of
any consideration by such holder for such Common Stock, then and in each such
event the maximum number of shares (as set forth in the instrument relating
thereto without regard to any provisions contained therein for a subsequent
adjustment of such number) of Common Stock issuable in payment of such
dividend or distribution or upon conversion or exercise of such Common Stock
Equivalents shall be deemed to be issued and outstanding as of the time of
such issuance or, in the event such a record date shall have been fixed, as
of the close of business on such record date. In each such event, the
Conversion Rate shall be increased as of the time of such issuance or, in the
event such a record date shall have been fixed, as of the close of business
on such record date, by multiplying the Conversion Rate by a fraction,
(i) the numerator of which shall be the sum of (x) the total
number of shares of Common Stock issued and outstanding (before
conversion of any then outstanding shares of Preferred Stock and
excluding Common Stock issuable upon exchange or conversion or exercise
of outstanding Common Stock Equivalents) immediately prior to the time
of such issuance or the close of business on such record date plus (y)
the number of shares of Common Stock issuable in payment of such
dividend or distribution or upon conversion or exercise of such Common
Stock Equivalents; and
(ii) the denominator of which shall be the total number of
shares of Common Stock issued and outstanding (before conversion of any
then outstanding shares of Preferred Stock and excluding Common Stock
issuable upon exchange or conversion or exercise of outstanding Common
Stock Equivalents) immediately prior to the time of such issuance or
the close of business on such record date;
provided, however, that (A) if such record date shall have been fixed
and such dividend is not fully paid or if such distribution is not
fully made on the date fixed therefor, the Conversion Rate computed
upon the original issuance thereof (or upon the occurrence of a record
date with respect thereto), and any subsequent adjustments based
thereon, shall be recomputed accordingly as of the close of business on
such record date, and thereafter the Conversion Rate shall be adjusted
pursuant to this Paragraph 5(d) as of the time of actual payment of
such dividends or distributions; (B) if such Common Stock Equivalents
provide, with the passage of time or otherwise, for any decrease in the
number of shares of Common Stock issuable upon conversion or exercise
thereof (or upon the occurrence of a record date with respect thereto),
the Conversion Rate computed upon the original issuance thereof (or
upon the occurrence of a record date with respect thereto) and any
subsequent adjustments based thereon, shall, upon any such decrease
becoming effective, be recomputed to reflect such decrease insofar as
it affects the rights of conversion or exercise of the Common Stock
Equivalents then outstanding; (C) upon the expiration of any rights of
conversion or exercise under any unexercised Common Stock Equivalents,
the Conversion Rate computed upon the original issuance thereof (or
upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon such expiration, be
recomputed as if the only additional shares of Common Stock issued were
the shares of such stock, if any, actually issued upon the conversion
or exercise of such Common Stock Equivalents; and (D) in the case of
Common Stock Equivalents which expire by their terms not more than
sixty (60) days after the date of issuance thereof, no adjustment in
the Conversion Rate shall be made until the expiration or exercise of
all such Common Stock Equivalents, whereupon such adjustments shall be
made in the manner provided in clause (C) above.
(e) Adjustment of Conversion Rates for Diluting Issues. The
Conversion Rate shall be subject to the following adjustment, in addition to
those set forth above. Except as otherwise provided in this subparagraph
(e), in the event the Corporation sells or issues any Common Stock or Common
Stock Equivalents at a per share consideration (as defined below) less than
the Conversion Price, then the Conversion Rate and Conversion Price then in
effect shall be adjusted as provided in subparagraphs (i), (ii) and (iii)
hereof. For the purposes of the foregoing, the per share consideration with
respect to the sale or issuance of Common Stock shall be the price per share
received by the Corporation, prior to the payment of any expenses,
commissions, discounts and other applicable costs, less the amount of any
dividend or other distribution on the Common Stock (other than in cash out of
its retained earnings, or to repurchase shares of Common Stock from employees
or consultants upon termination of employment or consultant relationship)
made since the most recent adjustment of the Conversion Rate. With respect
to the sale or issuance of Common Stock Equivalents which are convertible
into or exchangeable for Common Stock without further consideration, the per
share consideration shall be determined by dividing the maximum number of
shares of Common Stock issuable with respect to such Common Stock Equivalents
(as set forth in the instrument relating thereto without regard to any
provisions contained therein for subsequent adjustment of such number) into
the aggregate consideration received by the Corporation upon the sale or
issuance of such Common Stock Equivalents. With respect to the issuance of
other Common Stock Equivalents, the per share consideration shall be
determined by dividing the maximum number of shares of Common Stock issuable
with respect to such Common Stock Equivalents into the total aggregate
consideration received by the Corporation upon the sale or issuance of such
Common Stock Equivalents plus the minimum aggregate amount of additional
consideration receivable by the Corporation upon the conversion or exercise
of such Common Stock Equivalents. The issuance of Common Stock or Common
Stock Equivalents for no consideration shall be deemed to be an issuance at a
per share consideration of $.01. In connection with the sale or issuance of
Common Stock and/or Common Stock Equivalents for non-cash consideration, the
fair market value of such consideration shall be determined by the Board of
Directors of the Corporation.
As used herein, "Additional Shares of Common Stock" shall mean either
shares of Common Stock issued subsequent to the Original Issue Date or, with
respect to the issuance of Common Stock Equivalents, the maximum number of
shares of Common Stock issuable in exchange for, upon conversion of, or upon
exercise of such Common Stock Equivalents issued subsequent to the Original
Issue Date.
The Conversion Price and Conversion Rate shall be determined and
adjusted once only with respect to any single offering of the Corporation's
securities for financing purposes, provided that all closings with respect to
any such offering occur within a period of no more than 120 days and,
provided further, that an appropriate adjustment shall be made for the
benefit of any holder of Series A Preferred Stock who converts the Series A
Preferred Stock into Common Stock during such 120 day period.
(i) Upon each issuance of Additional Shares of Common Stock for
a per share consideration less than the Conversion Price in effect on
the date of such issuance, the Conversion Rate in effect on the date of
the issuance of Additional Shares of Common Stock will be adjusted by
multiplying it by a fraction the numerator of which is the Conversion
Price as then in effect and the denominator of which is the per share
consideration received by the Corporation for such Additional Shares of
Common Stock.
(ii) Upon each issuance of Common Stock Equivalents exchangeable
without further consideration into Common Stock for a per share
consideration less than a Conversion Price in effect on the date of
such issuance, the Conversion Rate in effect on such date will be
adjusted as in subparagraph (i) above on the basis that the related
Additional Shares of Common Stock are to be treated as having been
issued on the date of issuance of the Common Stock Equivalents, and the
aggregate consideration received by the Corporation for such Common
Stock Equivalents shall be deemed to have been received for such
Additional Shares of Common Stock.
(iii) Upon each issuance of Common Stock Equivalents other than
those described in subparagraph (ii) above, for a per share
consideration less than the Conversion Price in effect on the date of
such issuance, the Conversion Rate in effect on such date will be
adjusted as in subparagraph (i) above on the basis that the related
Additional Shares of Common Stock are to be treated as having been
issued on the date of issuance of such Common Stock Equivalents, and
the aggregate consideration received and the minimum amount receivable
by the Corporation on conversion or exercise of such Common Stock
Equivalents shall be deemed to have been received for such Additional
Shares.
(iv) Once any Additional Shares of Common Stock have been
treated as having been issued for the purpose of this subparagraph
5(e), they shall be treated as issued and outstanding shares of Common
Stock whenever any subsequent calculations must be made pursuant
hereto; provided that on the expiration of any options, warrants or
rights to purchase Additional Shares of Common Stock or the termination
of any rights to convert or exchange for Additional Shares of Common
Stock on account of which an adjustment in the Conversion Rate has been
made previously pursuant to this subparagraph 5(e), such Conversion
Rate shall forthwith be readjusted to such Conversion Rate as would
have been obtained had the adjustment made upon the issuance of such
options, warrants, rights, or convertible or exchangeable securities
been made upon the basis of the issuance of only the number of shares
of Common Stock actually issued upon the exercise of such options,
warrants or rights, or upon the conversion or exchange of such
securities.
(v) The foregoing notwithstanding, no adjustment of the
Conversion Rate or Conversion Price shall be made as a result of the
issuance of:
-- any shares of Common Stock (or any options, warrants or
rights to purchase such shares of Common Stock) issued or
issuable to employees, officers, directors or consultants of the
Corporation with the approval of the Board of Directors of the
Corporation pursuant to any stock option plan, stock incentive or
purchase plan or agreement approved by the Board of Directors of
the Corporation;
-- any shares of Common Stock pursuant to which any Conversion
Rate or Conversion Price is adjusted under subparagraphs (c) or
(d) of this Paragraph 5;
-- any shares of Common Stock issued pursuant to the exchange,
conversion, or exercise of any Common Stock Equivalents according
to their terms which have previously been incorporated into
computations hereunder on the date when such Common Stock
Equivalents were issued; or
-- any shares of Common Stock issued upon conversion of the
Series A Preferred Stock.
(f) No Adjustment. No adjustment in the Conversion Rate or Conversion
Price need be made if such adjustment would result in a change in the
Conversion Price of less than $.01. Any adjustment of less than $.01 which is
not made shall be carried forward and shall be made at the time of and
together with any subsequent adjustment which, on a cumulative basis, amounts
to an adjustment of $.01 or more in the Conversion Price.
(g) No Impairment. The Corporation will not, by amendment of its
Articles of Organization or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any
of the terms to be observed or performed hereunder by the Corporation, but
will at all times in good faith assist in the carrying out of all the
provisions of this Paragraph 5 and in the taking of all such action as may be
necessary or appropriate in order to protect the Conversion Rights of the
holders of the Series A Preferred Stock against impairment.
(h) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Rate pursuant to this Paragraph
5, the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to
each holder of Series A Preferred Stock a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the written
request at any time of any holder of Series A Preferred Stock, furnish or
cause to be furnished to such holder a like certificate setting forth (i)
such adjustments and readjustments, (ii) the Conversion Rate at the time in
effect, and (iii) the number of shares of Common Stock and the amount, if
any, of other property which at the time would be received upon the
conversion of the Series A Preferred Stock.
(i) Notices of Record Date. In the event of any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of (i) determining the holders thereof who are entitled to receive
any dividend (other than a cash dividend) or other distribution, any Common
Stock Equivalents or any right to subscribe for, purchase or otherwise
acquire any shares of stock of any class or any other securities or property,
or to receive any other right, (ii) effecting any reclassification or
recapitalization of its shares of Common Stock outstanding involving a change
in the shares of Common Stock, or (iii) merging or consolidating with or
into any other corporation, or selling, leasing or conveying all or
substantially all its property or business, or liquidating, dissolving or
winding up, the Corporation shall mail to each holder of Series A Preferred
Stock at least twenty (20) days prior to the date specified therein, a notice
specifying the date on which any such record is to be taken for the purpose
of such dividend, distribution, right, reclassification, recapitalization,
consolidation, sale, lease, conveyance, liquidation, dissolution or winding
up, and the amount and character of such dividend, distribution, right,
reclassification, recapitalization, consolidation, sale, lease, conveyance,
liquidation, dissolution or winding up. Failure to give such notice shall not
in any way affect the legality of such transaction.
(j) Reservation of Stock Issuance Upon Conversion. The Corporation
shall at all times reserve and keep available, free from preemptive rights,
3,393,500 shares out of its authorized but unissued shares of Common Stock,
solely for the purpose of effecting the conversion of the shares of Series A
Preferred Stock. The Corporation shall, prior to the date of conversion of
the Series A Preferred Stock as set forth in this Paragraph 5, take such
corporate action as may be necessary to increase its number of authorized but
unissued shares of Common Stock to such number of its shares of Common Stock
as shall from time to time be sufficient to effect the conversion of all
outstanding shares of Series A Preferred Stock.
(k) Notices. Any notice required by the provisions of this Paragraph
5 to be given to the holders of shares of Series A Preferred Stock shall be
deemed given if deposited in the United States mail, first class, postage
prepaid, and addressed to each holder of record at his address appearing on
the books of the Corporation.
(l) No Reissuance of Preferred Stock. No share or shares of Preferred
Stock acquired by the Corporation by reason of redemption, purchase,
conversion or otherwise shall be reissued, and all such shares shall be
cancelled, retired and eliminated from the shares which the Corporation shall
be authorized to issue.
(m) Validity of Shares. The Corporation agrees that it will from time
to time take all such actions as may be requisite to assure that all shares
of Common Stock which may be issued upon conversion of any of the Series A
Preferred Stock will, upon issuance, be legally and validly issued, fully
paid and non-assessable and free from all taxes, liens and charges with
respect to the issue thereof; and, without limiting the generality of the
foregoing, the Corporation agrees that it will from time to time take all
such action as may be requisite to assure that the par value per share, if
any, of the Common Stock is at all times equal to or less than the then
current par value of the Series A Preferred Stock divided by the number of
shares of Common Stock into which each share of the Series A Preferred Stock
can, from time to time, be converted.
(n) Taxes. The Corporation will pay all taxes and other governmental
charges that may be imposed in respect of the issue or delivery of shares of
Common Stock upon conversion of the Series A Preferred Stock.
(o) Good Faith. If any event occurs as to which in the reasonable
opinion of the Board of Directors of the Corporation, in good faith, the
other provisions of this Paragraph 5 are not strictly applicable but the lack
of any adjustment in the Conversion Price would not, in the opinion of the
Board of Directors of the Corporation, fairly protect the conversion rights
of the holders of the Series A Preferred Stock in accordance with the basic
intent and principles of such provisions, or if strictly applicable would not
fairly protect the conversion rights of the holders of the Series A Preferred
Stock in accordance with the basic intent and principles of such provisions,
then the Board of Directors shall appoint a firm of independent certified
public accountants (which may be the regular auditors of the Corporation) of
recognized national standing, which shall give their opinion upon the
adjustment, if any, to the Conversion Price, on a basis consistent with the
basic intent and principles of this Paragraph 5, necessary to preserve,
without dilution, the exercise rights of all the registered holders of the
Series A Preferred Stock. Upon receipt of such opinion, the Board of
Directors shall forthwith make the adjustments described therein.
6. Voting Rights. Except as otherwise required by law or the
Corporation's Articles of Organization, each share of Series A Preferred
Stock issued and outstanding shall have the number of votes equal to the
number of shares of Common Stock into which such shares of Series A Preferred
Stock could be converted on the record date for the vote or consent of
stockholders were sufficient shares of Common Stock available for conversion
and shall have voting rights and powers equal to the voting rights and powers
of the Common Stock. The holder of each share of Series A Preferred Stock
shall be entitled to notice of any stockholders' meeting in accordance with
the bylaws of the Corporation. The holders of the Series A Preferred Stock
shall vote with holders of the Common Stock upon any other matters submitted
to a vote of stockholders, except those matters required by law or the
Corporation's Articles of Organization, to be submitted to a class vote.
7. Covenants.
----------
(a) In addition to any other rights provided by law, so long as shares
of Series A Preferred Stock shall be outstanding, the Corporation shall not,
without first obtaining the affirmative vote or written consent of the
holders of 66 2/3 of such outstanding shares of Series A Preferred Stock,
amend or repeal any provision of, or add any provision to, the Corporation's
Articles of Organization, or bylaws if such action would alter or change the
preferences, rights, privileges or powers of, or the restrictions provided
for the benefit of, the Series A Preferred Stock.
Further, so long as any Series A Preferred Stock shall be outstanding,
the Corporation shall not without first obtaining the affirmative vote or
written consent of the holders of 66 2/3 of such outstanding shares of Series
A Preferred Stock, voting as a single class:
(i) Increase or decrease the number of shares of Series A
Preferred Stock authorized hereby;
(ii) Authorize or issue shares of any class or series of stock
having any rights, preferences or privileges superior to or on a parity
with the Series A Preferred Stock or authorize or issue shares of stock
of any class or any bonds, debentures, notes or other obligations
convertible into or exchangeable for, or having option rights to
purchase, any shares of stock of the Corporation having any rights,
preferences or privileges superior to or on a parity with the Series A
Preferred Stock;
(iii) Reclassify any outstanding shares into shares having any
rights, preferences or privileges superior to or on a parity with the
Series A Preferred Stock;
(iv) Pay or declare any dividends on any Junior Stock, except
for dividends payable on the Common Stock solely in the form of
additional shares of Common Stock;
(v) Repurchase, acquire or retire any shares of Preferred Stock
or Junior Shares, except in a consolidation or merger pursuant to
subsection (vi) below or from employees, directors or consultants of
this Corporation upon termination pursuant to terms of agreements
entered into with such persons approved by the Board of Directors of
the Corporation and providing for repurchase of such shares at cost; or
(vi) Undertake or effect any liquidation of the Corporation or
any consolidation or merger of the Corporation with or into another
corporation or the sale, transfer or conveyance of all or substantially
all of the assets of the Corporation to another person or persons in
any transaction or series of transactions, if the stockholders of this
Corporation hold less than 50% of the outstanding voting equity
securities of the successor or surviving corporation in such merger,
consolidation, sale or conveyance of assets.
(b) The obligations set forth in this Paragraph 7 may be amended or
waived only by holders of at least 66 2/3% of the outstanding shares of the
Series A Preferred Stock.
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,254
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<RECEIVABLES> 2,549
<ALLOWANCES> 112
<INVENTORY> 2,558
<CURRENT-ASSETS> 6,785
<PP&E> 6,129
<DEPRECIATION> 5,725
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0
0
<COMMON> 2,606
<OTHER-SE> (4,005)
<TOTAL-LIABILITY-AND-EQUITY> 7,295
<SALES> 2,879
<TOTAL-REVENUES> 2,879
<CGS> 2,346
<TOTAL-COSTS> 2,346
<OTHER-EXPENSES> 556
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 125
<INCOME-PRETAX> (148)
<INCOME-TAX> 0
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