<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 3, 1998
REGISTRATION NO. 333-48817
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PHASE METRICS, INC.*
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3829 33-0328048
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
10260 SORRENTO VALLEY ROAD
SAN DIEGO, CALIFORNIA 92121
(619) 646-4800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JOHN F. SCHAEFER
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
PHASE METRICS, INC.
10260 SORRENTO VALLEY ROAD
SAN DIEGO, CALIFORNIA 92121
(619) 646-4800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPY TO:
GREG T. WILLIAMS, ESQ.
BROBECK, PHLEGER & HARRISON LLP
38 TECHNOLOGY DRIVE
IRVINE, CALIFORNIA 92618
(949) 790-6300
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
*TABLE OF ADDITIONAL REGISTRANTS
<TABLE>
<CAPTION>
STATE OR OTHER
JURISDICTION OF PRIMARY STANDARD
INCORPORATION OR INDUSTRIAL CLASSIFICATION I.R.S. EMPLOYER
NAME, ADDRESS AND TELEPHONE NUMBER(1) ORGANIZATION CODE NUMBER IDENTIFICATION NO.
- --------------------------------------------- ----------------- ------------------------- ------------------
<S> <C> <C> <C>
Air Bearings, Incorporated................... California 3829 94-3092378
Applied Robotic Technologies, Inc............ California 3829 68-0022756
Helios, Incorporated......................... California 3829 77-0077044
Santa Barbara Metric, Inc.................... California 3829 77-0430551
</TABLE>
- ---------------
(1) The address of these additional registrants is 10260 Sorrento Valley Road,
San Diego, California 92121. Their telephone number is (619) 646-4800.
<PAGE> 3
EXPLANATORY NOTE
This Registration Statement covers the registration of an aggregate
principal amount of $110,000,000 of new 10 3/4% Senior Notes due 2005 (the "New
Notes") of Phase Metrics, Inc. (the "Company") and the guarantees related
thereto that may be exchanged (the "Exchange Offer") for equal principal amounts
of the Company's outstanding 10 3/4% Senior Notes due 2005 (the "Notes") and the
guarantees related thereto. This Registration Statement also covers the
registration of the New Notes and the guarantees related thereto for resale by
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") in market-making
transactions. The complete Prospectus relating to the Exchange Offer (the
"Exchange Offer Prospectus") follows immediately after this Explanatory Note.
Following the Exchange Offer Prospectus beginning on page B-1 are certain pages
and sections of a prospectus relating solely to any market-making transactions
by DLJ (along with the relevant pages of the Exchange Offer Prospectus, the
"Market-Making Prospectus"), including an alternate front cover page, an
alternate section entitled "Risk Factors -- Absence of Active Trading Market" to
be used in lieu of the section entitled "Risk Factors -- Absence of Trading
Market; Restrictions on Transfers," an alternate section entitled "Use of
Proceeds" and an alternate section entitled "Plan of Distribution." In addition,
the Market-Making Prospectus will not include the following sections (or the
information set forth under the captions for such sections) of the Exchange
Offer Prospectus: "Prospectus Summary -- The Note Offering" and "-- The Exchange
Offer," "Risk Factors -- Compliance with Exchange Offer Procedures; Restrictions
on Resales," "The Exchange Offer" and "Certain United States Federal Tax
Considerations." All other sections of the Exchange Offer Prospectus will be
included in the Market-Making Prospectus.
<PAGE> 4
PROSPECTUS
OFFER TO EXCHANGE
ALL OUTSTANDING
10 3/4% SENIOR NOTES DUE 2005
($110,000,000 PRINCIPAL AMOUNT OUTSTANDING)
FOR
NEW 10 3/4% SENIOR NOTES DUE 2005
($110,000,000 PRINCIPAL AMOUNT)
OF
[PHASE METRICS LOGO]
------------------------
The Exchange Offer Will Expire At 12:00 Midnight, New York City Time,
On , 1998, Unless Extended
------------------------
Phase Metrics, Inc., a Delaware corporation (the "Company"), hereby offers
(the "Exchange Offer"), upon the terms and subject to the conditions set forth
in this Prospectus and the accompanying Letter of Transmittal (the "Letter of
Transmittal"), to exchange up to an aggregate principal amount of $110,000,000
of its new 10 3/4% Senior Notes due 2005 (the "New Notes") for an equal
principal amount of its outstanding 10 3/4% Senior Notes due 2005 (the "Notes"),
in integral multiples of $1,000. The New Notes will be senior unsecured
obligations of the Company and are substantially identical (including principal
amount, interest rate, maturity and redemption rights) to the Notes for which
they may be exchanged pursuant to this Exchange Offer, except that (i) the
offering and sale of the New Notes will have been registered under the
Securities Act of 1933, as amended (the "Securities Act") and (ii) holders of
New Notes will not be entitled to certain rights under the Registration Rights
Agreement of the Company and Applied Robotic Technologies, Inc., Helios,
Incorporated, Air Bearings, Incorporated and Santa Barbara Metric, Inc., all of
which are California corporations and wholly-owned subsidiaries of the Company
(together with any future other subsidiary of the Company that executes a New
Note Guarantee, the "Subsidiary Guarantors") dated as of January 30, 1998 (the
"Registration Rights Agreement"). The New Notes will be fully and
unconditionally guaranteed on a senior unsecured basis (the "New Note
Guarantees") by, and will be joint and several obligations of the Subsidiary
Guarantors. The Notes have been, and the New Notes will be, issued under an
Indenture dated as of January 30, 1998 (the "Indenture"), among the Company, the
Subsidiary Guarantors and State Street Bank and Trust Company, as trustee (the
"Trustee"). See "Description of New Notes." There will be no proceeds to the
Company from this Exchange Offer; however, pursuant to the Registration Rights
Agreement, the Company will bear certain offering expenses.
------------------------
SEE "RISK FACTORS" COMMENCING ON PAGE 12 FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS WHO TENDER NOTES
IN THE EXCHANGE OFFER.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is , 1998.
<PAGE> 5
The Company's Japanese, Korean and Singapore subsidiaries, Phase Metrics
Japan Co. Ltd., Phase Metrics Korea Co. Ltd. and Phase Metrics Pacific PTE,
Ltd., respectively, and Phase Metrics International Incorporated, the Company's
foreign sales corporation based in Barbados (collectively, the "Non-Guarantor
Subsidiaries") have not guaranteed the Company's obligations under the Notes and
will not guarantee the Company's obligations under the New Notes. As of and for
the year ended December 31, 1997, and the six months ended June 30, 1998, the
operating results and assets of the Non-Guarantor Subsidiaries, individually and
in the aggregate, were not material to the results of operations and assets of
the Company on a consolidated basis, net of intercompany eliminations. See Note
13 of Notes to Consolidated Financial Statements. The total assets, total
liabilities, net sales and net income (loss) of the Non-Guarantor Subsidiaries
as a percentage of the Company's consolidated total assets, total liabilities,
net sales and net income (loss) as of and for the year ended December 31, 1997
were 3.1%, 0.4%, 1.6% and 10.1%, respectively, and as of and for the six months
ended June 30, 1998, were 5.2%, 0.7%, 6.1% and (0.2)%, respectively.
The Company will accept for exchange any and all Notes which are validly
tendered on or prior to 12:00 midnight New York City time, on ,
1998, unless the Exchange Offer is extended (the "Expiration Date"). Tenders of
Notes may be withdrawn at any time prior to 12:00 midnight, New York City time,
on the Expiration Date; otherwise such tenders are irrevocable. State Street
Bank and Trust Company will act as exchange agent with respect to the Notes (in
such capacity, the "Exchange Agent") in connection with the Exchange Offer. The
Exchange Offer is not conditioned upon any minimum principal amount of Notes
being tendered for exchange, but is otherwise subject to certain customary
conditions. Notes may be tendered only in denominations of $1,000 and any
integral multiple thereof. See "The Exchange Offer."
The Notes were initially sold by the Company on January 30, 1998 (the "Note
Closing") in transactions not registered under the Securities Act of 1933, as
amended (the "Securities Act") in reliance upon the exemption provided in
Section 4(2) thereof (the "Note Offering"). The Notes were subsequently resold
to qualified institutional buyers in reliance upon Rule 144A under the
Securities Act and to persons outside the United States in reliance on
Regulation S under the Securities Act. Accordingly, the Notes may not be
reoffered, resold or otherwise transferred in the United States unless
registered under the Securities Act or unless an applicable exemption from the
registration requirements of the Securities Act is available. The New Notes are
being offered hereunder in order to satisfy certain obligations of the Company
and the Subsidiary Guarantors under the Registration Rights Agreement. See "The
Exchange Offer."
The New Notes will bear interest from January 30, 1998, the date of
issuance of the Notes that may be tendered in exchange for the New Notes, at a
rate equal to 10 3/4% per annum. Interest on the New Notes will be payable
semiannually on February 1 and August 1 of each year, commencing August 1, 1998.
The New Notes are redeemable at the option of the Company, in whole or in part,
at any time on or after February 1, 2002, at the redemption prices set forth
herein, plus accrued and unpaid interest and Liquidated Damages (as defined
herein), if any, thereon to the date of redemption. See "Summary -- Summary of
Terms of New Notes."
Prior to February 1, 2001, up to 33% of the initially outstanding aggregate
principal amount of New Notes (and any Notes which remain outstanding after the
Exchange Offer) will be redeemable at the option of the Company from the net
proceeds of a public sale of the Company's Common Stock ("Common Stock") at a
price of 110.75% of the principal amount of the New Notes (and any Notes which
remain outstanding after the Exchange Offer), together with accrued and unpaid
interest and Liquidated Damages, if any, to the date of redemption; provided,
that at least 67% of the initially outstanding aggregate principal amount of New
Notes (and any Notes which remain outstanding after the Exchange Offer) remains
outstanding immediately after such redemption. Upon the occurrence of a Change
of Control (as defined herein), each Holder (as defined herein) of New Notes may
require the Company to repurchase all or a portion of such Holder's New Notes at
101% of the aggregate principal amount of the New Notes, together with accrued
and unpaid interest and Liquidated Damages, if any, to the date of repurchase.
There can be no assurance that sufficient funds will be available at the time of
any Change of Control to make any required repurchase of New Notes. See "Risk
Factors -- Payment Upon a Change of Control" and "Description of New
Notes -- Repurchase at the Option of Holders -- Change of Control."
ii
<PAGE> 6
The New Notes will be senior unsecured obligations of the Company and will
rank pari passu in right of payment to all existing and future senior
indebtedness of the Company and senior in right of payment to all existing and
future subordinated indebtedness of the Company. The New Notes will be
effectively subordinated, however, to all secured obligations of the Company, to
the extent of the assets securing such obligations. The New Notes will be fully
and unconditionally guaranteed under the New Note Guarantees on a joint and
several basis by the Subsidiary Guarantors. The New Note Guarantees will be
senior unsecured obligations of the Subsidiary Guarantors and will rank pari
passu in right of payment to all existing and future senior indebtedness of the
Subsidiary Guarantors. The New Note Guarantees will be effectively subordinated,
however, to all secured obligations of the Subsidiary Guarantors, to the extent
of the assets securing such obligations. As of June 30, 1998, the New Notes and
the New Note Guarantees would have been effectively subordinated to
approximately $2.8 million of secured indebtedness under the Company's capital
lease obligations which amount does not include any amounts outstanding under
the New Credit Facility which was terminated in August 1998. In addition, the
Notes are and the New Notes will be structurally subordinated to all
indebtedness and other obligations of the Non-Guarantor Subsidiaries, including
all accounts payable and debt for borrowed money. As of June 30, 1998, the
Non-Guarantor Subsidiaries had an aggregate of $0.9 million of such indebtedness
and other obligations outstanding, all of which ranked or will rank effectively
senior to the Notes and New Notes in right of payment. The Subsidiary Guarantors
did not, as of June 30, 1998, have any material amount of indebtedness
outstanding.
Based on interpretations of the staff of the SEC set forth in no-action
letters issued to third parties, the Company believes that any New Notes issued
pursuant to the Exchange Offer in exchange for Notes may be offered for resale,
resold and otherwise transferred by any holder thereof (other than any holder
which is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act; provided, that such New Notes are acquired in
the ordinary course of such holder's business and that such holder does not
intend to participate in a distribution of such New Notes.
Each broker-dealer ("Participating Broker-Dealer") that receives New Notes
for its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with the initial resale of such New Notes to
third parties. The Letter of Transmittal delivered with this Prospectus states
that by so acknowledging and by delivering a prospectus, a Participating
Broker-Dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating Broker-Dealer in
connection with resales of New Notes received in exchange for Notes where such
new Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities and such broker-dealer is not an
affiliate of the Company. The Company has agreed that for a period of one year
after the consummation of the Exchange Offer, it will make this Prospectus
available to any non-affiliate Participating Broker-Dealer for use in connection
with any such resale. See "Plan of Distribution."
Any broker-dealer who is an affiliate of the Company may not rely on the
SEC staff's no-action letters referenced above and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale of the New Notes.
Any Holder who tenders in the Exchange Offer with the intention to
participate, or for purpose of participating, in a distribution of the New Notes
also may not rely on the position of the staff of the SEC enunciated in the
no-action letters referenced above and, in the absence of an exemption
therefrom, must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale of the New
Notes. Failure to comply with such requirements in such instance may result in
such Holder incurring liability under the Securities Act for which the Holder is
not indemnified by the Company. By executing the Letter of Transmittal delivered
with this Prospectus, each Holder will acknowledge that it does not have an
arrangement or understanding with any person to participate in the distribution
of the New Notes.
The Company does not intend to list the New Notes on any securities
exchange, or to seek admission thereof to trading in the National Association of
Securities Dealers Automated Quotation System. Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ"), a significant stockholder of the Company, has
advised the
iii
<PAGE> 7
Company that it intends to make a market in the New Notes; however, DLJ is not
obligated to do so and any market-making may be discontinued at any time at the
election of DLJ. In connection with DLJ's market making activities, DLJ will be
required to deliver a prospectus separate from this Prospectus meeting the
requirements of the Securities Act. DLJ may be required to discontinue its
market-making activities when the market-making prospectus used in connection
therewith must be updated for any reason. As a result, the Company cannot
determine whether an active trading market will develop for the New Notes. To
the extent that a market for the New Notes develops, their market value will
depend on market conditions (such as yields on alternative investments), general
economic conditions, the Company's financial condition and other conditions.
Such conditions might cause the New Notes, to the extent that they are actively
traded, to trade at a significant discount from their face value. See "Risk
Factors -- Absence of Trading Market; Restrictions on Transfer."
ANY NOTES NOT TENDERED AND ACCEPTED IN THE EXCHANGE OFFER WILL REMAIN
OUTSTANDING. TO THE EXTENT ANY NOTES ARE TENDERED AND ACCEPTED IN THE EXCHANGE
OFFER, A HOLDER'S ABILITY TO SELL UNTENDERED NOTES COULD BE ADVERSELY AFFECTED.
FOLLOWING CONSUMMATION OF THE EXCHANGE OFFER, THE HOLDERS OF NOTES WILL CONTINUE
TO BE SUBJECT TO THE EXISTING RESTRICTIONS UPON TRANSFER THEREOF AND THE COMPANY
WILL HAVE FULFILLED ITS PRINCIPAL OBLIGATIONS UNDER THE REGISTRATION RIGHTS
AGREEMENT. HOLDERS OF NOTES WHO DO NOT TENDER THEIR NOTES GENERALLY WILL NOT
HAVE ANY FURTHER REGISTRATION RIGHTS UNDER THE REGISTRATION RIGHTS AGREEMENT OR
OTHERWISE. SEE "THE EXCHANGE OFFER -- CONSEQUENCES OF FAILURE TO EXCHANGE."
This Prospectus, together with the Letter of Transmittal, is being sent to
all registered holders of Notes as of , 1998.
The Company will not receive any proceeds from the Exchange Offer. No
underwriter is being used in connection with the Exchange Offer.
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE NEW NOTES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY OF THE NEW NOTES TO ANY PERSON IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO
SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1998 (90 DAYS AFTER COMMENCEMENT OF THIS OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES, WHETHER OR NOT
PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
iv
<PAGE> 8
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"SEC" or the "Commission") a Registration Statement on Form S-4 under the
Securities Act for the registration of the New Notes offered hereby (the
"Registration Statement"). This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, certain items of which are contained in exhibits and
schedules to the Registration Statement as permitted by the rules and
regulations of the SEC. For further information with respect to the Company or
the New Notes offered hereby, reference is made to the Registration Statement,
including the exhibits and schedules thereto, which may be inspected without
charge at the public reference facility maintained by the SEC at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, and copies of which may be
obtained from the SEC at prescribed rates. Statements made in this Prospectus
concerning the contents of any document referred to herein are not necessarily
complete. With respect to each such document filed with the SEC as an exhibit to
the Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified by such reference.
The Company and the Subsidiary Guarantors are not currently subject to the
informational reporting requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). As a result of the offering of the New Notes, each
of the Company and the Subsidiary Guarantors will become subject to the
informational reporting requirements of the Exchange Act. The Company will
fulfill its obligations with respect to such requirements by filing periodic
reports with the Commission on its own behalf or, in the case of the Subsidiary
Guarantors, by including information regarding the Subsidiary Guarantors in the
Company's periodic reports. Under applicable provisions of the Exchange Act, the
duty to file periodic reports under the Exchange Act shall be automatically
suspended as to any fiscal year, if, at the beginning of such fiscal year, the
securities of each class to which the registration statement relates are held of
record by less than 300 persons. As of June 30, 1998, the Notes were held of
record by less than 20 persons. If this situation continues at January 1, 1999,
the obligations of the Company to file periodic reports with the Commission
under applicable provision of the Exchange Act would be automatically suspended
for 1999.
The Company has agreed that, whether or not it is required to do so by the
rules and regulations of the Commission, for so long as any of the New Notes
remain outstanding, it will furnish to the holders of the New Notes and to the
extent permitted by applicable law or regulation, file with the Commission
following the consummation of the Exchange Offer (i) all quarterly and annual
financial information required to be contained in a filing with the Commission
on Forms 10-Q and 10-K, including for each a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and with respect to
the annual financial statements only, a report thereon by the Company's
independent auditors and (ii) all reports required to be filed with the
Commission on Form 8-K. In addition, for so long as any of the New Notes remain
outstanding, the Company has agreed to make available to any prospective
purchaser of the New Notes or beneficial owner of the New Notes, in connection
with any sale thereof, the information required by Rule 144A(d)(4) under the
Securities Act.
Documents and other information filed by the Company with the SEC may also
be inspected and copied at the public reference facilities of the SEC at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at the web site
maintained by the SEC (http://www.sec.gov) and at the regional offices of the
SEC located at 7 World Trade Center, 13th Floor, New York, New York 10048 and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials may also be obtained from the Public Reference Section of the SEC,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at its
public reference facilities in New York, New York and Chicago, Illinois at
prescribed rates.
v
<PAGE> 9
SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Company's Consolidated Financial
Statements and related Notes thereto, appearing elsewhere in this Prospectus.
This Prospectus may contain forward-looking statements, including, without
limitation, the Company's future product development plans, future demand for
the Company's process and production-test equipment and the effect that certain
market conditions may have on the Company's future operating results.
Forward-looking statements necessarily involve risks and uncertainties. Market
conditions and the Company's actual results may differ materially from the
market conditions and results discussed in these statements. Factors that might
cause such a difference include, without limitation, those discussed in "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and those discussed elsewhere in this Prospectus. The
market share and competitive position data contained in this Prospectus are
based upon industry sources and Company estimates. Although such data is
inherently imprecise, based on its understanding of the markets in which the
Company competes, management believes that such data is generally indicative of
the Company's relative market share and competitive position. Unless the context
otherwise requires, all references to the "Company" and "Phase Metrics" refer to
Phase Metrics, Inc. and its consolidated subsidiaries. The definition of certain
terms may be found in the Glossary beginning on page A-1.
THE COMPANY
Phase Metrics is the leading supplier of technologically advanced process
and production-test equipment for the data storage industry. The Company's
systems are used primarily by manufacturers of disk drives, thin-film disks and
read/write heads to manage and improve their respective product yields by
analyzing product and process quality at critical stages in their production
processes. The ability to rapidly achieve and maintain yield improvements is one
of the most important determinants of profitability in the highly competitive
disk drive and disk drive component industries. The Company was formed in 1989
as a single product supplier to the data storage industry. In the last three
years, the Company has significantly expanded its product line through the
acquisition of seven specialized suppliers of complementary systems for the disk
drive and disk drive component industries. These acquisitions and an aggressive
internal research and development program have provided the Company with (i) a
significant research and development effort focused exclusively on the process
and production-test equipment market, (ii) a broad technological base and
product line with applications throughout the disk drive and disk drive
component production chains and (iii) a global infrastructure capable of
providing world-wide customer service and support.
Demand for data storage process and production-test equipment is driven by
the overall demand for disk drives and disk drive components, rapid advances in
data storage technology, and yield management challenges and margin pressure
facing data storage manufacturers. The ever increasing need for greater data
storage capacity is driven predominantly by the development of more storage
intensive software, the emergence of computer networks within the enterprise and
the overall increase in computer use. As storage capacity demands increase, the
demand for high performance disk drives and replacement or removable drives
increases. While technological advancements are enabling manufacturers to
produce significantly higher capacity disk drives with faster data access speeds
and greater transfer rates, they are also presenting significant challenges and
increasing the complexity of the manufacturing process. The growing complexity
of data storage manufacturing is in turn increasing test and production times
per product and creating pressure on manufacturing costs. Accordingly, there is
greater demand for process and production-test equipment that is able to keep
pace with advancing data storage technologies, while enhancing manufacturing
yields.
The Company's production-test systems include media certifiers, glide
testers, optical scanners and flying height and quasi-static magnetoresistive
("MR") head testers which provide in-line testing, measurement and analysis
throughout the manufacturing process, enabling manufacturers to detect defects
and make real-time process improvement decisions that can significantly impact
product yields, time-to-market, profitability and return on investment. The
Company's process systems include servowriters, disk burnishers and disk laser
texturizers which perform manufacturing process functions. The Company also
provides integrated automation systems for the disk drive, disk and read/write
head certification and manufacturing processes. The
1
<PAGE> 10
Company's products are driven by extensive proprietary software and electronic
hardware, optical and laser systems, and mechanical componentry.
The Company sells its systems throughout the world primarily through its
direct sales force. A substantial majority of the Company's sales are made to
domestic data storage companies with production facilities in the United States
as well as Singapore, Malaysia and other parts of Southeast Asia. The Company
believes that over 80% of the purchasing decisions for its products are made by
individuals based in the United States. The Company's customers include
substantially all of the world's leading data storage manufacturers, including
Fujitsu, HMT, IBM, Iomega, Komag, Samsung, Seagate, StorMedia and Trace.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS IN CONNECTION WITH AN INVESTMENT IN THE NEW NOTES, SEE
"RISK FACTORS."
COMPETITIVE STRENGTHS
The Company believes that it possesses key competitive strengths that have
enabled it to become the leading supplier of technologically advanced process
and production-test equipment for the data storage industry. These competitive
strengths include:
Broad Product Line and Extensive Technology Base. The Company believes that
it is a technological leader in designing, manufacturing and servicing process
and production-test systems that perform critical applications throughout the
disk drive and disk drive component production processes. These systems contain
a significant amount of proprietary software, sophisticated electronics and high
precision mechanics. As evidence of its technological leadership, the Company
believes it was the first to market with systems incorporating numerous
important new technologies, including: (i) in 1993, the first testing system
capable of accurately measuring the flying height of a read/write head below one
microinch; (ii) in 1995, the first disk (media) certifier with integrated
optical defect scanning and also the first certifier with digital glide
certification; (iii) in 1996, the first family of MR head testers to address
each stage of the manufacturing process for the rapidly growing MR head market
and (iv) in 1997, the first disk drive servowriter to incorporate non-contact,
optical encoder positioning technology. The Company currently holds 29 patents
in the United States, with an additional 71 patent applications pending in the
United States and nine pending overseas.
Largest World-Wide Installed Base of Systems. Based in part on published
industry data, the Company believes it has the largest world-wide installed base
of process and production-test systems serving the data storage industry. The
Company is able to leverage this installed base by selling these customers
additional systems as well as upgrades to existing systems to address rapidly
changing industry requirements. The Company believes that such upgrades are
becoming an increasingly important source of revenue for the Company.
Focused Research and Development. In response to rapidly changing technical
requirements in the data storage industry and to maintain its technological
leadership, the Company is continually engaged in efforts to improve its systems
and introduce innovative products and technologies. With approximately 170
engineers focused on research and development, the Company believes that it
maintains the largest engineering group in the world focusing on technological
solutions for data storage manufacturers. Moreover, in 1996, the Company formed
an advanced research department focused exclusively on developing and procuring
critical technologies for next-generation systems. In 1997 and for the six
months ended June 30, 1998, the Company invested approximately $43.6 million and
$19.2 million, respectively in its research and development efforts and expects
to continue to devote significant resources toward maintaining its technological
leadership.
Extensive Global Infrastructure. In addition to its extensive sales and
customer service and support infrastructure in the United States, since the
beginning of 1996 the Company has established sales and customer service and
support offices in Japan, South Korea, Singapore, Thailand and Taiwan. The
Company believes that substantial growth opportunities exist for sales of its
systems to domestic and foreign-based customers for use in their manufacturing
facilities located in Southeast Asia. Therefore, the Company currently has 40
dedicated customer service and support engineers and technicians in Southeast
Asia, which
2
<PAGE> 11
the Company believes is the largest foreign-based group of customer service and
support personnel of any domestic supplier of process and production-test
equipment to the data storage industry.
Experienced Management Team With Significant Ownership. The Company's
Chairman and Chief Executive Officer, John F. Schaefer joined the Company in
November 1994. Working with Arthur J. Cormier, the founder and previous
President of the Company, the Company assembled a group of experienced officers,
middle managers and senior technologists. Mr. Cormier is currently serving as a
director of and consultant to the Company. As of August 3, 1998, the Company's
directors and officers and their respective affiliates beneficially owned
approximately 90.1% of the Company's capital stock.
Demonstrated Ability to Integrate Acquisitions. In order to expand its
operations and capitalize on the growing demand for process and production-test
equipment for the data storage industry, since November 1994, the Company's
management team has acquired seven specialized suppliers of process and
production-test systems or technologies. The Company believes that it has
successfully integrated each of these acquisitions into its operations.
GROWTH STRATEGY
The Company believes that it is well-positioned to grow future revenue and
cash flow. The key elements of the Company's growth strategy are as follows:
Maintain Leadership in Core Technologies. The Company intends to remain a
technological leader in its markets by continuing to work with customers,
academic institutions and independent third parties to identify emerging data
storage technology trends early in the development process and contribute to the
development of standards related to process and production-test for the data
storage industry. Because the Company's systems are integral to its customers'
manufacturing processes, the Company believes that it is well-positioned to
utilize its research and development resources to partner with its customers in
the development of next-generation products.
Leverage Installed Base of Systems. The Company intends to leverage its
installed base of systems by selling new systems to existing customers and by
continuing to develop and aggressively market system upgrade solutions in
response to rapidly changing industry requirements. In addition, because data
storage manufacturers are required to focus increasingly on their own core
competencies, the Company believes that there is a significant opportunity to
increase its sales by supplying certain process and production-test equipment to
data storage manufacturers that currently develop such systems internally.
Leverage and Expand Global Infrastructure. Due to its extensive global
service and support infrastructure, the Company believes it is well-positioned
to increase productivity and profitability. In particular, the Company believes
that it will be able to leverage the significant investment it has made in
establishing a sales and customer service and support infrastructure in
Southeast Asia to capitalize on the increasing activity in the data storage
industry in that region. As data storage manufacturers require equipment
suppliers to support their increasingly global operations, the Company intends
to continue to expand its world-wide service and support network.
Pursue Complementary Acquisitions. As with many other industries, data
storage manufacturers are increasingly attempting to rationalize their vendor
bases. As a result, there has been an increasing trend toward consolidation of
data storage equipment suppliers. The Company intends to continue to capitalize
on this trend by completing complementary acquisitions of additional product
lines, technologies and related businesses. The Company believes that its market
leadership position and demonstrated ability to successfully integrate strategic
acquisitions will continue to attract additional strategic opportunities.
THE REFINANCING
In connection with the Note Offering in January 1998, Phase Metrics
refinanced (the "Refinancing") all of its then-existing term loan and revolving
credit indebtedness under its then-existing credit facility (the "Former Credit
Facility"). The net proceeds from the Note Offering, together with existing cash
and $1.6 million in initial borrowings (the "Initial Draw") under the credit
facility that the Company entered into in January 1998 to replace the Former
Credit Facility (the "New Credit Facility") were used to repay all
3
<PAGE> 12
outstanding indebtedness under the Former Credit Facility as well as the
expenses related to the Note Offering and the Refinancing. See "Use of
Proceeds."
At June 30, 1998, the Company had outstanding indebtedness of $125.0
million, including $8.4 million of outstanding indebtedness under the New Credit
Facility. In August 1998, the Company repaid in full the principal amount
outstanding under the New Credit Facility and all accrued interest thereon of
approximately $7.1 million with a portion of the net proceeds from the issuance
and sale of the Company's Series C Preferred Stock, and, immediately thereafter,
the New Credit Facility was terminated. Giving effect to the repayment of the
outstanding indebtedness under the New Credit Facility, as of June 30, 1998, the
New Notes and the New Note Guarantees would have been effectively subordinated
to approximately $2.8 million of secured indebtedness under the Company's
capital lease obligations. The Company is currently negotiating to establish a
new credit facility, but as of the date of this Prospectus, has no revolving or
other credit facility from which to borrow money.
SERIES C PREFERRED STOCK FINANCING
In August 1998, the Company issued and sold an aggregate of 6,360,000
shares of its Series C Preferred Stock for $4.00 per share to a group of
investors, which included a number of its current stockholders and two members
of the Company's Board of Directors (the "Series C Financing"). The Company
received aggregate proceeds of approximately $25.4 million in connection with
the Series C Financing. Immediately following the consummation of the Series C
Financing, the Company used $7.1 million of the net proceeds therefrom to repay
the outstanding indebtedness under the New Credit Facility.
Subject to the receipt of regulatory approval under the Hart-Scott-Rodino
Antitrust Improvements Act of 1996 and any other necessary approvals but in no
event later than 120 days from the date of the Series C Financing, one of the
investors in the Series C Financing has agreed to purchase an additional $5.0
million of Series C Preferred Stock, representing 1,250,000 shares at a purchase
price of $4.00 per share. There can be no assurance that the Company will be
able to successfully close this subsequent round of equity financing. See
"Description of Capital Stock -- Series C Preferred Stock."
------------------------
The Company commenced operations in 1989 and was recapitalized in 1994 in
connection with the acquisition of two companies. The Company's principal
executive offices are located at 10260 Sorrento Valley Road, San Diego,
California 92121, and its telephone number is (619) 646-4800.
------------------------
Phase Metrics is a trademark of the Company. This Prospectus includes other
trademarks of the Company and trademarks of other companies.
4
<PAGE> 13
THE NOTE OFFERING
THE NOTES...................... The Notes were sold by the Company at the
Note Closing on January 30, 1998 and were
subsequently resold to qualified
institutional buyers pursuant to Rule 144A
under the Securities Act and to persons in
transactions outside the United States in
reliance on Regulation S under the Securities
Act. According to information received from
the Trustee, there were approximately 30
purchasers of the Notes from the Initial
Purchaser.
REGISTRATION RIGHTS
AGREEMENT...................... In connection with the Note Offering, the
Company entered into the Registration Rights
Agreement, which grants holders of the Notes
certain exchange and registration rights,
which generally terminate upon the
consummation of this Exchange Offer.
THE EXCHANGE OFFER
SECURITIES OFFERED............. $110.0 million in aggregate principal amount
of the Company's new 10 3/4% Senior Notes due
2005.
THE EXCHANGE OFFER............. $1,000 principal amount of New Notes in
exchange for each $1,000 principal amount of
the Notes issued in the Note Offering. As of
the date hereof, $110.0 million aggregate
principal amount of Notes are outstanding.
EXPIRATION DATE................ 12:00 midnight, New York City time on
, 1998, unless the Exchange Offer
is extended (which in no event shall be more
than days from such date), in which case
the term "Expiration Date" means the latest
date and time to which the Exchange Offer is
extended.
INTEREST ON THE NEW NOTES AND
THE NOTES...................... The New Notes will bear interest from January
30, 1998, the date of issuance of the Notes
that may be tendered in exchange for the New
Notes. Accordingly, holders of Notes that are
accepted for exchange will not receive
interest on the Notes that is accrued but
unpaid at the time of tender, but such
interest will be payable on the first
interest payment date on the New Notes after
the Expiration Date.
CONDITIONS TO THE EXCHANGE
OFFER.......................... The Exchange Offer is subject to certain
customary conditions, which may be waived by
the Company.
PROCEDURES FOR TENDERING
NOTES.......................... Each holder of Notes wishing to accept the
Exchange Offer must complete, sign and date
the relevant accompanying Letter of
Transmittal, or a facsimile thereof, in
accordance with the instructions contained
herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such
facsimile, together with the Notes and any
other required documentation to the Exchange
Agent at the address set forth in the Letter
of Transmittal. The enclosed Letter of
Transmittal should be used to tender Notes.
By executing the Letter of Transmittal, each
holder will represent to the Company that,
among other things, the holder or the person
receiving such New Notes, whether or not such
person is the holder, is acquiring the New
Notes in the ordinary course of business and
that neither the holder nor any such other
person has any intention or arrangement or
other understanding with any person to
participate in a distribution of such New
Notes. In lieu of physical delivery of the
certificates representing Notes, tendering
holders may transfer Notes pursu-
5
<PAGE> 14
ant to the procedure for book-entry transfer
as set forth under "The Exchange
Offer -- Procedures for Tendering."
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS.............. Any beneficial owner whose Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other
nominee and who wishes to tender should
contact such registered holder promptly and
instruct such registered holder to tender on
such beneficial owner's behalf. If such
beneficial owner wishes to tender on such
beneficial owner's own behalf, such
beneficial owner must, prior to completing
and executing the Letter of Transmittal and
delivering its Notes, either make appropriate
arrangements to register ownership of the
Notes in such beneficial owner's name or
obtain a properly completed bond power from
the registered holder. The transfer of
registered ownership may take considerable
time.
GUARANTEED DELIVERY
PROCEDURES..................... Holders of Notes who wish to tender their
Notes and whose Notes are not immediately
available or who cannot deliver their Notes
(or, in the alternative, comply with the
procedures for book-entry transfer), the
Letter of Transmittal or any other documents
required by the Letter of Transmittal to the
Exchange Agent prior to the Expiration Date
must tender their Notes according to the
guaranteed delivery procedures set forth in
"The Exchange Offer -- Guaranteed Delivery
Procedures."
WITHDRAWAL RIGHTS.............. Tenders may be withdrawn at any time prior to
12:00 midnight, New York City time, on the
Expiration Date pursuant to the procedures
described under "The Exchange Offer -- Terms
of the Exchange Offer."
ACCEPTANCE OF NOTES AND
DELIVERY OF NEW NOTES.......... The Company will accept for exchange any and
all Notes that are properly tendered in the
Exchange Offer prior to 12:00 midnight, New
York City time, on the Expiration Date. The
New Notes issued pursuant to the Exchange
Offer will be delivered promptly following
the Expiration Date. See "The Exchange
Offer -- Terms of the Exchange Offer."
FEDERAL INCOME TAX
CONSEQUENCES................... The issuance of the New Notes to holders of
the Notes pursuant to the terms set forth in
this Prospectus will not constitute an
exchange for federal income tax purposes.
Consequently, no gain or loss would be
recognized by holders of the Notes upon
receipt of the New Notes. See "Certain
Federal Income Tax Consequences of the
Exchange Offer."
USE OF PROCEEDS................ There will be no proceeds to the Company from
the exchange of Notes pursuant to the
Exchange Offer. The net proceeds to the
Company from the sale of the Notes were
approximately $105.9 million (after deducting
discounts and commissions and Note Offering
expenses payable by the Company). The Company
used all of such net proceeds, together with
the Initial Draw to repay in full its
then-existing term loan and revolving credit
indebtedness under the Former Credit
Facility, including all accrued interest
thereunder to the date of repayment, and all
expenses related to the Refinancing.
EFFECT ON HOLDERS OF NOTES..... As a result of the making of this Exchange
Offer, the Company will have fulfilled its
principal obligations under the Registration
Rights Agreement, and holders of Notes who do
not tender their Notes will generally not
have any further registration rights under
6
<PAGE> 15
the Registration Rights Agreement or
otherwise. Such holders will continue to hold
the untendered Notes and will be entitled to
all the rights and subject to all the
limitations applicable thereto under the
Indentures and Registration Rights Agreement,
except to the extent such rights or
limitations, by their terms, terminate or
cease to have further effectiveness as a
result of the Exchange Offer. All untendered
Notes will continue to be subject to certain
restrictions on transfer. Accordingly, if any
Notes are tendered and accepted in the
Exchange Offer, the trading market, if any,
for the untendered Notes could be adversely
affected.
EXCHANGE AGENT................. State Street Bank and Trust Company is
serving as Exchange Agent in connection with
the Exchange Offer. See "The Exchange
Offer -- Exchange Agent."
SUMMARY OF TERMS OF NEW NOTES
The form and terms of the New Notes are the same as the form and terms of
the Notes (which they will replace) except that (i) the New Notes have been
registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof and (ii) holders of the New Notes generally
will not be entitled to further registration rights under the Registration
Rights Agreement. The New Notes will evidence the same debt as the Notes and
will be entitled to the benefits of the Indenture. See "Description of New
Notes."
SECURITIES OFFERED............. $110.0 million in aggregate principal amount
of the Company's 10 3/4% Senior Notes due
2005.
MATURITY DATE.................. February 1, 2005.
INTEREST RATE AND PAYMENT
DATES.......................... The New Notes will bear interest at the rate
of 10 3/4% per annum, payable semiannually in
arrears on February 1 and August 1 of each
year, commencing August 1, 1998.
OPTIONAL REDEMPTION............ The New Notes will be redeemable at the
option of the Company, in whole or in part,
at any time on or after February 1, 2002, in
cash at the redemption prices set forth
herein, plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the
date of redemption. In addition, at any time
prior to February 1, 2001, the Company may
redeem up to 33% of the initially outstanding
aggregate principal amount of New Notes at a
redemption price equal to 110.75% of the
principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if
any, thereon to the date of redemption, with
the net proceeds of a Public Equity Offering;
provided, that at least 67% of the initially
outstanding aggregate principal amount of New
Notes remains outstanding immediately after
the occurrence of such redemption. See
"Description of New Notes -- Optional
Redemption."
CHANGE OF CONTROL.............. Upon the occurrence of a Change of Control,
each holder of New Notes will have the right
to require the Company to repurchase all or
any part of such holder's New Notes at an
offer price in cash equal to 101% of the
aggregate principal amount thereof, plus
accrued and unpaid interest and Liquidated
Damages, if any, thereon to the date of
repurchase. See "Description of New
Notes -- Repurchase at the Option of
Holders -- Change of Control." There can be
no assurance that, in the event of a Change
of Control, the Company would have sufficient
funds to
7
<PAGE> 16
repurchase all New Notes tendered. See "Risk
Factors -- Payment Upon a Change of Control."
RANKING........................ The New Notes will be senior unsecured
obligations of the Company and will rank pari
passu in right of payment with all existing
and future senior indebtedness of the Company
and senior in right of payment to all
existing and future subordinated indebtedness
of the Company. The New Notes will be
effectively subordinated, however, to all
secured obligations of the Company, to the
extent of the assets securing such
obligations. As of June 30, 1998, the Notes
and the New Note Guarantees would have been
effectively subordinated to approximately
$2.8 million of secured indebtedness under
the Company's capital lease obligations,
which amount does not include any amounts
outstanding under the New Credit Facility
which was terminated in August 1998. See
"Risk Factors -- Effective Subordination;
Encumbrances on Assets."
NEW NOTE GUARANTEES............ The New Notes will be fully and
unconditionally guaranteed on a joint and
several basis by all Subsidiary Guarantors.
The New Note Guarantees will be senior
unsecured obligations of the Subsidiary
Guarantors and will rank pari passu in right
of payment to all existing and future senior
indebtedness of the Subsidiary Guarantors.
The New Note Guarantees will be effectively
subordinated to all secured obligations of
the Subsidiary Guarantors, to the extent of
the assets securing such obligations.
CERTAIN COVENANTS.............. The Indenture related to the New Notes will
contain certain covenants that will limit,
among other things, the ability of the
Company to (i) pay dividends, redeem capital
stock or make certain other restricted
payments or investments; (ii) incur
additional indebtedness or issue preferred
equity interests; (iii) merge, consolidate or
sell all or substantially all of its assets;
(iv) create liens on assets and (v) enter
into certain transactions with affiliates or
related persons. See "Description of New
Notes -- Certain Covenants."
FORM AND DENOMINATION.......... The New Notes will be represented by U.S.
Global Notes and Regulation S Permanent
Global Notes in fully registered form,
deposited with a custodian for and registered
in the name of a nominee of the Depositary.
Beneficial interests in the U.S. Global Notes
will be shown on, and transfers thereof will
be effected through, records maintained by
the Depositary and its Participants. The
Regulation S Permanent Global Notes will be
deposited with the Trustee as custodian for
the Depositary, and beneficial interests
therein may be held through Euroclear, Cedel
Bank or any other Depositary Participant. See
"Description of New Notes -- Book-Entry;
Delivery; Form and Transfer."
REGISTRATION RIGHTS............ The Company is required to file a shelf
registration statement (the "Shelf
Registration Statement") if the Exchange
Offer is not permitted by applicable law or
if any Holder of Notes or New Notes that are
Transfer Restricted Securities (as defined in
the Registration Rights Agreement) shall
notify the Company that such Holder was
prohibited from participating in the Exchange
8
<PAGE> 17
Offer or such Holder is not able to sell any
New Notes acquired by it in the Exchange
Offer to the public without delivering a
prospectus, and this Prospectus is not
appropriate or available for such resales, or
such Holder is a broker-dealer and holds
Notes acquired directly from the Company or
any of its affiliates. If any Shelf
Registration Statement required to be filed
is not filed on or prior to the applicable
filing deadline, any such Shelf Registration
Statement has not been declared effective on
or prior to the applicable effectiveness
deadline or any Shelf Registration Statement
that is required to be filed and declared
effective but thereafter ceases to be
effective or usable for its intended purpose,
the Company and the Subsidiary Guarantors,
jointly and severally, have agreed to pay
liquidated damages in an amount equal to $.05
per week per $1,000 in principal amount for
each week or portion thereof that the
registration default continues for the first
ninety (90) day period immediately following
the occurrence of such registration default.
The amount of such liquidated damages shall
increase by an additional $.05 per week per
$1,000 in principal amount with respect to
each subsequent ninety-day period until all
registration defaults have been cured up to a
maximum amount of liquidated damages of $.25
per week per $1,000 in principal amount.
NON-GUARANTOR SUBSIDIARIES..... The Company's Non-Guarantor Subsidiaries have
not guaranteed the Company's obligations
under the Notes and will not guarantee the
Company's obligations under the New Notes. As
of and for the year ended December 31, 1997,
and the six months ended June 30, 1998, the
operating results and assets of the
Non-Guarantor Subsidiaries, individually and
in the aggregate, were not material to the
results of operations and assets of the
Company on a consolidated basis, net of
intercompany eliminations. See Note 13 of
Notes to Consolidated Financial Statements.
The total assets, total liabilities, net
sales and net income (loss) of the
Non-Guarantor Subsidiaries as a percentage of
the Company's consolidated total assets,
total liabilities, net sales and net income
(loss) as of and for the year ended December
31, 1997 were 3.1%, 0.4%, 1.6% and 10.1%,
respectively, and as of and for the six
months ended June 30, 1998, were 5.2%, 0.7%,
6.1% and (0.2)%, respectively.
9
<PAGE> 18
SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents summary selected consolidated financial data
of the Company for the periods indicated. The summary selected consolidated
statement of operations data for the years ended December 31, 1995, 1996 and
1997 is derived from the Company's audited Consolidated Financial Statements
included elsewhere in this Prospectus. The summary selected consolidated
statement of operations data for the three and six months ended June 30, 1997
and 1998 and the summary selected consolidated balance sheet data as of June 30,
1998 are derived from the Company's unaudited interim Consolidated Financial
Statements included elsewhere in this Prospectus. The unaudited interim
Consolidated Financial Statements were prepared by management of the Company on
the same basis as the Company's audited Consolidated Financial Statements and,
in the opinion of management, include all adjustments (consisting of normal
recurring accruals) necessary to present fairly the Company's operating results
and financial position for such periods. Results of operations for the three and
six months ended June 30, 1998 are not necessarily indicative of the results to
be expected for the full year. The following selected consolidated financial
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Company's Consolidated
Financial Statements and related Notes thereto included elsewhere herein and the
other information contained in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
YEAR ENDED DECEMBER 31, JUNE 30, JUNE 30,
------------------------------ ------------------ -------------------
1995(1) 1996(1) 1997 1997 1998 1997 1998
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales...................................... $116,894 $190,773 $184,660 $52,633 $ 31,400 $104,236 $ 63,902
Gross profit (loss))(2)........................ 52,128 86,912 83,366 25,169 (1,455) 48,858 11,430
Operating expenses(3).......................... 40,161 98,332 81,131 22,739 25,473 42,695 41,042
Income (loss) from operations.................. 11,967 (11,420) 2,235 2,430 (26,928) 6,163 (29,612)
Net income (loss).............................. 4,669 (11,990) (5,544) (558) (42,157) 206 (46,575)
OTHER DATA:
Cash provided by (used for) operating
activities................................... $ 18,300 $(21,402) $ (6,392) $(1,748) $ 2,650 $ (2,138) $ (2,020)
Cash used for investing activities............. (11,102) (45,316) (17,169) (8,361) (544) (11,348) (1,294)
Cash provided by (used for) financing
activities................................... (3,099) 64,439 23,883 9,595 (172) 13,109 3,159
EBITDA(4)...................................... 27,864 21,533 24,107 9,537 (23,094) 18,219 (21,982)
Depreciation, amortization and write-downs of
intangible assets............................ 15,897 32,953 21,872 7,107 3,834 12,056 7,630
Capital expenditures........................... 9,135 24,564 17,091 8,361 544 11,348 1,294
Ratio of earnings to fixed charges(5).......... 1.2x -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------
<S> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 2,809
Working capital........................................... 31,426
Total assets.............................................. 119,211
Long-term debt, including current portion................. 124,978
Redeemable preferred stock................................ 10,355
Stockholders' deficit..................................... (65,425)
</TABLE>
- ---------------
(1) Between June 1995 and December 1996, the Company completed six
acquisitions, including Helios, Incorporated ("Helios") in June 1995,
Applied Robotic Technologies, Inc. ("ART") in July 1995, certain net assets
of Tahoe Instruments ("Tahoe") in July 1995, Air Bearings, Incorporated
("ABI") in January 1996, Santa Barbara Metric, Inc. ("SBM") in December
1996 and a portion of the business of Kirell Development, Inc. ("Kirell")
in December 1996. See Notes 1 and 3 of Notes to Consolidated Financial
Statements. Each of these acquisitions was accounted for as a purchase for
financial reporting purposes, and, as a result, the Company's Consolidated
Statements of Operations include the operating results of Helios, ART,
Tahoe, ABI, SBM and a portion of the business of Kirell from their
respective acquisition dates.
(2) In connection with the negative impact on the Company's operations of the
significant data storage industry downturn, for the three and six months
ended June 30, 1998, the Company recorded a $13.5 million charge to cost of
sales to write down excess and obsolete inventory, as well as a $22.7
million valuation allowance against its entire net deferred tax asset
balance.
10
<PAGE> 19
(3) The Company incurred $1.0 million of restructuring costs in 1998 in
connection with the acquisitions of ProQuip and Cambrian, primarily related
to the elimination of duplicate facilities and information systems. The
Company incurred $3.0 million of restructuring costs in June, 1998,
primarily related to severance costs, contractual obligations and asset
impairment resulting from a workforce reduction and facility relocations.
(4) EBITDA represents income (loss) from operations before depreciation and
amortization and write-downs of intangibles. EBITDA is presented because
management believes it is a commonly accepted financial indicator used by
certain investors and analysts to analyze and compare companies on the
basis of operating performance. EBITDA is not intended to represent cash
flows for the period, nor has it been presented as an alternative to
operating income (loss) as an indicator of operating performance and should
not be considered in isolation or as a substitute for measures of
performance prepared in accordance with generally accepted accounting
principles. The Company understands that, while EBITDA is frequently used
by securities analysts in the evaluation of companies, EBITDA as used
herein is not necessarily comparable to other similarly titled captions of
other companies due to potential inconsistencies in the method of
calculation.
(5) For purposes of determining this ratio, earnings consist of income (loss)
before income taxes (benefit) and extraordinary items. Fixed charges
consist of interest expense, a portion of operating lease rental expense
that is representative of the interest factor (deemed to be one-third of
operating lease rental expense) and dividends and related accretion to
redemption value on preferred stock. For the years ended December 31, 1996
and 1997, the three months ended June 30, 1997 and 1998, and the six months
ended June 30, 1997 and 1998, earnings were inadequate to cover fixed
charges by $24.8 million, $14.7 million, $2.0 million, $31.7 million, $2.2
million and $38.8 million, respectively. For the year ended December 31,
1997 and the six months ended June 30, 1998, the pro forma ratio of
earnings to fixed charges reflects an increase to interest expense of
approximately $3.3 million and $0.1 million, respectively, after giving
effect to the Note Offering as if the transaction had occurred as of
January 1, 1997. For the year ended December 31, 1997 and the six months
ended June 30, 1998, earnings were inadequate to cover fixed charges on a
pro forma basis by $18.0 million and $38.9 million, respectively.
11
<PAGE> 20
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following Risk Factors should be considered carefully before tendering Notes in
the Exchange Offer.
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS
In connection with the Note Offering, the Company incurred a significant
amount of indebtedness. At June 30, 1998, the Company had indebtedness of $125.0
million, including $8.4 million outstanding under the New Credit Facility. In
August 1998, the Company repaid in full the principal amount outstanding under
the New Credit Facility and all accrued interest thereon of approximately $7.1
million with a portion of the net proceeds from the Series C Financing and
immediately thereafter terminated the New Credit Facility. Subject to certain
limitations, the Company may also incur additional indebtedness in the future
under the terms of the Indenture related to the New Notes. As of the date of
this Prospectus, the Company does not have a revolving credit facility in place
for working capital, although it is currently in negotiations with a number of
lenders to establish such a facility. See "Capitalization."
The Company's ability to make scheduled payments of principal and interest
on, or to refinance, its indebtedness (including the New Notes), and to fund its
operations, including planned capital expenditures and research and development
expenses, depends on its future performance and financial results, which, to a
certain extent, are subject to general conditions in the data storage industry
as well as general economic, financial, competitive and other factors that are
beyond its control. For the years ended December 31, 1996 and 1997, the three
months ended June 30, 1997 and 1998 and the six months ended June 30, 1997 and
1998, earnings were inadequate to cover fixed charges by $24.8 million, $14.7
million, $2.0 million, $31.7 million, $2.2 million and $38.8 million,
respectively. On a pro forma basis, assuming the New Notes were issued on
January 1, 1997, earnings were inadequate to cover fixed charges by $18.0
million and $38.9 million, for the year ended December 31, 1997, and the six
months ended June 30, 1998, respectively. The data storage industry in general
has been experiencing a significant weakness in demand for products, intense
competition and pricing erosion, and overcapacity. Such adverse market
conditions have resulted, and may in the future result in, the deferral or
cancellation of orders for several of the Company's products. Delays or declines
in orders for the Company's products have had a material adverse effect on the
Company's operating results and financial condition over the last several
quarters and fluctuations in demand for the Company's products is expected to
continue for at least the balance of 1998. Under current or future market
conditions there can be no assurance that the Company's business will generate
adequate cash flow or that any growth can be achieved. If the Company is unable
to generate sufficient cash flow from operations in the future to service its
debt and operate its business, including making necessary capital expenditures,
the Company may be required to refinance all or a portion of its existing debt,
including the New Notes, to sell assets or to obtain additional financing. There
can be no assurance that any such action would be accomplished on terms
acceptable to the Company or at all.
The Company's high level of debt will have several important effects on its
future operations, including, but not limited to, (i) making it more difficult
for the Company to satisfy its obligations with respect to the New Notes, (ii)
increasing the Company's vulnerability to general adverse economic and industry
conditions, (iii) limiting the Company's ability to obtain additional financing
to fund future working capital, capital expenditures, research and development
and other general corporate requirements, (iv) requiring the dedication of a
substantial portion of the Company's cash flow from operations to the payment of
principal of, and interest on, its indebtedness, thereby reducing the
availability of such cash flow to fund working capital, capital expenditures,
research and development or other operating needs and uses and (v) limiting the
Company's flexibility in planning for, or reacting to, changes in its business.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
RESTRICTIVE FINANCING COVENANTS
The Indenture related to the New Notes contains a number of covenants that
will significantly restrict the operations of the Company, such as the ability
of the Company to incur indebtedness, make prepayments of
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certain indebtedness, pay dividends, make investments, engage in transactions
with stockholders and affiliates, create liens, sell assets and engage in
mergers and other consolidations. There can be no assurance that the Company
will be able to comply with such covenants or restrictions in the future. The
Company's ability to comply with such covenants and restrictions may be affected
by events beyond its control, including prevailing economic and financial
conditions and general conditions in the data storage industry.
EFFECTIVE SUBORDINATION; ENCUMBRANCES ON ASSETS
As of June 30, 1998, the New Notes and the New Note Guarantees would have
been effectively subordinated to approximately $2.8 million of secured
indebtedness under the Company's capital lease obligations, which amount does
not include any amounts outstanding under the New Credit Facility which was
terminated in August 1998.
If the Company incurs any additional senior indebtedness which would rank
pari passu in right of payment with the New Notes, and even if such indebtedness
were not secured, the holder of such debt would be entitled to share ratably
with the holders of the New Notes in any proceeds distributed in connection with
any insolvency, liquidation, reorganization, dissolution or other winding-up of
the Company. This may have the effect of reducing the amount of proceeds
available to pay to holders of the New Notes upon the occurrence of any such
events.
The Company's Non-Guarantor Subsidiaries have not guaranteed the Company's
obligations under the Notes and will not guarantee the Company's obligations
under the New Notes. As of and for the year ended December 31, 1997, and the six
months ended June 30, 1998, the operating results and assets of the
Non-Guarantor Subsidiaries, individually and in the aggregate, were not material
to the results of operations and assets of the Company on a consolidated basis,
net of intercompany eliminations. See Note 13 of Notes to Consolidated Financial
Statements. The total assets, total liabilities, net sales and net income (loss)
of the Non-Guarantor Subsidiaries as a percentage of the Company's consolidated
total assets, total liabilities, net sales and net income (loss) as of and for
the year ended December 31, 1997 were 3.1%, 0.4%, 1.6% and 10.1%, respectively,
and as of and for the six months ended June 30, 1998, were 5.2%, 0.7%, 6.1% and
(0.2)%, respectively.
RECENT NET LOSSES; RETAINED DEFICIT; CASH USED FOR OPERATING ACTIVITIES
The Company had net losses of approximately $12.0 million, $5.5 million,
$42.4 million and $46.6 million for 1996 and 1997, and the three and six months
ended June 30, 1998, respectively. Such losses and accrual of certain preferred
stock dividends and accretion for the redemption value of such preferred stock
have contributed to a retained deficit of approximately $70.9 million as of June
30, 1998. In addition, the Company used cash for operating activities of
approximately $21.4 million, $6.4 million, $2.1 million and $2.0 million for
1996, 1997, and the three and six months ended June 30, 1998, respectively.
There can be no assurance that the Company will achieve profitability or that it
will generate positive cash flow from operating activities in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results have fluctuated in the past and the Company
expects that its operating results will continue to fluctuate in the future from
quarter to quarter and year to year. These fluctuations have resulted from a
number of factors, including the size, timing and rescheduling or cancellation
of orders from, and shipments to, major customers; the timing of introductions
of new products and product enhancements by the Company or its competitors; the
Company's ability to develop, introduce and market new, technologically advanced
products; the cyclicality of the data storage industry; the rescheduling of
capital expenditures by the Company's customers; variations in the Company's
customer base and product mix; the level of any significant volume pricing
discounts provided by the Company; the availability and cost of key production
materials and components; the Company's ability to effectively manage its
inventory and to control costs; the financial stability of major customers; the
Company's success in expanding its operations overseas; personnel changes;
expenses associated with acquisitions; restructurings; fluctuations in
amortization and write-downs of intangible assets;
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foreign currency exchange rate fluctuations and general economic factors in the
United States and certain foreign countries, including Japan, South Korea,
Singapore, Malaysia and other parts of Southeast Asia.
The data storage industry in general, including many of the Company's
customers, is currently experiencing a weakness in demand for data storage
products, intense competition and pricing erosion, and overcapacity in
manufacturing operations. Such adverse market conditions have resulted in the
rescheduling or cancellation of specific orders by several of the Company's
major customers and has had a material adverse effect on the Company's business,
results of operations and financial condition. The Company expects order delays
and reschedulings to occur in the future. Because the Company must incur
expenses and purchase inventory based on anticipated and actual customer orders,
any significant delay, rescheduling or cancellation of such orders would have a
material adverse effect on the Company's operating results. For example, during
the second and third quarters of 1997, the Company increased its inventory
substantially in anticipation of satisfying expected demand from three of the
Company's largest customers. A significant portion of this anticipated demand
has not materialized to date due primarily to overcapacity of certain process
and production-test equipment at these customers.
The Company had net sales of $52.6 million for the second quarter of 1997
compared to $31.4 million for the second quarter of 1998, $104.2 million for the
six months ended June 30, 1997 compared to $63.9 million for the six months
ended June 30, 1998 and $190.8 million in 1996 compared to $184.7 million for
1997. The Company had EBITDA (as described in Footnote 2 in "Summary Selected
Consolidated Financial Data") of $9.5 million for the second quarter of 1997
compared to $(23.1) million for the second quarter of 1998, $18.2 million for
the six months ended June 30, 1997 compared to $(22.0) million for the six
months ended June 30, 1998, and $21.5 million in 1996 compared to $24.1 million
in 1997. Cash used for operating activities decreased from $2.1 million for the
six months ended June 30, 1997 to $2.0 million for the six months ended June 30,
1998 due to the net loss for the six months ended June 30, 1998, a decrease in
amortization and write-downs of intangible assets, a decrease in deferred income
tax assets, a smaller increase period to period in accounts receivable, a
decrease in 1998 inventories as compared to an increase in 1997 and increases in
1998 income taxes receivable and accrued expenses compared to decreases in 1997.
Cash used for operating activities decreased from $21.4 million in 1996 to $6.4
million in 1997 due to a smaller net loss, smaller increases year over year in
deferred income taxes, inventories and income taxes receivable and a decrease in
prepaid expenses and other assets, offset by decreases in depreciation,
amortization and write-downs of intangible assets, purchased in-process research
and development, an increase in accounts receivable and larger decreases year
over year in accounts payable and customer deposits, accrued expenses and other
liabilities. The net loss of $0.6 million for the second quarter of 1997
increased to a net loss of $42.2 million for the second quarter of 1998 and net
income of $0.2 million for the six months ended June 30, 1997 decreased to a net
loss of $46.6 million for the six months ended June 30, 1998. These decreases
were primarily due to decreased net sales, lower gross profit margins, the
restructuring charge, the settlement charge, increased interest expense and the
extraordinary loss, net of income taxes, partially offset by decreases in
research and development and selling, general and administrative expenses. A net
loss of $12.0 million in 1996 decreased to a net loss of $5.5 million in 1997
due primarily to decreases in amortization and write-downs of intangible assets
and purchased in-process research and development expenses, partially offset by
increases in research and development and interest expense. See "Summary
Selected Consolidated Financial Data" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
As indicated above, the Company's business, operating results and financial
condition have been adversely affected by a downturn in the data storage
industry and reduced or delayed capital equipment expenditures by data storage
companies. As it has done in the past, in June 1998, the Company implemented
certain cost-cutting measures, including reductions in headcount, to reduce its
operating expenses to respond to this situation. In this regard, in June 1998,
the Company announced and implemented a restructuring of its operations. This
restructuring included a workforce reduction of approximately 115 employees (16%
of the Company's workforce), relocation and consolidation of much of its
Concord, California operation to the Company's Fremont, California facility, and
listing for sale the real estate owned by the Company in San Diego, California
on which the Company's headquarters is located. The property is listed in excess
of its book value. Upon completion of such sale, the Company intends to secure a
smaller leased facility in San Diego in
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<PAGE> 23
which to conduct its Southern California operations. While the Company believes
its cost-cutting measures and the sale of its San Diego real estate are
appropriate given the Company's current and anticipated levels of net sales,
there can be no assurance that such measures will be sufficient and that
additional cost-cutting measures will not be necessary in the future. Moreover,
there can be no assurance that any current or future cost-cutting measures will
not have a material adverse effect on the Company's ability to increase its net
sales or service its debt.
In connection with the negative impact on the Company's operations of the
significant data storage industry downturn, for the three months ended June 30,
1998, the Company recorded a $13.5 million charge to cost of sales to write down
excess and obsolete inventory, as well as a $22.7 million valuation allowance
against its entire net deferred tax asset balance.
The Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indicators of future performance. Quarterly results in the future may fluctuate
due to the factors discussed above or other factors. Further, the Company's
historical operating results for 1993 through the second quarter of 1998 are not
necessarily indicative of future performance for any particular period in light
of the Company's acquisition activity during those periods. There can be no
assurance that any past revenue growth or past results of operations will be
achieved in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DEPENDENCE ON AND CYCLICALITY OF DATA STORAGE INDUSTRY
The Company's business depends almost entirely upon capital expenditures by
manufacturers of disk drives and disk drive components, which in turn depend
upon market demand for their products. The data storage industry is cyclical and
historically has experienced varying growth rates and periods of oversupply
causing higher than anticipated inventory levels and intense price competition.
The data storage industry is currently experiencing one of its most severe
downturns with continuing weakness in demand for products, intense competition,
significant price erosion and overcapacity. This in turn causes reduced demand
for and pricing pressures on capital equipment used in the disk drive and disk
drive component production processes, including the type of equipment sold by
the Company. In addition, since the third quarter of 1997, certain of the
Company's customers have been delaying or have cancelled purchases of certain of
the Company's products due to overcapacity of certain process and
production-test equipment at these customers. The current downturn in the disk
storage industry generally, and the slowdown in orders from the Company's
customers in the last several quarters has had a material adverse effect on the
Company's business, operating results and financial condition. In the event the
weakness in demand for disk drives and disk drive components continues or
customers continue to delay or cancel the purchase of the Company's products,
the Company's business, financial condition and results of operations will be
materially adversely affected. Moreover, no assurance can be given that the
Company's business, operating results and financial condition will not be
materially adversely affected by future downturns in world-wide capital
equipment expenditures by data storage companies. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
RAPID TECHNOLOGICAL CHANGE
The data storage industry is characterized by rapid technological changes
and evolving industry standards. The Company's customers strive to introduce new
products and enhancements frequently, with relatively short product life cycles,
typically between nine and 18 months. In addition, the Company's customers often
develop multiple products simultaneously, such that new products could be
introduced as frequently as every three months. New product introductions by the
Company's customers typically result in new technological challenges for the
Company, both with respect to its installed base and with respect to next
generation products. As a result, the Company must continue to enhance its
existing products and develop and manufacture new products with improved
capabilities. This has required and will continue to require substantial
investments by the Company in research and development. Although the Company
continually develops new products, there can be no assurance that the Company
will be able to accurately anticipate technological advances in the disk drive
market and develop products incorporating such advances in a timely manner or at
all. The Company's failure to develop, manufacture and market new or enhanced
products, would have a material adverse effect on its business, financial
condition and results of operations. The Company is highly dependent on its
close working relationships with certain of its key
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<PAGE> 24
customers to advance its technologies. The termination of any one of these key
relationships for any reason could have a material adverse effect on the
Company's ability to anticipate and develop necessary technological changes to
its products.
The Company's customers are constantly striving to improve their production
processes, including improving the manufacturing of substrates, the deposition
of material on the substrate, the finish processing of magnetic media, and head
fabrication. To the extent that the Company's customers can improve product
quality by modifying their own design and internal production processes without
the need to add process and production-test equipment, demand for the Company's
equipment would likely decline. Further, unless the Company is able to
effectively respond to such changes, manufacturing process changes for disk
drives, disks and read/write heads could also have a material adverse effect on
the Company's business, financial condition and results of operations.
There can be no assurance that future technological innovations will not
reduce demand for disk drives. Competing technologies to disk drive based data
storage do exist, including solid state memory (flash memory), tape memory and
re-writable optical technology (CD and DVD technology). Although the current
core technology for rotating magnetic disk drive data storage has been the
predominant technology in the industry for many years, it is likely that some
day this technology will be replaced by an alternate technology. There can be no
assurance that the Company's products will be adaptable to any successor
technology. The Company's business, financial condition and results of
operations could be materially adversely affected by any significant migration
toward technology that would replace disk drives as a computer data storage
medium.
During 1995 and continuing through the first six months of 1997, the
Company experienced significant development and design problems and delays
during the attempted introduction of its MC950 series next generation disk
certifier product. These development and design problems diverted significant
research and development resources which could have been utilized for the
development of new products and various enhancements for other products. There
can be no assurance that the Company will not experience the same or similar
problems with future introductions of new products or enhancements.
CUSTOMER CONCENTRATION
There are a relatively small number of data storage manufacturers
throughout the world and the Company derives a significant portion of its net
sales from a relatively small number of customers. The Company expects that its
dependence on relatively few key customers will continue in the future.
Approximately 52.2%, 45.0%, 51.0% and 54.1% of the Company's net sales in 1995,
1996, 1997 and the six months ended June 30, 1998, respectively, were derived
from sales to the Company's three largest customers in each of those periods.
Even though the Company's customer mix will likely change from period to period
in the future, Seagate Technology, Inc. ("Seagate"), Komag Incorporated
("Komag"), HMT Technology ("HMT"), Iomega Corporation ("Iomega") and Trace
Storage Technology USA Corporation ("Trace") have historically accounted for a
significant portion of the Company's net sales. For 1995, 1996, 1997 and the six
months ended June 30, 1998, Seagate accounted for 25.0%, 19.0%, 18.0% and 11.0%,
respectively, of net sales; Komag accounted for 10.7%, 14.5%, 15.9% and 0.6%,
respectively, of net sales; HMT accounted for 4.4%, 5.2%, 17.1% and 26.3%,
respectively, of net sales; Iomega accounted for 16.5%, 7.9%, 1.9% and 1.4%,
respectively, of net sales and Trace accounted for 6.8%, 11.5%, 4.4% and 1.8%,
respectively, of net sales. For the six months ended June 30, 1998, Western
Digital accounted for 16.8% of net sales. If net sales to these or any other
significant customer of the Company were to decrease in any material amount in
the future, the Company's business, results of operations and financial
condition would be materially adversely affected.
In general, the Company's customers do not enter into long-term purchase
agreements with the Company. If completed orders are not replaced on a timely
basis by new orders from the same or other customers, the Company's net sales
would be materially adversely affected. In addition, the loss of a key customer;
any reduction in orders from any key customer or the rescheduling or
cancellation of a significant order from a key customer, including reductions,
delays or cancellations due to customer departures from recent buying patterns;
or economic or competitive conditions in the disk drive industry could have a
material adverse effect on the Company's business, financial condition and
results of operations. Any failure to collect or delay in collecting receivables
could have a material adverse effect on the Company's business, operating
results and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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There has been a trend toward consolidation in the disk drive industry and
the Company expects this trend to continue. Certain of the Company's customers
have in the past and may in the future acquire competitors or be acquired by
competitors, causing further consolidation in the disk drive industry. Previous
acquisitions in the disk drive industry have often caused the purchasing
departments of the combined companies to reevaluate their purchasing decisions.
There can be no assurance that such acquisitions will not result in a change in
a current customer's purchasing habits, including a loss of the customer, a
decrease in orders from that customer or a rescheduling or cancellation of
orders previously made by a customer. Moreover, acquisitions involving existing
customers may cause the concentration of the Company's customer revenues to
increase thereby increasing the Company's dependence on fewer customers.
INVENTORY RISKS
Due to the cyclical nature of and rapid technological change in the disk
drive industry, the Company's inventory is subject to substantial risk. To
address these risks, the Company monitors its inventories on a periodic basis
and provides inventory write-downs intended to cover inventory risks. However,
given the Company's dependence on a few customers and a limited number of
product programs for each customer, the magnitude of the commitments the Company
must make to support its customers' programs and the Company's limited remedies
in the event a customer cancels or materially reduces one or more product
orders, or should a customer experience financial difficulties, the Company may
be required to take significant inventory charges which, in turn, could
materially and adversely affect the Company's business, operating results and
financial condition. In connection with the negative impact on the Company's
operations of the significant data storage industry downturn, in the three
months ended June 30, 1998, the Company recorded a $13.5 million charge to cost
of sales to write down excess and obsolete inventory. There can be no assurance
that the Company will not be required to take additional inventory write-downs
in the future, due to the Company's inability to obtain necessary product
acceptance, or due to further cancellations by customers.
COMPETITION
The disk drive process and production-test equipment industry is highly
competitive. In each of the Company's product lines, the Company faces
substantial competition from established merchant suppliers of process and
production-test equipment, some of which have greater financial, engineering,
manufacturing, research and development and marketing resources than the
Company. For example, the Company faces competition from General Disk for
servowriters; Hitachi DECO and Sony Techtronics for disk certifiers; Swan
Instruments for MR head testers; Zygo Corporation for flying height testers,
Technastar for automation technology and Guzik Technical for spin-stands.
Historically, there has also been competition from entrepreneurs with focused
market knowledge and new technology. The Company also experiences intense
competition world-wide from Hitachi DECO, a large, full-line manufacturer of
process and production-test equipment. Hitachi DECO, a subsidiary of Hitachi
Limited Japan, has substantially greater financial, technical, marketing,
manufacturing, research and development and other resources than the Company.
The Company also experiences competition from other full-line and partial-line
manufacturers of process and production-test equipment. There can be no
assurance that the Company's competitors will not develop enhancements to, or
future generations of, competitive products that will offer price or performance
features superior to the Company's products, or that new competitors will not
enter the Company's markets. Finally, as many of the Company's competitors are
based in foreign countries, they have cost structures and equipment prices based
on foreign currencies. Accordingly, currency fluctuations could cause the
Company's dollar-priced products to be less competitive than its competitors'
products priced in other currencies.
Many of the Company's competitors are investing heavily in the development
of new and enhanced products aimed at applications currently addressed by the
Company's products. The Company expects its competitors to continue to improve
the design and performance of their products and to introduce new products with
competitive price/performance characteristics. Competitive pressures often
necessitate price reductions which can adversely affect operating results. The
Company will be required to make a continued high level of investment in product
development and research, sales and marketing and ongoing customer service and
support to remain competitive. There can be no assurance that the Company will
have sufficient resources to continue to make such investments or that the
Company will be able to achieve the technological advances necessary to maintain
its competitive position.
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The Company believes that its future success will be dependent, in part,
upon its ability to compete successfully in the Japanese, South Korean and
Southeast Asian markets. The Company's largest competitor, Hitachi DECO, is
headquartered in Japan which gives it a competitive advantage over the Company
in that market to the extent buying decisions are influenced by Hitachi DECO's
local presence. In addition, the Company's ability to compete in Japan, South
Korea and Southeast Asia in the future is dependent upon continuing free trade
between these countries and the United States, the continuing ability of the
Company to develop in a timely manner products that meet the technical
requirements of its foreign customers, and the continuing ability of the Company
to develop and maintain satisfactory relationships with leading companies in the
data storage industry in these areas. Moreover, the Company's sales in these
areas will be affected by the overall economies of Japan, South Korea and
Southeast Asia.
In addition to the competition the Company faces from other merchant
manufacturers of process and production-test equipment, most of the Company's
customers develop at least a portion of their own process and production-test
equipment needs internally, especially servowriters and read/write head test
equipment. Accordingly, the Company must compete against the internal
development efforts of this captive market. Manufacturers within this captive
market are often reluctant to change their production lines to incorporate
merchant-supplied process and production-test technology. Moreover, it is
possible that with the rapid changes in data storage technology, the development
of new process and production-test equipment will be so closely linked to the
Company's customers' product development cycles that certain customers and
potential customers will find it more efficient to develop their own process and
production-testing equipment needs internally, thereby placing the Company at a
competitive disadvantage.
Because of the foregoing competitive factors, there can be no assurance
that the Company will be able to compete successfully in the future. Increased
competitive pressure could cause the Company to lower prices for its products,
thereby adversely affecting the Company's business, financial condition and
results of operations.
PRODUCT CONCENTRATION
The Company derives its revenues primarily from sales of its process and
production-test systems and parts for such systems. The Company's products can
generally be categorized into four principal areas: (i) disk (media) testing and
processing, (ii) read/write head testing, (iii) disk drive testing and
processing and (iv) automation. The Company derives a significant portion of its
net sales from a relatively small number of products. In 1995, 1996, 1997 and
the six months ended June 30, 1998, the Company derived approximately 44.0%,
47.0%, 58.9% and 54.6% of its net sales, respectively, from sales of its media
certifier products (excluding parts and service), with the MG250 series
constituting a majority of the Company's media certifier sales over each of
these periods. In June 1997, the Company introduced its MC950 series media
certifier products. The Company expects that net sales from its media certifier
products, including its MG series and its MC series, will continue to account
for a substantial portion of the Company's total net sales in the foreseeable
future. Any material reduction in demand for its media certifier products would
have a material adverse effect on the Company's business, results of operations
and financial condition.
DEPENDENCE ON PROPRIETARY TECHNOLOGY
The Company's success is heavily dependent upon the establishment and
maintenance of proprietary technologies. Although the Company attempts to
protect its intellectual property rights through patents, copyrights, trade
secrets and other measures, there can be no assurance that the steps taken by
the Company to protect its proprietary technologies will be adequate to prevent
misappropriation by third parties or will be adequate under the laws of some
foreign countries, which may not protect the Company's proprietary rights to the
same extent as do laws of the United States. In addition, others could "reverse
engineer" the Company's products in order to determine their method of operation
and introduce competing products or develop competing technology independently.
Any such adverse circumstances could have a material adverse effect on the
Company's business, financial condition and results of operations.
Although the Company does not believe any of its products or proprietary
rights infringe the rights of third parties, there can be no assurance that
infringement claims will not be asserted against the Company in the future. Any
such claims, with or without merit, could divert the attention of management,
result in costly
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litigation, cause product shipment delays or require the Company to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, or at all. If
infringement were established, the Company could be required to pay damages or
be enjoined from making, using or selling the infringing product. Likewise,
there can be no assurance that a third party's product, if infringing on the
Company's proprietary rights, may be prevented from doing so without litigation.
Any of the foregoing could have a material adverse effect on the Company's
business, financial condition and results of operations.
No assurance can be given that the claims allowed on any patents held by
the Company will be sufficiently broad to protect the Company's technology.
Moreover, there can be no assurance that any patent owned by the Company will
not be invalidated, deemed unenforceable, circumvented or challenged, that the
rights granted thereunder will provide competitive advantages to the Company or
that any of the Company's pending or future patent applications will be issued
with claims of the scope sought by the Company, if at all. Furthermore, there
can be no assurance that others will not develop similar products, duplicate the
Company's products or design around the patents owned by the Company. In
addition, there can be no assurance that foreign intellectual property laws or
the Company's agreements will protect the Company's intellectual property rights
in any foreign country. Any failure to protect the Company's intellectual
property rights could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company requires each of its employees to enter into a proprietary
rights and non-disclosure agreement in which the employee agrees to maintain the
confidentiality of all proprietary information of the Company and, subject to
certain exceptions, to assign to the Company all rights in any proprietary
information or technology made or contributed by the employee during his or her
employment. In addition, the Company regularly enters into non-disclosure
agreements with third parties, such as consultants, potential joint venture
partners and customers. In spite of these precautions, it may be possible for
third parties to copy, develop or otherwise obtain and use the Company's
proprietary technology without authorization or to develop similar technology
independently.
MANUFACTURING RISKS
The Company's products have a large number of components and are highly
complex. The Company has experienced and may in the future experience
manufacturing delays due to technical difficulties. In addition, many of the
Company's products must be semi-customized to meet individual product
specification requirements. The customization of a customer order may require
new technical capabilities not previously incorporated successfully into the
Company's products. As a result, the Company may be unable to complete the
customized development or technical specifications of its customers in a timely
manner. Any significant failure in this regard would have a material adverse
effect on the Company's business, financial condition and results of operations
as well as its customer relationships. In addition, due to the semi-customized
nature of many of the Company's products, the Company has in the past and may in
the future incur substantial unanticipated costs in a product's development and
production, such as increased cost of components due to expediting charges,
other purchasing inefficiencies and greater than expected engineering, quality
control, installation, upgrade, post-installation service and support and
warranty costs which cannot be passed on to the customer. The occurrence of any
of such events in the future could materially adversely affect the Company's
business, financial condition and results of operations.
In certain instances the Company relies on a single source or a limited
group of suppliers for certain components and subassemblies used in its
products. Although the Company seeks to reduce its dependence on sole and
limited source suppliers, the partial or complete loss of these sources could
have at least a temporary material adverse effect on the Company's results of
operations and damage customer relationships due to the complexity of the
products they supply and the significant amount of time required to qualify new
suppliers. In addition, long lead times are often required to obtain critical
components and subassemblies used in certain of the Company's products from
these and other suppliers which could impede the Company's ability to quickly
respond to changes in demand and product specifications.
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Shortages of critical components and subassemblies to manufacture the
Company's products have occurred in the past and there can be no assurance that
shortages will not occur in the future, or that materials will be available
without longer lead times. In addition, the manufacture and timely delivery of
products by the Company is often dependent on the ability of certain suppliers
to deliver subassemblies and other components in a timely manner. The failure of
such suppliers to deliver these components in a timely manner may delay the
delivery of products by the Company until alternative sourcing could be
developed. There can be no assurance that an alternative source could be located
in time to avoid penalties or cancellation of the Company's product orders. If a
significant order or orders were cancelled for this reason it could have a
material adverse effect on the Company's business, financial condition and
results of operations. Further, a significant increase in the price of one or
more components used to produce the Company's products would increase the cost
of producing the Company's products. See "Business -- Manufacturing."
The Company conducts its manufacturing activities at its facilities in San
Diego, Fremont, Concord and Hayward, California. The Company's manufacturing
facilities are located in seismically active areas. A major catastrophe (such as
an earthquake or other natural disaster) or other long-term disruption in the
Company's manufacturing activities could result in a prolonged interruption of
the Company's business. See "Business -- Manufacturing."
RISKS ASSOCIATED WITH ACQUISITIONS
While the Company currently has no commitments, agreements or
understandings with respect to any future acquisitions, its business strategy
includes the expansion of its business, products lines and technology through
acquisitions. The Company regularly reviews various acquisition prospects,
including companies, technologies or products complementary to the Company's
business and periodically engages in discussions regarding such possible
acquisitions. Acquisitions involve numerous risks, including evaluating new
technologies; difficulties in the assimilation of the operations, products,
personnel and cultures of the acquired companies; the ability to manage
geographically remote units; the diversion of management's attention from other
day-to-day business concerns; risks of entering markets in which the Company has
limited or no direct experience and the potential loss of key employees of the
acquired companies. In addition, acquisitions may result in dilutive issuances
of equity securities; the incurrence of additional debt; reduction of existing
cash balances; amortization expenses related to goodwill and other intangible
assets and other charges to operations that may materially adversely affect the
Company's results of operations. Moreover, there can be no assurance that any
equity or debt financings proposed in connection with any acquisition would be
available to the Company on acceptable terms or at all, when, and if, suitable
strategic acquisition opportunities arise. Although management expects to
carefully analyze any opportunity before committing the Company's resources,
there can be no assurance that any acquisition that is completed will result in
long-term benefits to the Company or its stockholders or that Phase Metrics'
management will be able to manage effectively the resulting business. See
"Business -- Competition."
The Company recorded write-downs totaling approximately $11.9 million and
$2.0 million for 1996 and 1997, respectively, related to impairment losses on
certain purchased technology recorded primarily in connection with the Company's
acquisitions of ART and certain assets of Cambrian and ABI. Such impairment
losses were generally the result of post-acquisition technological changes that
were developed independent of purchased technologies, causing a decline in the
carrying values of such purchased technologies. There can be no assurance that
such impairments will not occur in the future or that future acquisitions will
not result in similar write-downs of acquired assets. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 1 of Notes to Consolidated Financial Statements.
CAPITAL NEEDS
The Company believes that, in order to achieve its long-term strategic
objectives and maintain and enhance its competitive position, it will need
additional financial resources over the next several years to fund acquisitions,
service debt, make capital expenditures, fund working capital and pay for
research and development. The Company has added significant manufacturing
capacity and increased its fixed costs over the past two years while expanding
its facilities in Concord, Fremont and San Diego, California, and continues to
invest in new technologies and its international infrastructure. The Company's
fixed costs may also increase
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if the Company elects to expand its infrastructure in South Korea, Japan, other
parts of Asia, or other locations. Any liquidity deficiency in the future could
delay or change management's plans for the Company including curtailing its
acquisition strategy, capital expenditures, facilities expansion and research
and development expenditures, which could materially adversely affect the
ability of the Company to service its debt (including indebtedness under the New
Notes) and its business, financial condition and results of operations.
Upon completion of the Exchange Offer, the Company will continue to have
limited cash resources and significant future obligations. The precise amount
and timing of the Company's funding needs cannot be determined at this time and
will depend upon a number of factors, including the market demand for the
Company's products, the availability of strategic opportunities, the progress of
the Company's product development efforts, technological challenges that must be
overcome in connection with existing and future products, the Company's
inventory management and the Company's management of its cash and accounts
payable. The Company may not be able to obtain additional financing as needed on
acceptable terms or at all. If the Company is unable to obtain sufficient
capital, it could be required to curtail its acquisition strategy, capital
expenditures, facilities expansion and research and development expenditures,
which could materially adversely affect the Company's business, financial
condition and results of operations. See "Use of Proceeds," "Capitalization,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
In August 1998, the Company issued and sold an aggregate of 6,360,000
shares of its Series C Preferred Stock in its Series C Financing for an
aggregate of $25.4 million in proceeds. Immediately following the consummation
of the Series C Financing, the Company used $7.1 million of the proceeds thereof
to repay in full all outstanding indebtedness under the New Credit Facility and
thereafter terminated such facility. As of the date of this Prospectus, the
Company had no revolving or other type of credit facility for working capital.
Subject to the receipt of regulatory approval under the Hart-Scott-Rodino
Antitrust Improvements Act of 1996 and any other necessary approvals, but in no
event no later than 120 days from the date of the Series C Financing, one of the
investors in the Series C Financing has agreed to purchase an additional $5.0
million of Series C Preferred Stock, representing 1,250,000 shares at a purchase
price of $4.00 per share. There can be no assurance that the Company will be
able to successfully close this subsequent round of equity financing. See
"Description of Capital Stock -- Series C Preferred Stock."
Based on currently available information, the Company believes that its
available cash and cash generated from operations will be adequate to fund its
operations for the foreseeable future, and for no less than the next 12 months.
The Company has listed for sale the real estate it owns in San Diego,
California, on which its headquarters is located. The property is listed in
excess of its book value. The Company is also negotiating with a number of
lenders to establish a new revolving credit facility. There can be no assurance
that the Company will be successful in selling its San Diego real estate or
securing a new revolving credit facility.
DEPENDENCE UPON KEY PERSONNEL
The Company's future performance depends in significant part upon the
continued service of its Chief Executive Officer, other senior management
personnel and its key technical personnel. The Company is dependent on its
ability to identify, hire, train, retain and motivate high quality personnel,
especially highly skilled engineers involved in the ongoing developments
required to develop and enhance the Company's products and introduce new and
enhanced future products and applications. The industry in which the Company
competes is characterized by a high level of employee mobility and aggressive
recruiting of skilled personnel. The Company's employees may terminate their
employment with the Company at any time. Accordingly, there can be no assurance
that any of the Company's current employees will continue to work for the
Company. Loss of services of key employees could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company has an employment agreement with its Chief Executive Officer, but does
not maintain key-man life insurance with respect to such individual. The
employment agreement is terminable at will by either party upon 30-days written
notice and contains a covenant not to compete during the term of the agreement
and for two years
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thereafter. See "Business -- Employees" and "Management -- Compensation Plans
and Arrangements -- Employment Contracts and Change in Control Arrangements."
INTERNATIONAL OPERATIONS
The Company's sales and operating activities outside of the United States
are subject to inherent risks, including fluctuations in the value of the United
States dollar relative to foreign currencies, tariffs, quotas, taxes and other
market barriers, political, economic and monetary instability, restrictions on
the export or import of technology, potentially limited intellectual property
protection, difficulties in staffing and managing international operations and
potentially adverse tax consequences. There can be no assurance that any of
these factors will not have a material adverse effect on the Company's business,
financial condition or results of operations. In addition, although
substantially all of the Company's export sales to date have been denominated in
United States dollars, such sales may not be denominated in dollars in the
future. As a result, currency exchange fluctuations in countries where the
Company does business could have a material adverse effect on the Company's
business, financial condition and results of operations. In this regard, several
Asian countries including South Korea, Japan and Thailand, have recently
experienced significant economic downturns and significant declines in the value
of their currencies relative to the U.S. dollar. Due to these conditions, it is
possible that certain of the Company's customers will delay, reschedule or
cancel significant current or future orders for the Company's products. If any
such orders are delayed, rescheduled or cancelled, the Company's business,
financial condition and results of operations would be adversely affected.
ENVIRONMENTAL REGULATIONS
The Company is subject to a variety of governmental regulations relating to
the use, storage, discharge, handling, emission, generation, manufacture,
treatment and disposal of toxic or other hazardous substances, chemicals,
materials or waste. The Company believes that it is in compliance, in all
material respects, with such regulations. Any failure to comply with current or
future regulations could result in civil penalties or criminal fines being
imposed on the Company, or its officers, directors or employees, suspension of
production, alteration of its manufacturing process or cessation of operations.
Such regulations could require the Company to acquire expensive remediation or
abatement equipment or to incur expenses to comply with environmental
regulations. Any failure by the Company to properly manage the use, disposal or
storage of, or adequately restrict the release of, hazardous or toxic substances
could subject the Company to significant liabilities.
CONCENTRATION OF STOCK OWNERSHIP
The Company's directors and officers and their respective affiliates
beneficially own approximately 90.1% of the Company's capital stock as of August
3, 1998. As a result, these stockholders, acting together, would be able to
effectively control all matters requiring approval by the stockholders of the
Company, including the election of directors and approval of significant
corporate transactions. These stockholders are parties to a Securityholders
Agreement which, among other provisions, requires such stockholders to vote
their shares of capital stock for certain nominees for directors of the Company.
See "Management," "Certain Transactions" and "Principal Stockholders."
FRAUDULENT CONVEYANCE CONSIDERATIONS
Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent transfer laws, if, among other things, the
Company or any Subsidiary Guarantor, at the time it incurred the indebtedness
evidenced by the New Notes or the New Note Guarantees, as the case may be,
(i)(a) was or is insolvent or rendered insolvent by reason of such occurrence or
(b) was or is engaged in a business or transaction for which the assets
remaining with the Company or such Subsidiary Guarantor constituted unreasonably
small capital or (c) intended or intends to incur, or believed or believes that
it would incur, debts beyond its ability to pay such debts as they mature and
(ii) the Company or such Subsidiary Guarantor received or receives less than
reasonably equivalent value or fair consideration for the incurrence of such
indebtedness or providing such guarantees, then the New Notes and the New Note
Guarantees could be voided or claims in respect of the New Notes or the New Note
Guarantees could be subordinated to all other
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<PAGE> 31
debts of the Company or such Subsidiary Guarantor, as the case may be. In
addition, the payment of interest and principal of the Company pursuant to the
New Notes or the payment of amounts by a Subsidiary Guarantor pursuant to a New
Note Guarantee could be voided and required to be returned to the person making
such payment, or to a fund for the credit of the creditors of the Company or
such Subsidiary Guarantor, as the case may be.
The measures of insolvency for purposes of the foregoing considerations
will vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, the Company or a Subsidiary Guarantor would be
considered insolvent if (i) the sum of its debts, including contingent
liabilities, were greater than the saleable value of all of its assets at a fair
valuation or if the present fair saleable value of its assets were less than the
amount that would be required to pay its probable liabilities on its existing
debts, including contingent liabilities, as they become absolute and mature or
(ii) it could not pay its debts as they become due.
On the basis of historical financial information, recent operating history
as discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and other factors, the Company and each Subsidiary
Guarantor believes that, after giving effect to the indebtedness incurred in
connection with the Note Offering, it was not insolvent, did not have
unreasonably small capital for the business in which it was engaged and had not
incurred debts beyond its ability to pay debts as they mature. There can be no
assurance, however, as to what standard a court would apply in making such
determinations or that a court would agree with the Company's or such Subsidiary
Guarantor's conclusions.
PAYMENT UPON A CHANGE OF CONTROL
The Indenture provides that, upon the occurrence of a Change of Control,
the Company will be required to make an offer to repurchase all of the New Notes
issued and then outstanding under the Indenture at a purchase price equal to
101% of the principal amount thereof plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the date of repurchase. See "Description
of New Notes -- Repurchase at the Option of Holders -- Change of Control." If a
Change of Control were to occur, it is unlikely that the Company would be able
to repay all of its obligations, the New Notes and any other indebtedness that
may become payable in such event without refinancing its obligations thereunder.
There can be no assurance that the Company would be able to obtain any such
financing on commercially reasonable terms, or at all, and consequently no
assurance can be given that the Company would be able to repurchase any of the
New Notes upon a Change of Control.
ABSENCE OF TRADING MARKET; RESTRICTIONS ON TRANSFERS
The Notes are currently owned by a relatively small number of beneficial
owners. The Notes have not been registered under the Securities Act and will be
subject to restrictions on transferability to the extent that they are not
exchanged for New Notes. To the extent that a substantial portion of the Notes
are exchanged in connection with this Exchange Offer, any trading market that
may have existed for the Notes could be materially and adversely affected by the
substantial reduction in the amount of Notes available for trading.
The New Notes will constitute a new issue of securities with no established
trading market. Although the New Notes will generally be permitted to be resold
or otherwise transferred by holders who are not affiliates of the Company
without compliance with the registration requirements under the Securities Act,
the Company does not intend to list the New Notes on any securities exchange or
to seek admission thereof to trading in the National Association of Securities
Dealers Automated Quotation System. Although DLJ has advised the Company that it
currently intends to make a market in the New Notes, DLJ is not obligated to do
so and may discontinue such market making at any time without notice. In
addition, such market making activity will be subject to the limits imposed by
the Exchange Act. If a trading market does not develop or is not maintained,
holders of the New Notes may experience difficulty in reselling the New Notes or
may be unable to sell them at all. If a market for the New Notes develops, any
such market may be discontinued at any time. Accordingly, there can be no
assurance as to the development or liquidity of any market for the New Notes.
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COMPLIANCE WITH EXCHANGE OFFER PROCEDURES; RESTRICTIONS ON RESALES
Issuance of the New Notes in exchange for Notes pursuant to the Exchange
Offer will be made only after a timely receipt by the Exchange Agent of such
Notes, a properly completed and duly executed Letter of Transmittal and all
other required documents. Therefore, holders of the Notes desiring to tender
such Notes in exchange for New Notes should allow sufficient time to ensure
timely delivery. The Company is under no duty to give notification of defects or
irregularities with respect to any tender of Notes for exchange. Notes that are
not tendered or are tendered but not accepted will, following the consummation
of the Exchange Offer, continue to be subject to the existing restrictions upon
transfer thereof and, upon the Expiration Date, the principal registration
rights under the Registration Rights Agreement generally will terminate. In
addition, any holder of Notes who tenders in the Exchange Offer for the purpose
of participating in or otherwise intends to participate in a distribution of the
New Notes will be required to comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale of the
New Notes to third parties. Each Participating Broker-Dealer that receives New
Notes for its own account in exchange for Notes, where such Notes were acquired
by such broker-dealer as a result of market-making activities or other trading
activities must acknowledge that it will deliver a prospectus in connection with
the initial resale of such New Notes to third parties. To the extent that Notes
are tendered and accepted in the Exchange Offer, the trading market for
untendered and tendered but unaccepted Notes could be adversely affected. See
"The Exchange Offer" and "Plan of Distribution."
YEAR 2000
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results as a result of this
issue. The Company is in the process of assessing the readiness of its internal
computer systems, its products and its vendors for handling the Year 2000 issue.
The Company has contacted critical third party suppliers in connection with its
assessment. The Company believes that all of its critical internal business
applications are Year 2000 compliant, and that all Company products shipped
after June 30, 1999 will be Year 2000 compliant. The Company does not believe
that the costs of any actions required as a result of such assessment will have
a material adverse effect on the Company's business, financial condition or
results of operations. There can be no assurance, however, that the Company will
successfully implement the correct solutions or that there will be no delay in
or increased costs associated with the Company's Year 2000 readiness programs.
The Company's inability to successfully implement such changes could have a
material adverse effect on the Company's business, financial condition or
results of operations. In addition, there can be no assurance that the Company's
critical product and service providers, and their critical providers and so on,
are or will become Year 2000 compliant on a timely basis both individually and
as a group, including information systems integrated among businesses, financial
institutions, government agencies, utilities, etc. The failure of such critical
product and service providers and integrated information systems to be or become
Year 2000 compliant could have a material adverse effect on the Company's
business, financial condition or results of operations. In addition, it is
possible that the Company's revenue may be adversely affected if current and
prospective customers direct their spending resources away from purchasing the
Company's products over the next two years in order to correct or replace
information systems which are not Year 2000 compliant.
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THE EXCHANGE OFFER
The following discussion sets forth or summarizes what the Company believes
are the material terms of the Exchange Offer, including those set forth in the
Letter of Transmittal distributed with this Prospectus. This summary is
qualified by reference to the full text of the documents related to the Exchange
Offer, copies of which are filed as exhibits to the Registration Statement of
which this Prospectus is a part, and are incorporated by reference herein.
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Notes were sold by the Company on January 30, 1998, and were
subsequently resold to qualified institutional buyers pursuant to Rule 144A
under the Securities Act and to certain persons in transactions outside the
United States in reliance on Regulation S under the Securities Act. In
connection with the Note Offering, the Company entered into the Registration
Rights Agreement on the date of the Note Closing, which requires, among other
things, the Company and the Subsidiary Guarantors to (i) file with the SEC a
Registration Statement under the Securities Act with respect to an issue of new
notes of the Company identical in all material respects to the Notes, (ii) use
their best efforts to cause such Registration Statement to become effective
under the Securities Act and (iii) upon the effectiveness of that Registration
Statement, offer to the holders of the Notes the opportunity to exchange their
Notes for a like principal amount of New Notes, which would be issued without a
restrictive legend and may be reoffered and resold by the Holder without
restrictions or limitations under the Securities Act (other than any such holder
that is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act). A copy of the Registration Rights Agreement has been filed as
an exhibit to the Registration Statement of which this Prospectus is a part. The
term "Holder" as used in this Prospectus means any person in whose name the
Notes are registered on the books of the Company or Trustee, or any other person
who has obtained a properly completed bond power from the registered holder.
Because the Exchange Offer is for any and all Notes, the number of Notes
tendered and exchanged in the Exchange Offer will reduce the principal amount of
Notes outstanding. Following the consummation of the Exchange Offer, Holders of
the Notes who did not tender their Notes generally will not have any further
registration rights under the Registration Rights Agreement, and such Notes will
continue to be subject to certain restrictions on transfer. The Notes are
currently eligible for sale pursuant to Rule 144A through the PORTAL System of
the National Association of Securities Dealers, Inc. Because the Company
anticipates that most Holders of Notes will elect to exchange such Notes for New
Notes due to the absence of restrictions on the resale of New Notes under the
Securities Act, the Company anticipates that the liquidity of the market for any
untendered Notes remaining after the consummation of the Exchange Offer may be
substantially limited.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Notes
validly tendered and not withdrawn prior to 12:00 midnight, New York City time,
on the Expiration Date. The Company will issue $1,000 principal amount of New
Notes in exchange for each $1,000 principal amount of outstanding Notes accepted
in the Exchange Offer. Holders may tender some or all of their Notes pursuant to
the Exchange Offer. Notes may be tendered only in integral multiples of $1,000.
The form and terms of the New Notes are the same as the form and terms of
the Notes except that (i) the New Notes have been registered under the
Securities Act and hence will not bear legends restricting the transfer thereof
and (ii) the holders of the New Notes generally will not be entitled to any
further rights under the Registration Rights Agreement, which rights generally
will terminate upon consummation of the Exchange Offer. The New Notes will
evidence the same debt as the Notes and will be entitled to the benefits of the
Indenture.
Holders of Notes do not have any appraisal or dissenters' rights under the
Delaware General Corporation Law or the Indenture in connection with the
Exchange Offer. The Company intends to conduct the Exchange
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<PAGE> 34
Offer in accordance with the applicable requirements of the Exchange Act and the
rules and regulations of the SEC thereunder, including Rule 14e-1 thereunder.
The Company shall be deemed to have accepted validly tendered Notes when,
as and if the Company has given oral or written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering Holders for the
purpose of receiving the New Notes from the Company.
If any tendered Notes are not accepted for exchange because of an invalid
tender, the occurrence of certain other events set forth herein or otherwise,
the certificates for any such unaccepted Notes will be returned, without
expense, to the tendering Holder thereof as promptly as practicable after the
Expiration Date.
Holders who tender Notes in the Exchange Offer will not be required to pay
brokerage commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of Notes pursuant to
the Exchange Offer. The Company will pay all charges and expenses, other than
transfer taxes in certain circumstances, in connection with the Exchange Offer.
See "-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 12:00 midnight, New York City time,
on , 1998, unless the Company, in its sole discretion, extends
the Exchange Offer, in which case the term "Expiration Date" shall mean the
latest date and time to which the Exchange Offer is extended.
To extend the Exchange Offer, the Company will notify the Exchange Agent of
any extension by oral or written notice, followed by a public announcement
thereof no later than 9:00 a.m., New York City time, on the next business day
after the previously scheduled Expiration Date.
The Company reserves the right, in its reasonable judgment, (i) to delay
accepting any Notes, to extend the Exchange Offer or to terminate the Exchange
Offer if any of the conditions set forth below under "-- Conditions" shall not
have been satisfied, by giving oral or written notice of such delay, extension
or termination to the Exchange Agent or (ii) to amend the terms of the Exchange
Offer in any manner. Any such delay in acceptance, extension, termination or
amendment will be followed as promptly as practicable by a public announcement
thereof. If the Exchange Offer is amended in a manner determined by the Company
to constitute a material change, the Company will promptly disclose such
amendment by means of a supplement to this Prospectus that will be distributed
to the registered Holders, and, depending upon the significance of the amendment
and the manner of disclosure to the registered Holders, the Company will extend
the Exchange Offer for five to ten business days if the Exchange Offer would
otherwise expire during such five to ten business-day period.
If the Company does not consummate the Exchange Offer, or, in lieu thereof,
the Company does not file and cause to become effective a resale shelf
registration for the New Notes within the time periods set forth in the
Registration Rights Agreement, Liquidated Damages will accrue and be payable on
the New Notes either temporarily or permanently. See "Description of New
Notes -- Registration Rights; Liquidated Damages."
INTEREST ON NEW NOTES
The New Notes will bear interest from January 30, 1998, the date of the
Note Closing. Accordingly, Holders of Notes that are accepted for exchange will
not receive interest that is accrued but unpaid on the Notes at the time of
tender, but such interest will be payable on the New Notes on the first interest
payment date after the Expiration Date. Interest on the New Notes will be
payable semiannually on each February 1 and August 1, commencing on August 1,
1998.
PROCEDURES FOR TENDERING
Only a Holder of Notes may tender such Notes in the Exchange Offer. To
tender in the Exchange Offer, a Holder must complete, sign and date the enclosed
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal and mail or otherwise
deliver such
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Letter of Transmittal or such facsimile, together with the Notes and any other
required documents, to the Exchange Agent so as to be received by the Exchange
Agent at the address set forth below prior to 12:00 midnight, New York City
time, on the Expiration Date. The Letter of Transmittal must be used to tender
Notes. Delivery of the Notes may be made by book-entry transfer in accordance
with the procedures described below. Confirmation of such book-entry transfer
must be received by the Exchange Agent prior to the Expiration Date.
By executing the Letter of Transmittal, each Holder will make to the
Company the representation set forth below in the second paragraph under the
heading "-- Resale of New Notes." The tender by a Holder and the acceptance
thereof by the Company will constitute an agreement between such Holder and the
Company in accordance with the terms and subject to the conditions set forth
herein and in the Letter of Transmittal.
THE METHOD OF DELIVERY OF NOTES AND THE LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE
HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR
NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to tender
should contact the registered Holder promptly and instruct such registered
Holder to tender on such beneficial owner's behalf.
Signatures on the Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Notes tendered pursuant thereto are tendered (i) by a registered
Holder who has not completed the box entitled "Special Issuance Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. In the event that signatures on a Letter of
Transmittal or a notice of withdrawal, as the case may be, are required to be
guaranteed, such guarantee must be by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered Holder of any Notes listed therein, such Notes must be endorsed or
accompanied by a properly completed bond power, signed by such registered Holder
as such registered Holder's name appears on such Notes with the signature
thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
The Company understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish accounts with respect to
the Notes at the Depository for the purpose of facilitating the Exchange Offer,
and subject to the establishment thereof, any financial institution that is a
participant in the Depository's system may make book-entry delivery of the Notes
by causing the Depository to transfer such Notes into the Exchange Agent's
account with respect to the Notes in accordance with the Depository's procedures
for such transfer. Although delivery of the Notes may be effected through
book-entry transfer into the Exchange Agent's account at the Depository, an
appropriate Letter of Transmittal properly completed and duly executed with any
required signature guarantee and all other required documents must in each case
be transmitted to and received or confirmed by the Exchange Agent at its address
set forth below on or prior to
27
<PAGE> 36
the Expiration Date, or, if the guaranteed delivery procedures described below
are complied with, within the time period provided under such procedures.
Delivery of documents to the Depository does not constitute delivery to the
Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Notes and withdrawal of tendered Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and all
Notes not properly tendered or any Notes the Company's acceptance of which
would, in the opinion of counsel for the Company, be unlawful. The Company also
reserves the right to waive any defects, irregularities or conditions of tender
as to particular Notes. The Company's interpretation of the terms and conditions
of the Exchange Offer (including the instructions in the Letter of Transmittal)
will be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Notes must be cured within such
time as the Company shall determine. Although the Company intends to notify
Holders of defects or irregularities with respect to tenders of Notes, none of
the Company, the Exchange Agent or any other person shall incur any liability
for failure to give such notification. Tenders of Notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any Notes received by the Exchange Agent that are not properly tendered and as
to which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering Holders, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Notes and (i) whose New Notes are not
immediately available, (ii) who cannot deliver their Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent or (iii) who
cannot complete the procedures for book-entry transfer, prior to the Expiration
Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice
of Guaranteed Delivery (by facsimile transmission, mail or hand
delivery) setting forth the name and address of the Holder, the
certificate number(s) of such Notes and the principal amount of Notes
tendered, stating that the tender is being made thereby and guaranteeing
that, within three New York Stock Exchange trading days after the
Expiration Date, the Letter of Transmittal (or facsimile thereof),
together with the certificates(s) representing the Notes (or a
confirmation of book-entry transfer of such Notes into the Exchange
Agent's account at the Depository) and any other documents required by
the Letter of Transmittal, will be deposited by the Eligible Institution
with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all
tendered Notes in proper form for transfer (or a confirmation of
book-entry transfer of such Notes into the Exchange Agent's account at
the Depository) and all other documents required by the Letter of
Transmittal, are received by the Exchange Agent within three New York
Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWALS OF TENDERS
Except as otherwise provided herein, tenders of Notes may be withdrawn at
any time prior to 12:00 midnight New York City time, on the Expiration Date.
To withdraw a tender of Notes in the Exchange Offer, a written or facsimile
transmission notice of withdrawal must be received by the Exchange Agent at its
address set forth herein prior to 12:00 midnight New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Notes to be withdrawn (the "Depositor"), (ii)
identify the Notes to be withdrawn
28
<PAGE> 37
(including the certificate number(s) and principal amount of such Notes, or, in
the case of Notes transferred by book-entry transfer, the name and number of the
account at the Depository to be credited), (iii) be signed by the Holder in the
same manner as the original signature on the Letter of Transmittal by which such
Notes were tendered (including any required signature guarantees) or be
accompanied by documents of transfer sufficient to have the Trustee with respect
to the Notes register the transfer of such Notes into the name of the person
withdrawing the tender and (iv) specify the name in which any such Notes are to
be registered, if different from that of the Depositor. All questions as to the
validity, form and eligibility (including time or receipt) of such notices will
be determined by the Company, whose determination shall be final and binding on
all parties. Any Notes so withdrawn will be deemed not to have been validly
tendered for purposes of the Exchange Offer and no New Notes will be issued with
respect thereto unless the Notes so withdrawn are validly retendered. Any Notes
which have been tendered but which are withdrawn will be returned to the Holder
thereof without cost to such Holder as soon as practicable after withdrawal or
termination of the Exchange Offer. Properly withdrawn Notes may be retendered by
following one of the procedures described above under "-- Procedures for
Tendering" at any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or to exchange New Notes for any Notes, and
may terminate or amend the Exchange Offer as provided herein before the
acceptance of such Notes, if any law, statute, rule, regulation or
interpretation by the staff of the SEC is proposed, adopted or enacted, which,
in the reasonable judgment of the Company, might materially impair the ability
of the Company to proceed with the Exchange Offer or materially impair the
contemplated benefits of the Exchange Offer to the Company.
If the Company determines in its reasonable judgment that any of the
conditions are not satisfied, the Company may in its reasonable determination
(i) refuse to accept any Notes and return all tendered Notes to the tendering
Holders, (ii) extend the Exchange Offer and retain all Notes tendered prior to
the expiration of the Exchange Offer, subject, however, to the rights of Holders
to withdraw such Notes or (iii) waive such unsatisfied conditions with respect
to the Exchange Offer and accept all properly tendered Notes which have not been
withdrawn. If such waiver constitutes a material change to the Exchange Offer
that is adverse to the Holders, the Company will promptly disclose such waiver
by means of a supplement to this Prospectus that will be distributed to the
registered Holders, and, depending upon the significance of the waiver and the
manner of disclosure to the registered Holders, the Company will extend the
Exchange Offer for a period of five to ten business days if the Exchange Offer
would otherwise expire during such five to ten business-day period.
EXCHANGE AGENT
State Street Bank and Trust Company will act as Exchange Agent for the
Exchange Offer.
Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal for the Notes and requests for
copies of a Notice of Guaranteed Delivery should be directed to the Exchange
Agent, addressed as follows:
By Registered or Certified Mail, Overnight Mail or Courier Service or in
Person by Hand:
The Exchange Agent
State Street Bank and Trust Company of California, N.A.
633 West 5th Street, 12th Floor
Los Angeles, California 90071
Attention: Jeanie Mar
By Facsimile:
(213) 362-7357
29
<PAGE> 38
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone, facsimile or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers or other persons
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
the Exchange Agent for its reasonable out-of-pocket expenses in connection
therewith and pay other registration expenses, including fees and expenses of
the Trustee, SEC filing fees, blue sky fees, legal expenses and printing and
distribution expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of the Notes pursuant to the Exchange Offer. If, however, certificates
representing the New Notes or the Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered Holder of the Notes tendered, or if
tendered Notes are registered in the name of any person other than the person
signing the Letter of Transmittal, or if a transfer tax is imposed for any
reason other than the exchange of the Notes for New Notes pursuant to the
Exchange Offer as provided herein, then the amount of any such transfer taxes
(whether imposed on the registered Holder or any other person) will be payable
by the tendering Holder.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Notes,
which is the aggregate principal amount of the Notes, as reflected in the
Company's accounting records on the date of exchange. Accordingly, no gain or
loss for accounting purposes will be recognized in connection with the Exchange
Offer. The expenses of the Exchange Offer will be amortized over the term of the
New Notes.
RESALE OF NEW NOTES
Based on interpretations by the staff of the SEC set forth in no-action
letters issued to third parties, the Company believes that New Notes issued
pursuant to the Exchange Offer in exchange for Notes may be offered for resale,
resold and otherwise transferred by any Holder of such New Notes (other than any
such Holder which is an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act; provided, that such New
Notes are acquired in the ordinary course of such Holder's business and such
Holder does not intend to participate, and has no arrangement or understanding
with any person to participate, in a distribution of such New Notes. To
participate in the Exchange Offer, each Holder must represent that it is not an
affiliate of the Company, it is not engaged in, and does not intend to engage
in, and has no arrangement or understanding with any Person to participate in, a
distribution of the New Notes that are issued in the Exchange Offer and it is
acquiring the New Notes in the Exchange Offer in its ordinary course of
business. Any Holder who tenders Notes in the Exchange Offer with the intention
to participate, or for the purpose of participating, in a distribution of the
New Notes may not rely on the position of the staff of the SEC enunciated in
Exxon Capital Holdings Corporation (available April 13, 1989), Morgan Stanley &
Co., Incorporated (available June 5, 1991) and Shearman & Sterling (available
July 2, 1993), or similar no-action letters, but rather must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Any such resale transaction should be
covered by an effective registration statement containing the selling
securityholder's information required by Item 507 or 508 of Regulation S-K of
the Securities Act, as applicable. In addition, each broker-dealer that receives
New Notes for its own account in exchange for Notes, where such Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, may be a statutory underwriter and must acknowledge in the
Letter of Transmittal that it will deliver a prospectus in connection with any
resale of New Notes.
By tendering in the Exchange Offer, each Holder will represent to the
Company that, among other things, (i) the New Notes acquired pursuant to the
Exchange Offer are being obtained in the ordinary course of
30
<PAGE> 39
business of the person receiving such New Notes, whether or not such person is a
Holder, (ii) neither the Holder nor any such other person has an arrangement or
understanding with any person to participate in a distribution of such New Notes
and (iii) the Holder and such other person acknowledge that if they participate
in the Exchange Offer for the purpose of distributing the New Notes (a) they
must, in the absence of an exemption therefrom, comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale of the New Notes and cannot rely on the no-action letters referenced
above and (b) failure to comply with such requirements in such instance could
result in such Holder incurring liability under the Securities Act for which
such Holder is not indemnified by the Company. Further, by tendering in the
Exchange Offer, each Holder that may be deemed an "affiliate" (as defined under
Rule 405 of the Securities Act) of the Company will represent to the Company
that such Holder understands and acknowledges that the New Notes may not be
offered for resale, resold or otherwise transferred by that Holder without
registration under the Securities Act or an exemption therefrom.
As set forth above, affiliates of the Company are not entitled to rely on
the no-action letters referenced above with respect to resales of the New Notes
without compliance with the registration and prospectus delivery requirements of
the Securities Act. In connection with the Note Offering, the Company entered
into the Registration Rights Agreement pursuant to which the Company agreed to
file and maintain, subject to certain limitations, a registration statement that
would allow DLJ to engage in market-making transactions with respect to the New
Notes. The Company has agreed to bear all registration expenses incurred under
such agreement, including printing and distribution expenses, reasonable fees of
counsel, blue sky fees and expenses, reasonable fees of independent accountants
in connection with the preparation of comfort letters, and SEC and the National
Association of Securities Dealers, Inc. filing fees and expenses.
CONSEQUENCES OF FAILURE TO EXCHANGE
As a result of the making of this Exchange Offer, the Company will have
fulfilled its principal obligations under the Registration Rights Agreement, and
Holders of Notes who do not tender their Notes generally will not have any
further rights under the Registration Rights Agreement. Accordingly, any Holder
of Notes that does not exchange that Holder's Notes for New Notes will continue
to hold Notes and will be entitled to all the rights and limitations applicable
thereto under the Indenture, except to the extent that such rights or
limitations, by their terms, terminate or cease to have further effectiveness as
a result of the Exchange Offer.
The Notes that are not exchanged for New Notes pursuant to the Exchange
Offer will remain restricted securities. Accordingly, such Notes may be resold
only (i) to the Company (upon redemption thereof or otherwise), (ii) pursuant to
an effective registration statement under the Securities Act, (iii) so long as
the Notes are eligible for resale pursuant to Rule 144A, to a qualified
institutional buyer within the meaning of Rule 144A under the Securities Act in
a transaction meeting the requirements of Rule 144A, (iv) outside the United
States to a foreign person pursuant to the exemption from the registration
requirements of the Securities Act provided by Regulation S thereunder, (v)
pursuant to an exemption from registration under the Securities Act provided by
Rule 144 thereunder (if available) or (vi) to an institutional accredited
investor in a transaction exempt from the registration requirements of the
Securities Act, in each case in accordance with any applicable securities laws
of any State of the United States. See "Risk Factors -- Absence of Trading
Market; Restrictions on Transfer."
OTHER
Participation in the Exchange Offer is voluntary and Holders should
carefully consider whether to accept. Holders of the Notes are urged to consult
their financial and tax advisors in making their own decision on what action to
take.
The Company may in the future seek to acquire any untendered Notes in open
market or privately negotiated transactions, through subsequent exchange offers
or otherwise. The Company has no present plans to acquire any Notes that are not
tendered in the Exchange Offer or to file a registration statement to assist in
making resales of any untendered Notes.
31
<PAGE> 40
USE OF PROCEEDS
There will be no proceeds to the Company from the Exchange Offer. The net
proceeds to the Company from the sale of the Notes were approximately $105.9
million (after deducting discounts and commissions and Note Offering expenses
payable by the Company). The Note Offering was part of a refinancing plan to,
among other things, (i) extend the maturity of those borrowings, (ii) fix the
interest rate of those borrowings at a rate believed by the Company to be
attractive for long-term fixed rate financing, (iii) provide the Company with
additional cash for working capital and certain capital expenditures and to fund
possible future acquisitions, and (iv) increase its operating and financial
flexibility. The Company used all of the net proceeds from the Note Offering,
together with the Initial Draw of approximately $1.6 million under the New
Credit Facility, to repay in full its then-existing term loan and revolving
credit indebtedness under the Former Credit Facility, including all accrued
interest thereunder to the date of repayment, and all expenses related to the
Refinancing. The term loan portion of the Former Credit Facility bore interest
at the Company's option of prime plus 2% to 2.5% or LIBOR plus 3% to 3.5% and
the revolver portion of the Former Credit Facility bore interest at the
Company's option of prime plus 0.5% to 2% or LIBOR plus 1.5% to 3%, based on the
Company's consolidated leverage ratio as defined in the Former Credit Agreement.
The term loans and revolver matured in December 2002 and December 1999,
respectively. The Company used proceeds from the term loans and revolver to
refinance its then existing credit facility, fund capital expenditures, working
capital and certain acquisitions.
32
<PAGE> 41
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1998 (in thousands, except share data).
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------
<S> <C>
Cash and cash equivalents................................... $ 2,809
=========
Debt (including current portion):
New Credit Facility....................................... $ 8,400
Senior Notes due 2005 ($110,000 principal amount)......... 105,778
Convertible Subordinated Notes............................ 8,000
Capital lease obligations................................. 2,800
---------
Total debt (including current portion)............ 124,978
Series B redeemable preferred stock, $.0001 par value,
3,857,280 shares authorized, issued and outstanding
(liquidation preference of $11,122)....................... 10,355
Stockholders' deficit:
Series A preferred stock, $.0001 par value, 8,250,000
shares authorized, issued and outstanding (liquidation
preference of $9,000).................................. 3
Common stock, $.0001 par value, 70,000,000 shares
authorized;
5,600,060 shares issued and outstanding................ 6,276
Retained deficit.......................................... (70,854)
Accumulated translation adjustments....................... (850)
---------
Total stockholders' deficit....................... (65,425)
---------
Total capitalization......................... $ 69,908
=========
</TABLE>
33
<PAGE> 42
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated statement of operations data for the
years ended December 31, 1995, 1996 and 1997, and the selected consolidated
balance sheet data as of December 31, 1996 and 1997, are derived from the
Company's audited Consolidated Financial Statements included elsewhere in this
Prospectus. The selected consolidated statement of operations data for the three
and six months ended June 30, 1997 and 1998 and the selected consolidated
balance sheet data as of June 30, 1998, are derived from the Company's unaudited
interim Consolidated Financial Statements included elsewhere in this Prospectus.
The unaudited interim Consolidated Financial Statements were prepared by
management of the Company on the same basis as the Company's audited
Consolidated Financial Statements and, in the opinion of management, include all
adjustments (consisting of normal recurring accruals) necessary to present
fairly the Company's operating results and financial position for such periods.
The selected consolidated statement of operations data for the years ended
December 31, 1993 and 1994, and the selected consolidated balance sheet data as
of December 31, 1993, 1994 and 1995 are derived from the Company's audited
Consolidated Financial Statements not included in this Prospectus. Results of
operations for the three and six months ended June 30, 1998 are not necessarily
indicative of the results to be expected for the full year. The following
selected consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and related
Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30, JUNE 30,
-------------------------------------------------- ------------------ -------------------
1993 1994(1) 1995(1) 1996(1) 1997 1997 1998 1997 1998
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales....................... $6,141 $ 20,064 $116,894 $190,773 $184,660 $52,633 $ 31,400 $104,236 $ 63,902
Gross profit (loss)(2).......... 3,172 10,099 52,128 86,912 83,366 25,169 (1,455) 48,858 11,430
Operating expenses(3)........... 2,821 8,530 40,161 98,332 81,131 22,739 25,473 42,695 41,042
Income (loss) from operations... 351 1,569 11,967 (11,420) 2,235 2,430 (26,928) 6,163 (29,612)
Interest expense................ -- 651 5,625 8,448 11,573 2,827 3,770 5,393 7,201
Income (loss) before income
taxes and extraordinary
items......................... 361 943 6,193 (19,842) (9,812) (797) (30,723) 294 (36,933)
Income tax (benefit)
expense(4).................... -- (611) 1,524 (8,974) (4,268) (239) 11,434 88 8,701
Income (loss) before
extraordinary items........... 361 1,554 4,669 (10,868) (5,544) (558) (42,157) 206 (45,634)
Extraordinary loss, net of
income taxes.................. -- -- -- 1,122 -- -- -- -- 941
Net income (loss)............... 361 1,554 4,669 (11,990) (5,544) (558) (42,157) 206 (46,575)
OTHER DATA:
Cash provided by (used for)
operating activities.......... 387 (1,994) 18,300 (21,402) (6,392) (1,745) 2,650 (2,138) (2,020)
Cash used for investing
activities.................... (122) (22,266) (11,102) (45,316) (17,169) (8,361) (544) (11,348) (1,294)
Cash provided by (used for)
financing activities.......... (10) 24,455 (3,099) 64,439 23,883 9,595 (172) 13,109 3,159
EBITDA(5)....................... 420 2,782 27,864 21,533 24,107 9,537 (23,094) 18,219 (21,982)
Depreciation, amortization and
write-downs of intangible
assets........................ 69 1,213 15,897 32,953 21,872 7,107 3,834 12,056 7,630
Capital expenditures............ 122 293 9,135 24,564 17,091 8,361 544 11,348 1,294
Ratio of earnings to fixed
charges(6).................... 11.3x 1.0x 1.2x -- -- -- -- -- --
</TABLE>
34
<PAGE> 43
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------------------------------- ------------------
1993 1994 1995 1996 1997 1998
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents....... $ 732 $ 917 $ 5,016 $ 2,737 $ 2,977 $ 2,809
Working capital................. 204 (15,616) (5,774) 42,681 66,075 31,426
Total assets.................... 2,531 49,609 119,896 154,013 154,730 119,211
Long-term debt, including
current portion............... 43 28,200 30,239 96,020 121,057 124,978
Redeemable preferred stock...... -- 314 3,314 6,314 9,237 10,355
Stockholders' equity
(deficit)(3).................. 395 (310) 3,592 (9,031) (17,873) (65,425)
</TABLE>
- ---------------
(1) In November 1994, the Company acquired ProQuip and certain net assets of
Cambrian. Between June 1995 and December 1996, the Company completed six
additional acquisitions, including Helios in June 1995, ART in July 1995,
certain net assets of Tahoe in July 1995, ABI in January 1996, SBM in
December 1996 and a portion of the business of Kirell in December 1996. See
Notes 1 and 3 of Notes to Consolidated Financial Statements. Each of these
acquisitions was accounted for as a purchase for financial reporting
purposes, and, as a result, the Company's consolidated statements include
the operating results of ProQuip, Cambrian, Helios, ART, Tahoe, ABI, SBM and
a portion of the business of Kirell from their respective acquisition dates.
(2) In connection with the negative impact on the Company's operations of the
significant data storage industry downturn, for the three and six months
ended June 30, 1998, the Company recorded a $13.5 million charge to cost of
sales to write down excess and obsolete inventory, as well as a $22.7
million valuation allowance against its entire deferred tax asset balance.
(3) The Company incurred $1.0 million of restructuring costs in 1998 in
connection with the acquisitions of ProQuip and Cambrian, primarily related
to the elimination of duplicate facilities and information systems. The
Company incurred $3.0 million of restructuring costs in June, 1998,
primarily related to severance costs, contractual obligations and asset
impairment resulting from a workforce reduction and facility relocations.
(4) Prior to the Recapitalization (as defined herein), the Company was an S
Corporation for 1994 income tax purposes and, as such, taxable income and
losses were passed on to the sole stockholder of the Company as cash
distributions. Had the Company been a C corporation, assuming a combined
statutory income tax rate of 41%, income tax expense would have been
approximately $0.1 million and $0.4 million for 1993 and 1994, respectively.
The Company has not declared or paid any cash dividends subsequent to its
conversion to a C Corporation and does not anticipate paying any cash
dividends in the foreseeable future. See "Certain Transactions."
(5) EBITDA represents income (loss) from operations before depreciation and
amortization and write downs of intangibles. EBITDA is presented because
management believes it is a commonly accepted financial indicator used by
certain investors and analysts to analyze and compare companies on the basis
of operating performance. EBITDA is not intended to represent cash flows for
the period, nor has it been presented as an alternative to operating income
(loss) as an indicator of operating performance and should not be considered
in isolation or as a substitute for measures of performance prepared in
accordance with generally accepted accounting principles. The Company
understands that, while EBITDA is frequently used by securities analysts in
the evaluation of companies, EBITDA as used herein is not necessarily
comparable to other similarly titled captions of other companies due to
potential inconsistencies in the method of calculation.
(6) For purposes of determining this ratio, earnings consist of income (loss)
before income taxes (benefit) and extraordinary items. Fixed charges consist
of interest expense, a portion of operating lease rental expense that is
representative of the interest factor (deemed to be one-third of operating
lease rental expense) and dividends and related accretion to redemption
value on preferred stock. For the years ended December 31, 1996 and 1997,
the three months ended June 30, 1997 and 1998, and the six months ended June
30, 1997 and 1998, earnings were inadequate to cover fixed charges by $24.8
million, $14.7 million, $2.0 million, $31.7 million, $2.2 million and $38.8
million, respectively. For the year ended December 31, 1997, and the six
months ended June 30, 1998, the pro forma ratio of earnings to fixed charges
reflects an increase to interest expense of approximately $3.3 million and
$0.1 million, respectively, after giving effect to the Note Offering as if
the transaction had occurred as of January 1, 1997. For the year ended
December 31, 1997, and the six months ended June 30, 1998, earnings were
inadequate to cover fixed charges on a pro forma basis by $18.0 million and
$38.9 million, respectively.
35
<PAGE> 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company commenced operations in 1989 as a specialized merchant supplier
of production-test equipment for the data storage industry. From its inception
to November 1994, the Company was primarily engaged in developing and selling
its flying height tester systems to read/write head manufacturers. In order to
expand its operations and capitalize on the growing demand for process and
production-test equipment for the data storage industry, in November 1994 the
Company completed the Recapitalization and commenced a series of acquisitions of
other specialized suppliers of process and production-test equipment. In
November 1994, the Company acquired ProQuip and Cambrian, suppliers of advanced
process and production-test equipment for disks and read/write heads. In June
1995, the Company acquired Helios, a supplier of advanced servowriter and other
related equipment used in the production of disk drives. In July 1995, the
Company acquired both ART, a supplier of advanced integrated automation systems
for process and production-test equipment, and Tahoe, a developer of advanced
quasi-static MR head testers used for testing MR read/write heads. In January
1996, the Company acquired ABI, a supplier of advanced air bearing spindles and
other related components used in the Company's products and by others. In
December 1996, the Company acquired both SBM, a developer of advanced spinstands
and micropositioner equipment and technology used by data storage manufacturers,
and a portion of the business of Kirell, a supplier of advanced laser
texturizers used in the production of disks. See "Certain Transactions --
Recapitalization."
The Company accounted for each of its acquisitions as a purchase, and, as a
result, the Company's consolidated statements of operations include the
operating results of the acquired businesses from their respective dates of
acquisition. In connection with certain of the acquisitions, the Company agreed
to make earnout payments based on future sales of certain products acquired in
the acquisitions. The combined stated maximum obligations under the material
arrangements totaled $14.1 million, of which $3.3 million was considered certain
and, accordingly, allocated to the original purchase price, and the remainder of
which is being charged to compensation expense as incurred. Of the $14.1 million
maximum obligation, $10.8 million had been earned as of June 30, 1998. The
remaining $3.3 million will be paid depending on actual sales of the defined
products. Also, in connection with the acquisitions, the Company recorded
capitalized intangible assets totaling $61.2 million. Capitalized intangible
assets consist primarily of purchased technology and are being amortized over
approximately three years from the respective acquisition dates. The net book
value of such capitalized intangible assets was $1.7 million as of June 30,
1998.
There are a relatively small number of data storage manufacturers
throughout the world and the Company derives a significant portion of its net
sales from a relatively small number of customers. The Company expects that its
dependence on relatively few key customers will continue in the future.
Approximately 52.2%, 45.0%, 51.0% and 54.1% of the Company's net sales in 1995,
1996, 1997 and the six months ended June 30, 1998, respectively, were derived
from sales to the Company's three largest customers in each of those periods.
Even though the Company's customer mix will likely change from period to period
in the future, Seagate Technology, Inc. ("Seagate"), Komag Incorporated
("Komag"), HMT Technology ("HMT"), Iomega Corporation ("Iomega") and Trace
Storage Technology USA Corporation ("Trace") have historically accounted for a
significant portion of the Company's net sales. For 1995, 1996, 1997 and the six
months ended June 30, 1998, Seagate accounted for 25.0%, 19.0%, 18.0% and 11.0%,
respectively, of net sales; Komag accounted for 10.7%, 14.5%, 15.9% and 0.6%,
respectively, of net sales; HMT accounted for 4.4%, 5.2%, 17.1% and 26.3%,
respectively, of net sales; Iomega accounted for 16.5%, 7.9%, 1.9% and 1.4%,
respectively, of net sales and Trace accounted for 6.8%, 11.5%, 4.4% and 1.8%,
respectively, of net sales. For the six months ended June 30, 1998, Western
Digital accounted for 16.8% of net sales. If net sales to these or any other
significant customer of the Company were to decrease in any material amount in
the future, the Company's business, results of operations and financial
condition would be materially adversely affected.
The Company has no long-term contracts with its customers, and, in general,
the Company's customers may cancel, change or reschedule their orders with
limited or no penalty. The Company's customers often submit master purchase
orders against which they release specific product orders from time to time,
often with
36
<PAGE> 45
little lead time. Any cancellation, reduction, rescheduling or significant delay
of anticipated or actual orders from significant customers could have a material
adverse effect on the Company's business, results of operations and financial
condition. Each of the Company's customers has some unique product specification
requirements which requires the Company to provide semi-customized products. As
a result, per unit sales prices for the Company's products will generally vary
by customer and sales order. If production costs with respect to the
customization work are underestimated, there could be an adverse impact on the
Company's gross profits. In addition, the Company's products often require
post-installation, on-site customization and integration in order to tailor
products to customer specifications. Revenue and corresponding expenses for
significant post-installation services are recognized in the period such
services are provided. Inaccurate estimation of such on-site service costs could
have a material adverse effect on the Company's business, results of operations
and financial condition.
The Company derives its revenues primarily from sales of its process and
production-test systems and parts for such systems. The Company's products can
generally be categorized into four principal areas: (i) disk (media) testing and
processing, (ii) read/write head testing, (iii) disk drive testing and
processing and (iv) automation. The Company derives a significant portion of its
net sales from a relatively small number of products. In 1995, 1996, 1997 and
the six months ended June 30, 1998, the Company derived approximately 44.0%,
47.0%, 58.9% and 54.6% of its net sales, respectively, from sales of its media
certifier products (excluding parts and service), with the MG250 series
constituting a majority of the Company's media certifier sales over each of
these periods. However, since its introduction in June 1997, sales of the
Company's MC950 series media certifier products have become an increasingly
higher percentage of its media certifier product sales. Moreover, the Company
expects that net sales from its media certifier products, including its MG
series and its MC series, will continue to account for a substantial portion of
the Company's total net sales in the foreseeable future. Any significant
reduction in demand for its media certifier products would have a material
adverse effect on the Company's business, results of operations and financial
condition.
The Company's operating results have fluctuated in the past and the Company
expects that its operating results will continue to fluctuate in the future from
quarter to quarter and year to year. These fluctuations have resulted from a
number of factors including the size and timing of orders from, and shipments
to, major customers; the timing of introductions of new products and product
enhancements by the Company or its competitors; the Company's ability to
develop, introduce and market new, technologically advanced products; the
cyclicality of the data storage industry; the rescheduling of capital
expenditures by the Company's customers; variations in the Company's customer
base and product mix; the level of any significant volume pricing discounts
provided by the Company; the availability and cost of key production materials
and components; the Company's ability to effectively manage its inventory and to
control costs; the financial stability of major customers; the Company's success
in expanding its operations overseas; personnel changes; expenses associated
with acquisitions; fluctuations in amortization and write-downs of intangible
assets; exchange rate fluctuations and general economic factors.
The data storage industry in general has been experiencing significant
weakness in demand for products, intense competition and pricing erosion, and
overcapacity. Such adverse market conditions have resulted, and may in the
future result in, the deferral or cancellation of orders for the Company's
products. Delays or declines in orders for the Company's products have had a
material adverse effect on the Company's operating results and financial
condition over the last several quarters and fluctuations in demand for the
Company's products is expected to continue for at least the balance of 1998.
Under current or future market conditions, there can be no assurance that the
Company's business will generate adequate cash flow or that any growth can be
achieved. Because the Company must incur expenses and purchase inventory based
on anticipated and actual customer orders, any significant delay, rescheduling
or cancellation of such orders will have a material adverse effect on the
Company's operating results. For example, during the second and third quarters
of 1997, the Company increased its inventory substantially in anticipation of
satisfying expected demand from three of the Company's largest customers. A
significant portion of this anticipated demand has not materialized to date due
primarily to overcapacity of certain process and production-test equipment at
these customers.
As indicated above, the Company's business, operating results and financial
condition have been adversely affected by a downturn in the data storage
industry and reduced or delayed capital equipment
37
<PAGE> 46
expenditures by data storage companies. As it has done in the past, in June
1998, the Company implemented certain cost-cutting measures, including
reductions in headcount, to reduce its operating expenses to respond to this
situation. In this regard, in June 1998, the Company announced and implemented a
restructuring of its operations. This restructuring included a workforce
reduction of approximately 115 employees (16% of the Company's workforce),
relocation and consolidation of much of its Concord, California operation to the
Company's Fremont, California facility, and listing for sale the real estate
owned by the Company in San Diego, California on which the Company's
headquarters is located. The property is listed in excess of its book value.
Upon completion of such sale, the Company intends to secure a smaller leased
facility in San Diego in which to conduct its operations. While the Company
believes its cost-cutting measures and the sale of its San Diego real estate are
appropriate given the Company's current and anticipated levels of net sales,
there can be no assurance that such measures will be sufficient and that
additional cost-cutting measures will not be necessary, or that any current or
future cost-cutting measures will not have a material adverse effect on that
Company's ability to increase its net sales.
In connection with the negative impact on the Company's operations of the
significant data storage industry downturn, in the three months ended June 30,
1998, the Company recorded a $13.5 million charge to cost of sales to write-down
excess and obsolete inventory, as well as a $22.7 million valuation allowance
against its entire net deferred tax asset balance.
In August 1998, the Company issued and sold an aggregate of 6,360,000
shares of its Series C Preferred Stock in its Series C Financing for an
aggregate of $25.4 million in proceeds. Immediately following the consummation
of the Series C Financing, the Company used $7.1 million of the proceeds thereof
to repay in full all outstanding indebtedness under the New Credit Facility and
thereafter terminated such facility. As of the date of this Prospectus, the
Company had no revolving or other type of credit facility for working capital.
Subject to the receipt of regulatory approval under the Hart-Scott-Rodino
Antitrust Improvements Act of 1996 and any other necessary approvals, but in no
event no later than 120 days from the date of the Series C Financing, one of the
investors in the Series C Financing has agreed to purchase an additional $5.0
million of Series C Preferred Stock, representing 1,250,000 shares at a purchase
price of $4.00 per share. There can be no assurance that the Company will be
able to successfully close this subsequent round of equity financing. See
"Description of Capital Stock -- Series C Preferred Stock."
The Company had net sales of $52.6 million for the second quarter of 1997
compared to $31.4 million for the second quarter of 1998, $104.2 million for the
six months ended June 30, 1997 compared to $63.9 million for the six months
ended June 30, 1998 and $190.8 million in 1996 compared to $184.7 million for
1997. The Company had EBITDA (as described in Footnote 2 in "Summary Selected
Consolidated Financial Data") of $9.5 million for the second quarter of 1997
compared to $(23.1) million for the second quarter of 1998, $18.2 million for
the six months ended June 30, 1997 compared to $(22.0) million for the six
months ended June 30, 1998 and $21.5 million in 1996 compared to $24.1 million
in 1997. Cash used for operating activities decreased from $2.1 million for the
six months ended June 30, 1997 to $2.0 million for the six months ended June 30,
1998 due to the six months ended June 30, 1998 net loss, a decrease in
amortization and write-downs of intangible assets, a decrease in deferred income
tax assets, a smaller increase period to period in accounts receivable, a
decrease in 1998 inventories as compared to an increase in 1997 and increases in
1998 income taxes receivable and accrued expenses compared to decreases in 1997.
Cash used for operating activities decreased from $21.4 million in 1996 to $6.4
million in 1997 due to a smaller net loss, smaller increases year over year in
deferred income taxes, inventories and income taxes receivable and a decrease in
prepaid expenses and other assets, offset by decreases in depreciation,
amortization and write-downs of intangible assets, purchased in-process research
and development, an increase in accounts receivable and larger decreases year
over year in accounts payable and customer deposits, accrued expenses and other
liabilities. The net loss of $0.6 million for the second quarter of 1997
increased to a net loss of $42.2 million for the second quarter of 1998 and net
income of $0.2 million for the six months ended June 30, 1997 decreased to a net
loss of $46.6 million for the six months ended June 30, 1998. These decreases
were primarily due to decreased net sales, lower gross profit margins, the
restructuring charge, the settlement charge, increased interest expense and the
extraordinary loss, net of income taxes, partially offset by decreases in
research and development and selling, general and administrative expenses. A net
loss of $12.0 million in 1996 decreased to a net loss of $5.5 million in 1997
due primarily to decreases in amortization and write-downs of intangible assets
and
38
<PAGE> 47
purchased in-process research and development expenses, partially offset by
increases in research and development and interest expense.
The Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indicators of future performance. Quarterly results in the future may fluctuate
due to the factors discussed above or other factors. Further, the Company's
historical operating results for any past period are not necessarily indicative
of future performance for any particular period in light of the Company's
acquisition activity during those periods, among other factors.
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results as a result of this
issue. The Company is in the process of assessing the readiness of its internal
computer systems, its products and its vendors for handling the Year 2000 issue.
The Company has contacted critical third party suppliers in connection with its
assessment. The Company believes that all of its critical internal business
applications are Year 2000 compliant, and that all Company products shipped
after June 30, 1999 will be Year 2000 compliant. The Company does not believe
that the costs of any actions required as a result of such assessment will have
a material adverse effect on the Company's business, financial condition or
results of operations. There can be no assurance, however, that the Company will
successfully implement the correct solutions or that there will be no delay in
or increased costs associated with the Company's Year 2000 readiness programs.
The Company's inability to successfully implement such changes could have a
material adverse effect on the Company's business, financial condition or
results of operations. In addition, there can be no assurance that the Company's
critical product and service providers, and their critical providers and so on,
are or will become Year 2000 compliant on a timely basis both individually and
as a group, including information systems integrated among businesses, financial
institutions, government agencies, utilities, etc. The failure of such critical
product and service providers and integrated information systems to be or become
Year 2000 compliant could have a material adverse effect on the Company's
business, financial condition or results of operations. In addition, it is
possible that the Company's revenue may be adversely affected if current and
prospective customers direct their spending resources away from purchasing the
Company's products over the next two years in order to correct or replace
information systems which are not Year 2000 compliant.
39
<PAGE> 48
RESULTS OF OPERATIONS
The following tables set forth for the periods indicated certain
consolidated statement of operations data in dollars, as well as such data
expressed as a percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
YEAR ENDED DECEMBER 31, JUNE 30, JUNE 30,
------------------------------ ------------------ -------------------
1995 1996 1997 1997 1998 1997 1998
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales...................................... $116,894 $190,773 $184,660 $52,633 $ 31,400 $104,236 $ 63,902
Cost of sales.................................. 64,766 103,861 101,294 27,464 32,855 55,378 52,472
-------- -------- -------- ------- -------- -------- --------
Gross profit (loss).......................... 52,128 86,912 83,366 25,169 (1,455) 48,858 11,430
Operating expenses:
Research and development..................... 11,372 31,110 43,572 11,221 9,689 21,651 19,158
Selling, general and administrative.......... 15,695 24,631 22,968 6,155 5,224 12,318 9,686
Amortization and write-downs of
intangibles................................ 13,094 28,656 14,591 5,363 1,642 8,726 3,280
Settlement charge............................ -- -- -- -- 5,872 -- 5,872
Restructuring charge......................... -- -- -- -- 3,046 -- 3,046
Purchased in-process research and
development................................ -- 13,935 -- -- -- -- --
-------- -------- -------- ------- -------- -------- --------
Income (loss) from operations.................. 11,967 (11,420) 2,235 2,430 (26,928) 6,163 (29,612)
Interest expense............................... 5,625 8,448 11,573 2,827 3,770 5,393 7,201
Other (income) expense -- net.................. 149 (26) 474 400 25 476 120
-------- -------- -------- ------- -------- -------- --------
Income (loss) before income taxes and
extraordinary items.......................... 6,193 (19,842) (9,812) (797) (30,723) 294 (36,933)
Income tax (benefit) expense................... 1,524 (8,974) (4,268) (239) 11,434 88 8,701
-------- -------- -------- ------- -------- -------- --------
Income (loss) before extraordinary items....... 4,669 (10,868) (5,544) (558) 42,157 206 (45,634)
Extraordinary loss, net of income taxes........ -- 1,122 -- -- -- -- 941
-------- -------- -------- ------- -------- -------- --------
Net income (loss).............................. $ 4,669 $(11,990) $ (5,544) $ (558) $ 42,157 $ 206 $ 46,575
======== ======== ======== ======= ======== ======== ========
OTHER DATA:
Cash flows provided by (used for) operating
activities................................... $ 18,300 $(21,402) $ (6,392) $ 1,745 $ 2,650 $ (2,138) $ (2,020)
Cash flows used for investing activities....... (11,102) (45,316) (17,169) (8,361) (544) (11,348) (1,294)
Cash flows provided by (used for) financing
activities................................... (3,099) 64,439 23,883 9,595 (172) 13,109 3,159
EBITDA(1)...................................... 27,864 21,533 24,107 9,537 (23,094) 18,219 (21,982)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30, JUNE 30,
--------------------------- ----------------- -----------------
1995 1996 1997 1997 1998 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales............................................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................................ 55.4 54.4 54.9 52.2 104.6 53.1 82.1
------- ------- ------- ------- ------- ------- -------
Gross profit (loss)................................ 44.6 45.6 45.1 47.8 (4.6) 46.9 17.9
Operating expenses:
Research and development........................... 9.7 16.3 23.6 21.3 30.9 20.8 30.0
Selling, general and administrative................ 13.4 12.9 12.4 11.7 16.6 11.8 15.2
Amortization and write-downs of intangibles........ 11.2 15.0 7.9 10.2 5.2 8.4 5.1
Settlement charge.................................. -- -- -- -- 18.7 -- 9.2
Restructuring charge............................... -- -- -- -- 9.7 -- 4.8
Purchased in-process research and development...... -- 7.3 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations........................ 10.3 (5.9) 1.2 4.6 (85.7) 5.9 (46.4)
Interest expense..................................... 4.8 4.4 6.3 5.4 12.0 5.2 11.3
Other (income) expense -- net........................ 0.1 -- 0.3 0.8 0.1 0.5 0.2
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes and extraordinary
items.............................................. 5.4 (10.3) (5.4) (1.6) (97.8) 0.2 (57.9)
Income tax (benefit) expense......................... 1.3 (4.7) (2.3) (0.5) 36.4 0.1 13.6
------- ------- ------- ------- ------- ------- -------
Income (loss) before extraordinary items............. 4.1 (5.6) (3.1) (1.1) (134.2) 0.1 (71.5)
Extraordinary loss, net of income taxes.............. -- 0.6 -- -- -- -- 1.5
------- ------- ------- ------- ------- ------- -------
Net income (loss).................................... 4.1 (6.2) (3.1) (1.1) (134.2) 0.1 (70.0)
======= ======= ======= ======= ======= ======= =======
OTHER DATA:
Cash flows provided by (used for) operating
activities......................................... 15.7% (11.2)% (3.5)% 3.3% 8.4% (2.1)% (3.2)%
Cash flows used for investing activities............. (9.5) (23.8) (9.3) (15.9) (1.7) (10.9) (2.0)
Cash flows provided by (used for) financing
activities (2.7) (33.8) 12.9 18.2 (0.5) 12.6 4.9
EBITDA(1)............................................ 23.8 11.3 13.1 18.1 (73.6) 17.5 (34.4)
</TABLE>
- ---------------
(1) See "Selected Consolidated Financial Data" for definition of EBITDA.
40
<PAGE> 49
Net Sales
Net sales consist primarily of revenue from sales of the Company's process
and production-test equipment and, to a lesser extent, related upgrades, parts
and services. Net sales decreased 40.3% from $52.6 million for the second
quarter of 1997 to $31.4 million for the second quarter of 1998 and decreased
38.7% from $104.2 million for the six months ended June 30, 1997 to $63.9
million for the six months ended June 30, 1998. These decreases were primarily
due to decreased sales of the Company's products due to the severe downturn in
the data storage market caused by weakness in demand, intense competition and
pricing erosion, and oversupply.
Net sales decreased 3.2% from $190.8 million for 1996 to $184.7 million for
1997. This decrease was primarily due to decreased sales of the Company's
servowriter and automation systems, which was partially offset by increased
sales of media certification systems over these periods.
Net sales increased 63.2% from $116.9 million for 1995 to $190.8 million
for 1996. This increase was due primarily to increased sales of the Company's
media certification systems and automation systems for 1996 compared to 1995.
Approximately one-half of this increase in net sales for 1996 was attributable
to the effect of the Company's 1995 acquisitions of Helios, ART and Tahoe and
the inclusion of their net sales for the entire 1996 period and the Company's
acquisition of ABI and the inclusion of its net sales from the date of its
acquisition in January 1996.
Gross Profit (Loss)
Cost of sales includes material costs, direct labor and overhead costs
related to the production and delivery of the Company's products, including
warranty and other service costs. Gross profit (loss) decreased from $25.2
million for the second quarter of 1997 to ($1.5) million for the second quarter
of 1998 and from $48.9 million for the six months ended June 30, 1997 to $11.4
million for the six months ended June 30, 1998. Gross profit (loss) as a
percentage of net sales ("gross margin") decreased from 47.8% for the second
quarter of 1997 to (4.6%) for the second quarter of 1998 and from 46.9% for the
six months ended 1997 to 17.9% for the six months ended June 30, 1998. These
decreases were primarily due to (i) a $13.5 million inventory write-down
recorded in the second quarter of 1998 as a result of the severe downturn in the
data storage industry and its impact on the Company's operations, (ii)
underutilization of manufacturing capacity and (iii) higher costs resulting from
lower production volumes, partially offset by decreases in personnel costs as a
result of workforce reductions in August, 1997 and January, 1998.
Gross profit decreased from $86.9 million for 1996 to $83.4 million for
1997. Gross margin decreased from 45.6% for 1996 to 45.1% for 1997.
Gross profit increased from $52.1 million for 1995 to $86.9 million for
1996. Gross margin increased from 44.6% for 1995 to 45.6% for 1996. The
increased gross margin was primarily due to a more favorable product sales mix
and certain volume production efficiencies achieved for 1996 compared to 1995.
This increase was partially offset by the impact of volume pricing offered by
the Company.
In April 1998, the Company entered into an agreement (the "Settlement
Agreement") to reimburse a major customer for costs incurred in connection with
the customer's cancellation of a contract with a third party to purchase
upgrades to certain production test equipment originally purchased from the
Company. The Company took this action to protect its intellectual property and
preserve a valued customer relationship. The Company will make the reimbursement
provided for under the Settlement Agreement by providing a credit to the
customer for products to be purchased by the customer during 1998. Products to
be purchased under the Settlement Agreement are at favorable pricing which will
negatively impact the Company's gross profit margin during the second half of
1998.
The Company is unable to control with any degree of certainty its product
sales volume, linearity or mix from period to period and therefore the Company's
gross margin in future periods may fluctuate from those achieved in past
periods. In any period when the Company experiences an unfavorable product sales
volume, linearity or mix and/or provides significant volume pricing discounts,
the Company's gross margin may decrease.
41
<PAGE> 50
Research and Development Expense
Research and development expense consists primarily of salaries and related
costs of personnel and contract labor, project materials and other costs
associated with the Company's ongoing research and product development. Research
and development expense decreased from $11.2 million for the second quarter of
1997 to $9.7 million for the second quarter of 1998 and from $21.7 million for
the six months ended June 30, 1997 to $19.2 million for the six months ended
June 30, 1998. Research and development expense as a percentage of net sales
increased from 21.3% for the second quarter of 1997 to 30.9% for the second
quarter of 1998, and from 20.8% for the six months ended June 30, 1997 to 30.0%
for the six months ended June 30, 1998. The percentage increases were primarily
due to the decrease in net sales, partially offset by a decrease in personnel
costs as a result of workforce reductions in August 1997 and January 1998. The
Company anticipates that it will continue to devote a significant amount of
financial resources to research and development for the foreseeable future.
Research and development expense increased from $31.1 million for 1996 to
$43.6 million for 1997. Research and development expense as a percentage of net
sales increased from 16.3% for 1996 to 23.6% for 1997. This increase was
primarily the result of increased purchases and use of project materials and
increased personnel related to significant design improvements for existing
products, and research and development related to new and next generation
products.
Research and development expense increased from $11.4 million for 1995 to
$31.1 million for 1996. Research and development expense as a percentage of net
sales increased from 9.7% for 1995 to 16.3% for 1996. This increase was
attributable to the effect of the Company's 1995 acquisitions of Helios, ART and
Tahoe and the inclusion of their research and development expenses for the
entire 1996 period and the Company's acquisition of ABI and the inclusion of its
research and development expense from the date of its acquisition in January
1996.
A significant amount of the increased research and development expenses and
improvements in 1996 and 1997 include relatively significant development efforts
related to one of the Company's media certifier products. The Company
experienced more challenges than planned in developing this product due to its
unique technical designs and capabilities.
Selling, General and Administrative Expense
Selling, general and administrative expense primarily consists of salaries
and related personnel costs, including certain acquisition related earnout costs
incurred in connection with certain of the Company's acquisitions. See Note 9 of
Notes to Consolidated Financial Statements. Selling, general and administrative
expense decreased from $6.2 million for the second quarter of 1997 to $5.2
million for the second quarter of 1998. Selling, general and administrative
expense as a percentage of net sales increased from 11.7% for the second quarter
of 1997 to 16.6% for the second quarter of 1998. This percentage increase was
primarily due to the decrease in net sales along with an increase in the bad
debt provision in the second quarter of 1998, partially offset by a decrease in
personnel costs as a result of workforce reductions in August 1997 and January
1998.
Selling, general and administrative expense decreased from $12.3 million
for the six months ended June 30, 1997 to $9.7 million for the six months ended
June 30, 1998. Selling, general and administrative expense as a percentage of
net sales increased from 11.8% for the six months ended June 30, 1997 to 15.2%
for the six months ended June 30, 1998. This percentage increase was primarily
due to the decrease in net sales, partially offset by a decrease in personnel
costs as a result of workforce reductions in August 1997 and January 1998, as
well as decreases in consulting fees, professional fees, and the bad debt
provision.
Selling, general and administrative expense decreased from $24.6 million
for 1996 to $23.0 million for 1997. Selling, general and administrative expense
as a percentage of net sales decreased from 12.9% for 1996 to 12.4% for 1997.
The decrease in absolute dollars was principally due to the payment of $1.5
million in special, one-time bonuses to certain senior executive officers of the
Company in December of 1996 and lower
42
<PAGE> 51
earnout costs of $2.0 million incurred for 1997 compared to $3.8 million for
1996, which were offset by increased personnel costs.
Selling, general and administrative expense increased from $15.7 million
for 1995 to $24.6 million for 1996. Selling, general and administrative expense
as a percentage of net sales decreased from 13.4% for 1995 to 12.9% for 1996 due
to increased net sales over these periods. The increase in absolute dollars for
1996 was primarily attributable to (i) the effect of the Company's 1995
acquisitions of Helios, ART and Tahoe and the inclusion of their selling,
general and administrative expenses for the entire 1996 period and the Company's
acquisition of ABI and the inclusion of its selling, general and administrative
expense from the date of its acquisition in January 1996; (ii) the payment of
$1.5 million in special, one-time bonuses to certain senior executive officers
of the Company in December 1996 and (iii) higher earnout costs of $3.8 million
incurred for 1996 compared to $1.4 million for 1995.
Amortization and Write-Downs of Intangibles
Amortization and write-downs of intangibles primarily consist of the
amortization of intangible assets, including intangible assets acquired in
connection with the acquisitions of ProQuip, Cambrian, Helios, ART and ABI
(principally purchased technology and covenants not to compete) and write-downs
related to the impairment of such assets. See Notes 1 and 3 of Notes to
Consolidated Financial Statements.
Amortization and write-downs of intangible assets decreased from $5.4
million for the second quarter of 1997 to $1.6 million for the second quarter of
1998 and from $8.7 million for the six months ended June 30, 1997 to $3.3
million for the six months ended June 30, 1998. These decreases were due to
write-downs to fair value of $2.0 million in the second quarter of 1997 related
to impairment of certain intangible assets recorded in connection with one of
the Company's acquisitions, as well as to more intangible assets becoming fully
amortized prior to or during the three months and six months ended June 30,
1998.
Amortization and write-downs of intangibles decreased from $28.7 million
for 1996 to $14.6 million for 1997. This decrease was the result of write-downs
to fair value in 1996 related to impairment of certain intangible assets
recorded in connection with the Company's acquisitions of ART and Cambrian,
partially offset by write-downs to fair value in 1997, related to impairment of
certain intangible assets recorded in connection with the Company's acquisition
of ABI. Such impairments were generally the result of post-acquisition
technological changes that were developed independent of purchased technologies
causing a decline in the carrying values of such purchased technologies.
Amortization and write-downs of intangibles increased from $13.1 million
for 1995 to $28.7 million for 1996, reflecting the result of (i) a full year of
1996 amortization expense related to intangible assets recorded in connection
with the Company's June and July 1995 acquisitions of Helios, ART and a portion
of the business of Tahoe, (ii) 1996 amortization expense related to intangible
assets recorded in connection with the Company's January 1996 acquisition of ABI
and (iii) write-downs to fair value related to impairment of certain intangible
assets recorded in connection with the Company's acquisitions of ART and
Cambrian. Such impairment was generally the result of post-acquisition
technological changes that were developed independent of purchased technologies
causing a decline in the carrying values of such purchased technologies.
Settlement Charge
In connection with the Settlement Agreement, discussed under "Results of
Operations -- Gross Profit (Loss)," the Company recorded a $5.9 million charge
to earnings in the second quarter of 1998.
Restructuring Charge
The data storage industry in general has been experiencing significant
weakness in demand for data storage products, intense competition and pricing
erosion, and overcapacity. Such adverse market conditions have resulted in the
rescheduling or cancellation of orders by several of the Company's major
customers and has had a material adverse effect on the Company's business,
results of operations and financial condition over the past several quarters. In
light of these circumstances, and the Company's expectation that the current
adverse market conditions in the data storage industry will extend at least into
1999, in June 1998, the Company announced and implemented a restructuring of its
operations. This restructuring included a workforce reduction of approximately
115 employees (16% of the Company's workforce), relocation and
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consolidation of much of its Concord, California operation to the Company's
Fremont, California facility, and listing for sale the real estate owned by the
Company in San Diego, California on which the Company's headquarter is located.
The property is listed in excess of its book value. Upon completion of such
sale, the Company intends to secure a smaller leased facility in San Diego in
which to conduct its operations. While the Company believes its cost-cutting
measures and the sale of its San Diego real estate are appropriate given the
Company's current and anticipated levels of net sales, there can be no assurance
that such measures will be sufficient and that additional cost-cutting measures
will not be necessary, or that any current or future cost-cutting measures will
not have a material adverse effect on that Company's ability to increase its net
sales.
In the second quarter of 1998, the Company recorded a charge of $3.0
million related to this restructuring, including $0.9 million for employee
severance costs, $0.7 million for contractual lease buyouts and $1.4 million in
asset impairment costs related to assets obsoleted due to restructuring
activities. As of June 30, 1998, approximately $0.4 million in termination
benefits had been paid to affected employees, and $2.6 million was recorded as
an accrued liability related to the restructuring. Relocation of the Concord
operation is expected to be completed in the third quarter of 1998. The period
costs to be incurred in connection with these activities are not expected to be
significant.
Purchased In-Process Research and Development
In connection with certain of the Company's acquisitions in 1996, the
Company acquired research and development projects that had not reached
technical feasibility and had no probable alternative future uses. The amount
allocated to purchased in-process research and development for the acquisition
of ABI was based on an independent third party valuation and was expensed as of
the date of the acquisition. Purchased in-process research and development
expense related to the Company's acquisition of ABI was $11.0 million for 1996.
Purchased in-process research and development expense relating, in substantial
part, to the Company's acquisition of ABI, SBM and a portion of the business of
Kirell was $13.9 million for all of 1996. In 1996 and 1997, the Company incurred
costs of approximately $1.9 million and $1.5 million, respectively, in
connection with development of crash tolerant spindle technology which comprised
the purchased in-process research and development project acquired in the ABI
acquisition. In 1997, the Company incurred costs of approximately $1.6 million
and $1.0 million, respectively, in connection with development of spinstand and
laser texturizer technology which comprised the purchased in-process research
and development projects acquired in the SBM and Kirell acquisitions. The
in-process research and development projects acquired in connection with the ABI
and Kirell acquisitions were completed successfully in 1997 with the Company's
introduction of products for sale. The in-process research and development
project acquired in connection with the SBM acquisition remains in development
The Company estimates that in 1998, it will incur costs of approximately $1.0
million in connection with development of SBM in-process technology prior to the
expected introduction and initiation of sales of the related product in 1998.
Interest Expense
Interest expense increased from $2.8 million for the second quarter of 1997
to $3.8 million for the second quarter of 1998, from $5.4 million for the six
months ended June 30, 1997 to $7.2 million for the six months ended June 30,
1998, from $5.6 million for 1995 to $8.4 million for 1996 and to $11.6 million
for 1997. These increases primarily reflect the increased debt levels
outstanding and higher interest rates during the respective periods.
Income Taxes
Income tax expense (benefit) was ($0.2) million for the second quarter of
1997 and $11.4 million for the second quarter of 1998. Income tax expense was
$0.1 million for the six months ended June 30, 1997 and $8.7 million for the six
months ended June 30, 1998. Income tax expense (benefit) was $1.5 million for
1995, $(9.0) million for 1996 and $(4.3) million for 1997.
For the 1997 periods, the effective income tax rates differed from the
applicable statutory rates due primarily to utilization of income tax credits
available for research and development expenses. For the 1998 periods, the
effective income tax rates differed from the applicable statutory rates due
primarily to the
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$22.7 million charge taken in the second quarter of 1998 for a valuation
allowance against the Company's entire deferred tax asset balance. Such charge
was taken due to factors which give rise to uncertainty as to whether the net
deferred tax asset is realizable, including the lack of history of consistent
earnings and the significant loss in the second quarter of 1998.
Extraordinary Items
Extraordinary loss, net of income taxes, was $0.9 million for the six
months ended June 30, 1998, and consisted of the write-off of unamortized debt
issuance costs in connection with the January 30, 1998 repayment of debt
outstanding under the Company's then-existing credit agreement.
Extraordinary loss, net of income taxes, was $1.1 million for 1996, and
consisted of the write-off of unamortized debt issuance costs in connection with
the refinancing of the Company's then-existing credit agreements in January and
December 1996, respectively.
Cash Flow from Operating Activities
Cash flow from operating activities is computed based on net income (loss)
plus depreciation, amortization and write-downs of intangibles assets, certain
other non-cash charges, purchased in-process research and development costs and
changes in certain assets and liabilities.
Cash used for operating activities was $2.1 million for the six months
ended June 30, 1997 and $2.0 million for the six months ended June 30, 1998.
Period to period fluctuations in operations impacting these amounts were the net
loss for the six months ended June 30, 1998, a decrease in amortization and
write-downs of intangible assets, a decrease in deferred income tax assets, a
smaller increase period to period in accounts receivable, a decrease in 1998
inventories compared to an increase in 1997 and increases in 1998 income taxes
receivable and accrued expenses compared to decreases in 1997.
Cash used for operating activities decreased from $21.4 million in 1996 to
$6.4 million in 1997 due to a smaller net loss, smaller increases year over year
in deferred income taxes, inventories and income taxes receivable and a decrease
in prepaid expenses and other assets, offset by decreases in depreciation,
amortization and write-downs of intangible assets, purchased in-process research
and development, an increase in accounts receivable and larger decreases year
over year in accounts payable and customer deposits, accrued expenses and other
liabilities.
Cash provided by (used for) operating activities decreased from $18.3
million provided in 1995 to $21.4 million used in 1996 due to the 1996 net loss,
decreases in accounts payable and customer deposits, accrued expenses and other
liabilities, an increase in income tax receivable, as well as larger increases
year over year in deferred income taxes, prepaid expenses and other assets,
offset by increases in depreciation, amortization and write-downs of intangible
assets and purchased in-process research and development and a decrease in
accounts receivable.
EBITDA
EBITDA represents income (loss) from operations before depreciation and
amortization and write downs of intangible assets. EBITDA is presented because
management believes EBITDA is a commonly accepted financial indicator used by
certain investors and analysts to analyze and compare companies on the basis of
operating performance. EBITDA is not intended to represent cash flows for the
period, nor has it been presented as an alternative to operating income (loss)
as an indicator of operating performance and should not be considered in
isolation or as a substitute for measures of performance prepared in accordance
with generally accepted accounting principles.
The Company had EBITDA of $9.5 million for the second quarter of 1997
compared to $(23.1) million for the second quarter of 1998 and $18.2 million for
the six months ended June 30, 1997 compared to $(22.0) million for the six
months ended June 30, 1998. These decreases were primarily due to decreased net
sales, lower gross margins, the settlement charge and the restructuring charge,
partially offset by decreases in research and development and selling, general
and administrative expenses.
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EBITDA increased from $21.5 million for 1996 to $24.1 million for 1997.
This increase resulted primarily from decreases in selling, general and
administrative expenses and purchased in-process research and development
partially offset by decreases in gross profit and increases in research and
development.
EBITDA decreased from $27.9 million for 1995 to $21.5 million for 1996.
This decrease was due to increases in research and development expenses,
selling, general and administrative expense and purchased in-process research
and development expenses, partially offset by increased gross profit.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its capital requirements through sales of Common
and Preferred Stock, and borrowings under subordinated, term and revolving
credit facilities. The Company's principal sources of liquidity have been cash
flow from operations and borrowing availability under its credit facilities. The
Company's principal requirements for cash are debt service requirements, capital
expenditures and working capital.
In August, 1998, the Company repaid in full the principal amount
outstanding under the New Credit Facility and all accrued interest thereon of
approximately $7.1 million and terminated the New Credit Facility. As of the
date of this Prospectus, the Company does not have a revolving credit facility
in place, although it is currently in negotiations with a number of lenders to
establish such a facility. In connection with the repayment of the indebtedness
under the New Credit Facility, the Company will record a $0.4 million write-off
of the related unamortized debt issuance costs as an extraordinary loss in the
consolidated financial statements.
The Company's second quarter operating results have resulted in a technical
default under certain financial covenants contained in the New Credit Facility.
The Company is not in payment default under the New Credit Facility. As a result
of the technical default, the $8.4 million outstanding under the Company's New
Credit Facility has been reclassified to current liabilities on the accompanying
consolidated balance sheet.
As of June 30, 1998, the Company's outstanding indebtedness included $105.8
million under the Notes, $8.4 million under the New Credit Facility, $8.0
million under its Convertible Subordinated Notes and $2.8 million of capital
lease obligations. At June 30, 1998, the Company had $6.6 million of accrued
interest on indebtedness outstanding on the Convertible Subordinated Notes. The
Convertible Subordinated Notes (including all accrued interest thereon) are
convertible into 5,142,720 shares of Common Stock at the option of the holders
thereof and will automatically convert upon the consummation of an initial
public offering of the Company's Common Stock. See "Description of New Notes"
and "Description of Indebtedness -- Convertible Subordinated Notes."
The Notes and the related Indenture do not contain ongoing quarterly or
annual financial covenant requirements but do contain customary covenants
restricting the Company's ability to, among other things, incur additional
indebtedness, create liens or other encumbrances, pay dividends or make other
restricted payments, make investments, loans and guarantees or sell or otherwise
dispose of a substantial portion of assets to, or merge or consolidate with,
another entity.
In August 1998, the Company issued and sold an aggregate of 6,360,000
shares of its Series C Preferred Stock for $4.00 per share to a group of
investors, which included a number of its current stockholders and two members
of the Company's Board of Directors. The Company received aggregate proceeds of
approximately $25.4 million in connection with the Series C Financing.
Immediately following the consummation of the Series C Financing, the Company
used $7.1 million of the net proceeds therefrom to repay the indebtedness and
accrued interest outstanding under the New Credit Facility. There is a
difference of $1 per share between the redemption price of $5 per share and the
purchase price of $4 per share. This difference will be accreted to retained
earnings over the redemption period.
Subject to the receipt of regulatory approval under the Hart-Scott-Rodino
Antitrust Improvements Act of 1996 and any other necessary approvals, but in no
event no later than 120 days from the date of the Series C
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Financing, one of the investors in the Series C Financing has agreed to purchase
an additional $5.0 million of Series C Preferred Stock representing 1,250,000
shares at a purchase price of $4.00 per share. There can be no assurance that
the Company will be able to successfully close this subsequent round of equity
financing. See "Description of Capital Stock -- Series C Preferred Stock."
The Company has listed for sale the real estate owned in San Diego,
California, on which its headquarters is located. The property is listed in
excess of its book value.
Cash used for investing activities was $11.3 million for the six months
ended June 30, 1997 and $1.3 million for the six months ended June 30, 1998, and
consisted of cash used in connection with purchases of property and equipment.
Cash provided by financing activities was $13.1 million for the six months ended
June 30, 1997 and $3.2 million for the six months ended June 30, 1998, and
consisted primarily of the net proceeds from the Notes and New Credit Facility,
net of repayment of borrowings under the Company's previous term notes and
revolving loans. Cash used for investing activities was $45.3 million in 1996
and consisted of cash used in connection with the acquisitions of ABI, SBM and a
portion of the business of Kirell as well as investments in property and
equipment. Cash used for investing activities was $17.2 million in 1997 and
consisted of purchases of property and equipment. Cash provided by financing
activities was $64.4 million in 1996 and consisted of the net proceeds from the
Company's January 1996 and December 1996 refinancings of its then-existing
credit facilities, as well as the sale-lease back of the Company's information
and telecommunications systems. Cash provided by financing activities was $23.9
million in 1997 and consisted of the net proceeds from the Company's
then-existing revolving credit facility.
The Company plans approximately $0.5 million in capital expenditures during
the next six months. The Company has no material outstanding commitments with
respect to such planned expenditures.
In connection with the Settlement Agreement discussed in "Results of
Operations -- Gross Profit (Loss)," the Company has secured a $3.7 million
standby letter of credit from a bank in favor of a customer. At June 30, 1998,
the Company had $2.2 million outstanding on the standby letter of credit. The
standby letter of credit balance will be reduced ratably as products are
completed and become available for shipment to the customer.
The Company's foreign subsidiaries, who represent the Non-Guarantor
Subsidiaries, have not guaranteed the Company's obligations under the Notes and
will not guarantee the Company's obligations under the New Notes. As of and for
the year ended December 31, 1997, and the six months ended June 30, 1998, the
operating results and assets of the Non-Guarantor Subsidiaries, individually and
in the aggregate, were not material to the results of operations and assets of
the Company on a consolidated basis, net of intercompany eliminations. See Note
13 of Notes to Consolidated Financial Statements. The total assets, total
liabilities, net sales and net income (loss) of the Non-Guarantor Subsidiaries
as a percentage of the Company's consolidated total assets, total liabilities,
net sales and net income (loss) as of and for the year ended December 31, 1997
were 3.1%, 0.4%, 1.6% and 10.1%, respectively, and as of and for the six months
ended June 30, 1998, were 5.2%, 0.7%, 6.1% and (0.2)%, respectively. The
financial statements of the Company's foreign subsidiaries are measured using
the local currency as the functional currency. The Company has not historically
experienced material gains or losses resulting from currency fluctuations.
Based on currently available information, the Company believes that its
available cash and cash generated from operations will be adequate to fund its
operations for the foreseeable future, and for no less than the next 12 months.
While operating activities may provide cash in certain periods, the Company may
require additional sources of financing. The Company may also from time to time
consider additional acquisitions of complementary businesses, products or
technologies, which may require additional financing. Additional sources of
funding could include additional debt and/or equity financings. The Company
continues to have limited capital resources and significant future obligations
and expects that it will require additional capital to support future growth, if
any. The existence of certain restrictive covenants in the indenture for the
Notes may inhibit the Company's ability to raise additional financing. There can
be no assurance the Company will be able to obtain alternative sources of
financing on favorable terms, if at all, at such time or times as the Company
may require such capital. See "Risk Factors -- Substantial Leverage; Ability to
Service Indebtedness."
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BUSINESS
The Company is the world's leading supplier of technologically advanced
process and production-test equipment for the data storage industry. The
Company's systems are used primarily by manufacturers of disk drives and disk
drive components (disks and read/write heads) at critical stages of their
production processes. The Company's systems, substantially all of which
incorporate significant amounts of proprietary technology and are software
intensive, include (i) media certifiers, burnishers, glide height testers,
optical scanners and laser texturizers which are used in the production of
thin-film disks (media), (ii) servowriters and electronic testers used in the
production of disk drives and high capacity disk cartridges, (iii) flying height
testers and quasi-static magnetoresistive ("MR") head testers used in the
production of read/write heads and (iv) integrated automation systems for the
disk drive, disk and read/write head test and manufacturing processes. The
Company's production-test systems (e.g., media certifiers, glide testers, flying
height testers and quasi-static MR head testers) are designed to provide in-line
testing, measurement and analysis throughout the manufacturing process, enabling
manufacturers to detect defects, sort products by performance grade and make
real-time process improvement decisions that can significantly impact product
yields, time-to-market, profitability and return on investment. The Company's
process systems (e.g., servowriters, disk burnishers and disk laser texturizers)
perform precise manufacturing process functions. Phase Metrics' customers
include substantially all of the world's leading data storage companies.
INDUSTRY BACKGROUND
The increasing demand for process and production-test equipment for the
data storage industry is driven by three primary factors: (i) the overall demand
for disk drives and disk drive components; (ii) rapid advances in data storage
technology and (iii) yield management challenges and margin pressure facing data
storage manufacturers.
Demand for Disk Drives and Disk Drive Components
Demand for PCs and workstations and the growing use of network servers is
stimulating strong demand for disk drives and disk drive components. According
to International Data Corporation ("IDC"), combined world-wide shipments of PCs,
workstations and servers are expected to reach approximately 92 million units in
1998, growing to approximately 120 million units by 2000. Moreover, unit growth
rates for disk drives and disk drive components are expected to exceed unit
growth rates for PCs, workstations and servers, due to a variety of factors,
including the rapidly increasing demand for high performance replacement disk
drives and high-capacity, removable-disk storage devices.
Increasing demand for greater data storage capacity is further stimulating
unit sales growth in disk drives and disk drive components. Factors contributing
to this increasing demand for greater storage capacity include:
- The development of more storage intensive operating systems and larger
software "suites"
- The continuing migration to networked architectures with greater storage
requirements
- Demand for more storage intensive software applications such as data
warehousing, digital image storing, enhanced graphics, multimedia and
video on demand
- Rapidly increasing Internet usage, including the ready availability of
data-intensive files which can be downloaded to a user's disk drive
Stimulated by these underlying market drivers, unit shipments of disk
drives and disk drive components have been growing rapidly over the past ten
years. According to IDC, world-wide shipments of hard disk drives are expected
to reach approximately 142 million units in 1998, growing to approximately 188
million units by 2000. In addition, according to DISK/TREND, Inc., world-wide
shipments of high-capacity, removable-disk drives are expected to reach
approximately 18 million units in 1998, growing to approximately 31 million
units by 2000. Strong world-wide demand for disk drives has resulted in a
growing demand for disks and read/write heads. According to TrendFOCUS, Inc.
("TrendFOCUS"), the number of disks and
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read/write heads produced is expected to reach approximately 405 million and 776
million units, respectively, in 1998, growing to approximately 523 million and
991 million units, respectively, in 2000. The increasing demand for disk drives,
disks and read/write heads requires manufacturers to expand their production
capacity. Based on industry data, the Company believes that major disk drive and
disk drive component manufacturers spent approximately $2.2 billion in 1997 on
expanding their facilities and purchasing capital equipment to increase
production capacity.
Disk Drive Technology
The principal components of a hard disk drive are disks (media), read/write
heads, spindle, actuator mechanics and electronics. Today, each disk drive
typically contains from one to ten disks that are attached to a spindle/motor
assembly. The read/write head is a small magnetic transducer that, when the disk
is spinning, "flies" just above the disk surface. Data are written on data
storing tracks on the disk when the disk drive's electronics send current pulses
to the head. These pulses cause the magnetic layer within the disk and under the
recording head to become magnetized, resulting in the storage of data on the
disk. During the read-back process, as the read/write head scans over the disk,
magnetic flux from the disk is picked up by the head and induces an electrical
current which is converted into voltage. The voltage is then transformed into
digital data by the disk drive's electronics. Recently introduced,
high-capacity, removable-disk storage devices operate under substantially the
same principals with the added benefit of disk removability and portability. The
following diagram illustrates the principal components of a disk drive:
Disk Drive Diagram
Technological Change
The performance characteristics of disk drives are continually advancing
which in turn are requiring concurrent advancements in process and
production-test equipment technology. The critical performance characteristics
of a disk drive are: (i) capacity -- the amount of data stored, measured in
megabytes or gigabytes; (ii) transfer rate -- the speed with which data can be
transferred between the disk drive and computer, measured in megabits per second
and (iii) access speed -- the time it takes to locate data on the disk, measured
in milliseconds. Demand for greater storage capacity, faster transfer rates and
faster access speeds, all within the same or smaller form factors, has resulted
in rapid and constant advances in disk drive technology. In general, disk drive
capacity can be improved by increasing the areal density of data on a disk.
According to the International Disk Drive Equipment and Materials Association
("IDEMA"), areal density has been growing at an average compound rate of
approximately 60% per year since 1991. Areal density is the amount of data
(bits) that can be stored in a square inch on the disk and is determined by
multiplying track density (tracks per inch) by average bit density on each inch
of track (bits per inch). Therefore, the capacity of a disk drive can be
increased by increasing the number of tracks on the disk and/or increasing the
number
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of bits of data in an inch of track. Lower head flying heights over the disk
surface area are necessary to achieve the small bit sizes required by increasing
areal density. The lower the head flies above the disk surface, the more
accurately the head can read the magnetic signal, allowing a smaller magnetized
region on the track to store each bit of data. Accordingly, the flying height of
read/write heads on very high areal density capacity disk drives has been
reduced to less than one microinch in some cases. In addition to increasing the
capacity of a disk by increasing areal density, the transfer rate and access
time performance characteristics of a disk drive can be improved by rotating the
disk at a faster rate. In disk drives today, the spindle/motor assembly rotates
the disk at 4,500 to 10,000 revolutions per minute, compared to 3,600 to 7,200
revolutions per minute less than three years ago.
Although increases in areal density and improved disk drive performance
characteristics have resulted in significant advancements for disk drives,
demand for even greater performance enhancements is continually stimulating
development and introduction of entirely new disk drive technologies. This is
evidenced by the recent introduction of MR heads. MR heads are significantly
more sensitive than inductive heads in reading data from disks with higher areal
densities. As a result, disk drive, disk and read/write head manufacturers are
rapidly transitioning to MR technologies. According to TrendFOCUS, MR heads
represented only 12% of the overall head market in 1995, but are expected to
grow to approximately 55% of the overall head market in 1997 and over 85% by
1999.
While technological advancements are enabling manufacturers to produce
significantly higher capacity disk drives with greater transfer rates and faster
access times, they are also presenting significant technological challenges and
increasing the complexity of manufacturing processes. For example, the ability
of disk manufacturers to produce disks capable of higher areal densities is
directly related to manufacturers' ability to control critical disk attributes
such as (i) increasing the magnetic strength or "coercivity" of a disk by
providing higher quality magnetic domains and thereby reducing the potential for
"noise"; (ii) limiting surface imperfections to reduce the amount of unusable
space on a disk and (iii) controlling smoothness and flatness to allow for lower
head flying heights without head/disk contact. In addition, even though smaller
read/write heads facilitate increasing areal densities, they are more easily
damaged and are more difficult to manufacture. MR heads in particular are
difficult to manufacture because of their small size and the presence of the
delicate MR element which is highly sensitive to electro-static discharge.
Faster access speeds and greater transfer rates require both advanced channel
technology to improve data communications and increasing disk rotation speeds.
As a result of these complexities, disk drive and disk drive component
manufacturers are installing increasingly sophisticated manufacturing processes.
The growing complexity of disk drive manufacturing is in turn increasing test
and production times per product and creating pressure on manufacturing costs.
These trends have resulted in greater demand for sophisticated process and
production-test equipment.
Yield Management
As data storage technology advances and manufacturing processes become more
complex, maximizing yield is increasingly critical to the data storage industry.
The ability to rapidly achieve and maintain high product yield is one of the
most important determinants of profitability in this highly competitive
industry. However, as disk drives and disk drive components are designed within
more precise tolerances, product yield becomes more sensitive to increasingly
smaller irregularities in the manufacturing process. Manufacturers must
therefore rely on yield management and process monitoring equipment to improve
their product yields and remain competitive. Process and production-test
equipment enables manufacturers to increase yield more quickly when a product is
new and improve a product's time to volume. In addition, early detection of
defects in the manufacturing process with the use of production-test equipment
allows manufacturers to improve yield through the availability of test data and
on-line analysis capabilities that enable real-time process improvements.
Moreover, production processes in the data storage industry involve numerous
sequential costly process steps. Production-test equipment enables manufacturers
to identify non-conforming products early in the manufacturing process, thus
avoiding additional costly manufacturing steps and/or the addition of expensive
componentry which is later scrapped. These pressures have also resulted in
increased demand for process and production-test equipment.
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Market for Process and Production-Test Equipment
Major manufacturers of disk drives and disk drive components require a
variety of high precision process and production-test equipment. These
technologically advanced products combine significant amounts of software with
high precision electro-mechanical componentry to provide real-time, high
throughput processing and production management capabilities. Process equipment
is used by manufacturers to perform manufacturing processes within increasingly
precise tolerances enabling the production of higher performance data storage
devices. Such process equipment includes servowriters for writing servo tracks
on nearly completed disk drives, burnishers for removing bumps from the surface
of a disk and laser texturizers for providing required bumps on a portion of a
disk's surface to prevent "stiction," namely the head sticking to the surface of
a disk. Production-test equipment is used by manufacturers to perform precise
inline testing, measurement and analysis throughout the manufacturing process
enabling manufacturers to detect defects and make real-time production
improvement decisions that can significantly impact customers' product yield and
profitability. Production-test equipment is also used in research and
development laboratories. Production-test equipment includes media certifiers to
verify the magnetic integrity of a disk and an optical media scanner to verify
the physical integrity of the disk surface, flying height testers to determine
the height a head flies above a disk and quasi-static MR head testers to measure
MR head characteristics.
The process and production-test equipment market for the data storage
industry is served by both merchant suppliers as well as the "captive" or
internal departments of data storage companies that develop and manufacture
process and production-test equipment for their own use. Historically, disk
drive and disk drive component manufacturers developed much of their own process
and production-test equipment internally and purchased a lesser amount of such
equipment from merchant suppliers. As the production process becomes more
complex and production capacity becomes more expensive to build and maintain,
however, data storage manufacturers are focusing more on their own core
competencies -- product design and production -- to remain competitive. This in
turn has caused increasing reliance on merchant suppliers of process and
production-test equipment. The enabling tools developed by such merchant
suppliers allow disk drive and disk drive component manufacturers to incorporate
more advanced production techniques into their manufacturing processes and more
accurately measure the conformity of component parts of the disk drive to their
specifications. The growing demand for digital data storage capacity and the
increasing complexity of data storage technology and related manufacturing
challenges have caused demand for process and production-test equipment to grow
rapidly in recent years. According to Peripheral Research Corporation, merchant
suppliers are expected to sell approximately $445 million of process and
production-test equipment to the data storage industry in 1998, growing to
approximately $522 million in 1999.
The process and production-test equipment industry was characterized by a
relatively fragmented group of specialized independent equipment suppliers.
These suppliers often had limited technological competence and narrow product
offerings. In addition, most of these specialized suppliers lacked the critical
mass to support extensive research and development programs and world-wide
customer service and support. As data storage manufacturers focus more on their
own core competencies in an increasingly global marketplace they are
increasingly seeking process and production-test capital equipment suppliers
that can play a strategic role in their ongoing product development and
manufacturing processes and at the same time provide world-wide service and
support.
COMPETITIVE STRENGTHS
The Company believes that it possesses key competitive strengths that have
enabled it to become the leading supplier of technologically advanced process
and production-test equipment for the data storage industry. These competitive
strengths include:
Broad Product Line and Extensive Technology Base. The Company believes that
it is a technological leader in designing, manufacturing and servicing process
and production-test systems that perform critical applications throughout the
disk drive and disk drive component production processes. These systems contain
a significant amount of proprietary software, sophisticated electronics, and
high precision mechanics. As evidence of its technological leadership, the
Company believes it was the first to market with systems
51
<PAGE> 60
incorporating numerous important new technologies, including (i) in 1993, the
first testing system capable of accurately measuring the flying height of a
read/write head below one microinch; (ii) in 1995, the first disk (media)
certifier with integrated optical defect scanning and also the first certifier
with digital glide certification; (iii) in 1996, the first family of MR head
testers to address each stage of the manufacturing process for the rapidly
growing MR head market and (iv) in 1997, the first disk drive servowriter to
incorporate non-contact, laser positioning technology. The Company currently
holds 29 patents in the United States, with an additional 71 patent applications
pending in the United States. The Company also holds a number of foreign patents
and has filed a number of foreign patent applications.
Largest World-Wide Installed Base of Systems. Based in part on published
industry data, the Company believes it has the largest world-wide installed base
of process and production-test systems serving the data storage industry. The
Company is able to leverage this installed base by selling these customers
additional systems, as well as upgrades to existing systems to address rapidly
changing industry requirements. The Company believes that such upgrades are
becoming an increasingly important source of revenue for the Company.
Focused Research and Development. In response to rapidly changing
technical requirements in the data storage industry and to maintain its
technological leadership, the Company is continually engaged in efforts to
improve its systems and introduce innovative products and technologies. With
approximately 170 engineers focused on research and development, the Company
believes that it maintains the largest engineering group in the world focusing
on technological solutions for data storage manufacturers. Moreover, in 1996,
the Company formed an advanced research department focused exclusively on
developing and procuring critical technologies for next-generation systems. In
1997, the Company invested approximately $43.6 million in its research and
development efforts and expects to continue to devote significant resources
toward maintaining its technological leadership.
Extensive Global Infrastructure. In addition to its extensive sales and
customer service and support infrastructure in the United States, since the
beginning of 1996 the Company has established sales and customer service and
support offices in Japan, South Korea, Singapore, Thailand and Taiwan. The
Company believes that substantial growth opportunities exist for sales of its
systems to domestic and foreign-based customers for use in their manufacturing
facilities located in Southeast Asia. Therefore, the Company currently has 40
dedicated customer service and support engineers and technicians in Southeast
Asia, which the Company believes is the largest foreign-based group of customer
service and support personnel of any domestic supplier of process and
production-test equipment to the data storage industry.
Experienced Management Team With Significant Ownership. The Company's
Chairman and Chief Executive Officer, John F. Schaefer joined the Company in
November 1994. Working with Arthur J. Cormier, the founder and previous
President of the Company, the Company assembled a group of experienced officers,
middle managers and senior technologists. Mr. Cormier is currently serving as a
director of and consultant to the Company. The Company's directors and officers
and their respective affiliates beneficially owned approximately 90.1% of the
Company's capital stock as of August 3, 1998.
Demonstrated Ability to Integrate Acquisitions. In order to expand its
operations and capitalize on the growing demand for process and production-test
equipment for the data storage industry, since November 1994, the Company's
management team has acquired seven specialized suppliers of process and
production-test systems or technologies. The Company believes that it has
successfully integrated each of these acquisitions into its operations.
GROWTH STRATEGY
The Company believes that it is well-positioned to grow future revenue and
cash flow. The key elements of the Company's growth strategy are as follows:
Maintain Leadership in Core Technologies. The Company intends to remain a
technological leader in its markets by continuing to work with customers,
academic institutions and independent third parties to identify emerging data
storage technology trends early in the development process and contribute to the
development
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<PAGE> 61
of standards related to process and production-test for the data storage
industry. Because the Company's systems are integral to its customers'
manufacturing processes, the Company believes that it is well-positioned to
utilize its research and development resources to partner with its customers in
the development of next-generation products.
Leverage Installed Base of Systems. The Company intends to leverage its
installed base of systems by selling new systems to existing customers and by
continuing to develop and aggressively market system upgrade solutions in
response to rapidly changing industry requirements. In addition, because data
storage manufacturers are required to focus increasingly on their own core
competencies, the Company believes that there is a significant opportunity to
increase its sales by supplying certain process and production-test equipment to
data storage manufacturers that currently develop such systems internally.
Leverage and Expand Global Infrastructure. Due to its extensive global
service and support infrastructure, the Company believes it is well-positioned
to increase productivity and profitability. In particular, the Company believes
that it will be able to leverage the significant investment it has made in
establishing a sales and customer service and support infrastructure in
Southeast Asia to capitalize on the increasing activity in the data storage
industry in that region. As data storage manufacturers require equipment
suppliers to support their increasingly global operations, the Company intends
to continue to expand its world-wide service and support network.
Pursue Complementary Acquisitions. As with many other industries, data
storage manufacturers are increasingly attempting to rationalize their vendor
bases. As a result, there has been an increasing trend toward consolidation of
data storage equipment suppliers. The Company intends to continue to capitalize
on this trend by completing complementary acquisitions of additional product
lines, technologies and related businesses. The Company believes that its market
leadership position and demonstrated ability to successfully integrate strategic
acquisitions will continue to attract additional strategic opportunities.
PRODUCTS
The Company's process and production-test products are an integral part of
the process of manufacturing disk drives, disks and read/write heads. The
Company's products address the increasingly complex disk drive and disk drive
component production processes and the constant pressure to improve
manufacturing yields. The Company's products combine substantial proprietary
technology, including extensive software, custom electronic componentry,
micro-positioning systems, high-performance air bearing spindles, optical
detectors, and various other internally designed probes required for detection
and measurement, together with commercially available components such as high
performance lasers, DC motors and optical encoders. The proprietary software
incorporated into each of the Company's products enable real-time process and
production-test capabilities without off-line processing. The Company believes
that its proprietary software offers a competitive advantage due to its powerful
signal processing and analysis capabilities, flexible user-interface, and
adaptability to specific customer applications.
The Company's products are categorized into four principal areas: (i) disk
(media) process and production-test equipment; (ii) read/write head
production-test equipment; (iii) disk drive process and production-test
equipment and (iv) production automation equipment. The Company's products are
predominantly used in an in-line production mode by the Company's customers. As
such, the customers integrate the Company's products into their processes, using
multiple variations of test protocols available on the systems. The Company's
software facilitates this adaptation process and, accordingly, substantially all
of the Company's products are semi-customized to satisfy each customer's unique
product specifications and test requirements. The Company anticipates more
extensive customization of its products in the future due to the increasing
complexity of the technology and production processes for data storage devices.
Therefore, the Company continually endeavors to enhance its products with new
features and functionality. The Company has demonstrated the ability to provide
required customizations and product upgrades in response to changes in data
storage technology. With its substantial product development and research
capability and commitment to maintaining close relationships with its customers,
the Company believes it is well positioned to continue to provide cost-effective
solutions to the rapidly changing data storage industry.
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<PAGE> 62
The following tables include the Company's principal current products and
products expected to be introduced during the first nine months of 1998.
DISK (MEDIA) PROCESS AND PRODUCTION-TEST EQUIPMENT
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
PRODUCT INTRODUCTION DATE APPLICATIONS
---------------------------- ---------------------- -------------------------------------------------
<S> <C> <C> <C> <C>
MEDIA CERTIFIERS
- ---------------------------------------------------------------------------------------------------------------
MG250 February 1995 Burnishing (removes bumps and particles from the
MC950 June 1997 surface
MG250APS January 1996 of a finished disk)
MG250EPS January 1998
MC950EPS Third Quarter of 1998 Optical Scanning ("APS" and "EPS" Options
MSA950 September 1997 optically scans the surface of a finished disk
for defects that could
damage the glide head)
Glide Certification (verifies that the surface of
a finished
disk does not have protrusions in excess of
certain specified
limits)
Media Certification (verifies that data can be
written and
read from a finished disk within certain
specifications)
OPTICAL INSPECTION SYSTEMS
- ---------------------------------------------------------------------------------------------------------------
PS5000 September 1997 Optical Scanning (scans for defects on disk
PS5100 June 1998 substrates and/or finished disks)
LASER TEXTURIZER
- ---------------------------------------------------------------------------------------------------------------
LT1000 April 1997 Laser Texturizing (creates precise surface bumps
on disks for head landing zones)
MEDIA BALANCE TESTER
- ---------------------------------------------------------------------------------------------------------------
MB1000 November 1996 Media Balancing (verifies that disk substrates or
finished disks are in balance within required
specifications)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 63
HEAD PRODUCTION-TEST EQUIPMENT
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
PRODUCT INTRODUCTION DATE APPLICATIONS
---------------------------- ---------------------- -------------------------------------------------
<S> <C> <C> <C> <C>
MR QUASI-STATIC HEAD
TESTERS
- ---------------------------------------------------------------------------------------------------------------
MRH(HGA-level Tester) September 1995 MR Quasi-static Testing (conducts critical tests
MRW(Wafer-level Tester) September 1996 at the wafer, bar, slider or HGA level of MR head
MRS(Slider-level Tester) June 1997 production, including resistance, amplitude,
MRB(Bar-level Tester) September 1997 asymmetry and stability tests)
HGA RESONANCE TESTER
- ---------------------------------------------------------------------------------------------------------------
HRT June 1994 Mechanical Resonance Testing (tests HGA for
mechanical resonance characteristics within
required specifications)
FLYING HEIGHT TESTERS
- ---------------------------------------------------------------------------------------------------------------
DFHT II September 1995 Flying Height Testing (measures head to disk
DFHT III January 1998 spacing ("flying height") under various dynamic
FH3000 June 1996 test conditions)
FH4000 September 1996
SPINSTAND
- ---------------------------------------------------------------------------------------------------------------
Metric 133 Third Quarter of 1998 Mechanics platform for head and disk testing
(used for multiple testing tasks, includes a
precision air bearing spindle, X and Y stages and
a micropositioner)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
DISK DRIVE PROCESS AND PRODUCTION-TEST EQUIPMENT
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
PRODUCT INTRODUCTION DATE APPLICATIONS
---------------------------- ---------------------- -------------------------------------------------
<S> <C> <C> <C> <C>
SERVOWRITERS
- ---------------------------------------------------------------------------------------------------------------
HS5100 March 1997 Servowriting Drives (establishes reference tracks
HS6100 September 1997 on hard disk drives to provide track/head
HS7000 September 1997 position information essential to operation)
HS7500 Third Quarter of 1998
Servowriting Media (establishes reference tracks
on high capacity removable storage devices
(cartridges), both floppy and hard disk, to
provide track/head position information essential
to operation)
DISK DRIVE SIMULATOR
- ---------------------------------------------------------------------------------------------------------------
Proteus July 1991 Electronic Disk Drive Simulator (tests disk drive
electronics)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
PRODUCTION AUTOMATION EQUIPMENT
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
PRODUCT INTRODUCTION DATE APPLICATIONS
---------------------------- ---------------------- -------------------------------------------------
<S> <C> <C> <C> <C>
AUTOMATION
- ---------------------------------------------------------------------------------------------------------------
Media Certifier Workcell August 1995 Production Media Handling (provides automated
Optical Inspection Workcell October 1997 handling of disks with certifiers, and sorts
disks into grades according to test results)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 64
Disk (Media) Process and Production-Test Equipment
The Company's disk-related test and certification products are used in-line
to test, certify and sort disks. The Company believes that its disk-related
products were used to test over half of the approximately 405 million disks
produced worldwide in 1998. The Company's customers also use these products to
provide quality control and to develop new products. The Company's two media
certifier product series and its optical inspection product perform one or more
of the following functions: (i) burnishing -- removing bumps and particles from
the surface of a finished disk; (ii) optical scanning -- optically scanning the
surface of a finished disk for defects that could damage the glide head; (iii)
glide certification -- verifying that the surface of a finished disk does not
have protrusions in excess of certain specified limits; and (iv) media
certification -- verifying that data can be written and read from a finished
disk within certain specifications. The Company's disk-related automation
products provide automated handling of disks with certifiers, and sort disks
into grades according to test results. The Company's laser texturizer creates
precise surface bumps on disks for head landing zones, i.e., the area of the
disk where the head rests when the disk drive is not in operation. This process
reduces the potential for stiction (head sticking to the disk). The Company's
media balance tester verifies that disk substrates or finished disks are in
balance within required specifications.
Designed to provide maximum throughput in high-volume, tightly controlled
disk manufacturing environments, the Company's disk-related products are
selected by Phase Metrics' customers to improve product yield, quality, and
production throughput. Based in part on published industry data, the Company
believes it has the largest installed base worldwide of disk production-test
equipment with approximately 4,000 stations.
MG250 and MG250EPS Media Certifiers. The MG250 product series certifies
disks to ensure that their magnetic integrity and physical properties meet the
stringent requirements of disk drive manufacturers. The single spindle,
spiral-type MG250 certifier incorporates the following functions: burnishing,
optical scanning (optional), glide testing, and certifying finished disks. The
MG250 offers an innovative MR-capable spiral certification approach, which
provides high process throughput. This MR-capable product is designed to perform
over a wide range of disk test conditions while operating at test frequencies up
to 50 MHz with low-glide technology to accommodate high areal density media. The
MG250 features a user-friendly interface, a fully programmable analog channel,
and automatic internal calibration algorithm. The MG250EPS incorporates
pre-glide optical scanning of the disk, which reduces operating costs by
increasing the useful life of the glide head used in the test process.
MC950 and MC950EPS Media Certifiers. The recently introduced MC950 product
series also certifies disks to ensure that their magnetic integrity and physical
properties meet the stringent requirements of disk drive manufacturers. The
MC950 incorporates two spindles and provides the functionality provided by the
MG250. However, the MC950 uses the classic step-and-repeat technology for media
certification favored by certain major customers, as opposed to the spiral
certification approach employed by the MG250. The MC950EPS will incorporate
pre-glide optical scanning of the disk, which will reduce operating costs by
increasing the useful life of the glide head used in the test process. The "EPS"
optical scanning option is expected to be available in the third quarter of
1998.
PS5100 Disk Inspection System. The PS5100 is an optical scanning system
that scans for defects on disk substrates and/or finished disks. The PS5100
stand-alone system is used by hard disk drive, substrate and media manufacturers
for failure analysis in both engineering and production environments. An
automated workcell configuration provides in-line inspection to allow substrate
or finished disk manufacturers to control and improve key process steps
producing up to 500 disks per hour and resulting in higher production yields,
output and product quality. The PS5100 has industry leading submicron-level
defect detection capability and features a spiral scanning technique for high
throughput.
LT1000 Laser Texturizer. The LT1000 is used to create precise surface bumps
on disks for head landing zones. The LT1000 also provides texture verification
to ensure that all disks are properly textured before moving to the next process
step.
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<PAGE> 65
MB1000 Media Balance Tester. The MB1000 verifies that disk substrates or
finished disks are in balance within required specifications. Increasing
rotation speeds used in high-end disk drives combined with more disks per drive
has tended to cause an increased sensitivity to media balance. The MB1000, which
incorporates an advanced air bearing spindle and a design that facilitates fast
disk loading and alignment, provides rapid pass/fail testing for adjustable
balance criteria. Testing may be performed at both substrate as well as finished
disk levels.
Head Production-Test Equipment
The Company's head testing products are used by leading disk drive head
manufacturers in the development, design and testing of their products to
improve manufacturing yields, product performance and reliability. The Company
estimates, based on industry sources, approximately 776 million HGAs (head
gimbal assemblies) will be shipped in 1998, all of which required multiple tests
for critical performance characteristics. The majority of head tests are
completed "in-line," or during the head manufacturing process, and are completed
on 100% of the heads produced. The Company believes that it is well positioned
to benefit from this high growth market by providing the following head
production-test equipment: (i) flying height testers -- which measure head
flying heights under various dynamic test conditions; (ii) MR quasi-static
testers -- which conduct critical tests at the wafer, bar, slider or HGA level
of MR head production, including resistance, amplitude, asymmetry and stability
tests; (iii) spinstands for use with dynamic electrical head tester
electronics -- which verify the actual working performance capabilities of HGAs
while being tested on a real disk and (iv) HGA resonance testers -- which test
HGAs for mechanical resonance characteristics within required specifications.
The maximum possible hard disk drive storage capacity is a function of the
signal to noise ratio provided by the read/write head and media combination.
Since head output increases exponentially as a function of the spacing between
the disk and head, head to disk spacing, i.e., flying height, is the most
critical head/disk interface parameter related to higher drive capacity. Lower
flying heads provide greater areal density by permitting higher tracks per inch
(tpi) on the disk and greater bit per inch (bpi) on each track. In 1993, the
Company established market leadership in measuring flying height by providing
the first flying height tester to accurately measure below one microinch. The
Company's flying height testers have maintained their market leadership position
and become the industry standard by providing the best gauge repeatability and
accuracy available.
MR Quasi-static Head Testers. The Company's MR quasi-static head testers
include MRW (wafer-level tester), MRB (bar-level tester), MRS (slider-level
tester), and MRH (HGA-level tester). They are designed to provide fast, accurate
and repeatable testing of MR heads at multiple locations in the manufacturing
process from the wafer to HGA levels. With production yields often below 50% in
the MR head manufacturing process, the ability to test MR elements early in the
manufacturing process to identify nonconforming products can result in
significant cost savings. In product development, MR quasi-static head testers
also assist in the design improvement process.
HRT Resonance Tester. The HRT is a tester used by read/write head and
suspension manufacturers and disk drive manufacturers to check and analyze the
mechanical resonance characteristics of HGAs within required specifications. The
HRT is designed for testing resonant frequencies of the head suspension to
facilitate improved access times, and is capable of measuring mechanical
resonance in a wide range of suspension types and heads. The HRT's removable HGA
mounting blocks simplify setup and facilitate high throughput operation.
DFHT III and FH3000 Flying Height Testers. The DFHT III flying height
tester is the recognized disk drive industry standard for flying height testing
with what the Company believes is the largest installed base in the industry.
Flying height requirements continue to be reduced which requires constant
improvements in flying height measurement technology. Featuring the Company's
patented dynamic interferometry technology, the DFHT III provides accurate,
repeatable and correlatable flying height test measurements of both MR and
inductive heads below one microinch in both engineering and production
applications. The FH3000 Flying Height Tester utilizes the same detector
technology, electronics and software as the DFHT III with a high
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<PAGE> 66
speed loading capability, thus increasing throughput. The DFHT III product is
used by read/write head manufacturers in HGA production and product development;
hard disk drive manufacturers for research, product development and incoming
quality assurance; media manufacturers to check glide head performance and
special head manufacturers for product development and in-line testing in
manufacturing.
FH4000 Flying Height Tester. The FH4000 flying height tester utilizes the
same technology as the DFHT III with the addition of altitude chamber
technology, which addresses the difficult task of measuring flying height at
different atmospheric pressures to simulate altitude changes. Since altitude can
have a significant effect on flying height, this critical product provides the
Company's customers with a method of analyzing altitude effects on flying
height.
Metric 133 Spinstand. The Metric 133 Spinstand will offer the
micropositioning control and mechanics required for advanced MR and GMR
read/write head development and production testing. Micropositioning is required
for critical off-track testing as TPI (tracks per inch) continues to increase in
new disk drive designs. The Metric 133 will use an advanced micropositioner
embedded into the linear-motor X-Y stages to accurately locate the head gap to
the track position with a resolution of 0.04 microinches and a repeatability of
better than one microinch. This product is expected to be available in the third
quarter of 1998.
Disk Drive Process and Production-Test Equipment
The Company's disk drive processing equipment consists of servowriters and
an electronic disk drive simulator. All hard disk drives and high capacity
removable cartridges require servowriting, a process whereby precision
servowriting equipment establishes reference tracks on disk drives to provide
track/head position information essential to operation. Until servo tracks are
written, hard disks drives and high capacity removable cartridges are not
functional. Therefore, the servowriter is a critical in-line process tool for
completing drives and cartridges. Historically, larger disk drive manufacturers
produced their own servowriters due to the critical nature of this equipment and
the lack of adequate outside sources for servowriting systems.
As disk drive capacities continue to increase, the track density on disk
drives also continues to increase. The Company's research and development
efforts are designed to keep pace with this trend. Since servowriters represent
a sizable capital investment for disk drive manufacturers, there is significant
value placed on flexibility (ability to support multiple drive programs), and
upgradeability (ability to change the core positioning technology to keep pace
with increasing TPI requirements). The Company's family of hard disk drive
servowriters provide industry leading capabilities in both of these areas.
Servowriting is also a critical function in the manufacture of high-capacity
floppy disks and high-capacity removable storage cartridges. The Company is the
leading supplier of servowriters to manufacturers in this rapidly growing
segment of the data storage market.
HS5100 Servowriter. The HS5100 servowriter is designed for conventional
hard disk drives. The HS5100 incorporates optical encoder based positioning to
15,000 tracks per inch for higher accuracy and increased reliability. The HS5100
is fully compatible with MR technology, utilizes a small footprint, minimizing
cleanroom capital costs, and has been designed for high throughput and yield.
HS6100 Servowriter. The HS6100 servowriter is designed for high capacity,
removable-disk storage devices and single disk servowriting. The HS6100 combines
the features of the HS5100 with an advanced air bearing spindle with rotating
speeds up to 13,000 r.p.m. for high precision spinning of the disk during the
servowriting operation. The HS6100 also employs customized fixturing for
cartridges and disks to accommodate the various emerging standards in this
rapidly growing segment of the data storage market.
HS7000 Servowriter. The HS7000 servowriter is designed for conventional
hard disk drives and is suited for very high track density servowriting up to
20,000 tracks per inch and servo operating frequencies up to 100 MHz. The HS7000
utilizes advanced laser diode detection and positioning technology with optical
encoders. Incorporating recently introduced, non-contact, dual servo positioning
systems to eliminate contact with the drive arm, this product has been designed
for high throughput and product yield and, with the March 1998 introduction of
the HS7500, the option to utilize the system outside the cleanroom environment.
The HS7000 and HS7500 are fully compatible with MR head technology.
Proteus. The Proteus electronically simulates the mechanical head and disk
assembly (HDA) drive and provides completely programmable simulation of head
signals. This facilitates disk drive electronics testing
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<PAGE> 67
and development. This engineering development tool is used to test the servo
electronics of a disk drive to facilitate rapid development of servo patterns
thereby decreasing the time to market for new disk drive designs.
Production Automation Equipment
The Company's automation workcells are sold with the disk production-test
equipment. Disk manufacturers demand automated handling of disks to meet
requirements for throughput, quality control, cleanliness, and process feedback.
The Company's workcells provide the disk manufacturers with the ability to
automatically sort product (disks) by different performance criteria for their
different customers. High throughput, flexibility, and statistical process
control features combine to provide low overall costs and high quality control.
Media Certifier Workcell. These automated disk handling systems offer
seamless workcell integration of the Company's MG250 and MC950 disk test
products. With advanced disk handling tools and process management and control
software, the Company's media test workcells have the highest manufacturing
throughput available. Although workcell output is a function of the product
being tested and the test set-up file being used, typical MC950 and MG250
workcells can test and sort between 3,500 and 5,000 disks per day.
Optical Inspection Workcell. The Optical Inspection Workcell incorporates
most of the certifier workcell technology, but involves different mechanical
interfaces (end effectors) and software to facilitate optical testing versus
certification. Throughput levels of up to 500 disks per hour are achievable.
CUSTOMERS, MARKETING AND SALES
The Company sells its products to virtually every major disk drive, disk
and read/write head manufacturer in the world. The following table sets forth
certain of the Company's customers during the past two years:
<TABLE>
<CAPTION>
DISK DRIVE SYSTEMS DISK SYSTEMS READ/WRITE HEAD SYSTEMS AUTOMATION
- ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C>
Avatar Systems HMT Technology Applied Magnetics HMT Technology
Corporation Corporation Corporation Corporation
Fuji Photo Film HOYA Corporation Fujitsu Limited HOYA Corporation
Company, Ltd. Komag, Incorporated International Business Seagate Technology,
Iomega Corporation MaxMedia Division, Machines Corporation Inc.
JTS Corporation Hyundai Electronics Mitsumi Electric Co., StorMedia,
Samsung Electronics America Ltd. Incorporated
Company, Ltd. Seagate Technology, Quantum Corporation Trace Storage
Inc. Read-Rite Corporation Technology
StorMedia, SAE Magnetics (H.K.) Corporation
Incorporated Ltd. Western Digital
Trace Storage Corporation
Technology
Corporation
Western Digital
Corporation
</TABLE>
There are a relatively small number of data storage manufacturers
throughout the world and the Company derives a significant portion of its net
sales from a relatively small number of customers. The Company expects that its
dependence on relatively few key customers will continue in the future.
Approximately 52.2%, 45.0%, 51.0% and 54.1% of the Company's net sales in 1995,
1996, 1997 and the six months ended June 30, 1998, respectively, were derived
from sales to the Company's three largest customers in each of those periods.
Even though the Company's customer mix will likely change from period to period
in the future, Seagate Technology, Inc. ("Seagate"), Komag Incorporated
("Komag"), HMT Technology ("HMT"), Iomega Corporation ("Iomega") and Trace
Storage Technology USA Corporation ("Trace") have historically accounted for a
significant portion of the Company's net sales. For 1995, 1996, 1997 and the six
months ended June 30, 1998, Seagate accounted for 25.0%, 19.0%, 18.0% and 11.0%,
respectively, of net sales; Komag accounted for 10.7%, 14.5%, 15.9% and 0.6%,
respectively, of net sales; HMT accounted for 4.4%, 5.2%, 17.1% and 26.3%,
respectively, of net sales; Iomega accounted for 16.5%, 7.9%, 1.9% and 1.4%,
respectively, of net sales and Trace accounted for 6.8%, 11.5%, 4.4% and 1.8%,
respectively, of net sales. In addition, for the six months ended June 30, 1998,
Western Digital accounted for 16.8% of net sales. If net sales to these or any
other significant customer of the Company were to decrease in any material
amount in the future, the Company's business, results of operations and
financial condition would be materially adversely affected.
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<PAGE> 68
A substantial majority of the Company's sales are repeat sales to
long-standing customers in the data storage industry. Usually, multiple units
are purchased with automation as a customer either completes a major fabrication
facility or upgrades an existing installed base of the Company's products. In
most instances, the decision to purchase the Company's products is based on the
customers' comparisons of multiple performance measures, including
specifications, throughput, product yield, compatibility to the existing
installed base and overall cost of the Company's product in the process. The
purchases often involve large purchase orders, against which the customers
authorize shipment releases. The substantial majority of the Company's machines
sell for between $100,000 and $200,000 per unit, with an average per unit price
of approximately $130,000. Products are often purchased in multiple units with
automation, known as work cells.
The Company has no long-term contracts with its customers. The Company's
customers often submit master purchase orders against which they "release"
specific product orders from time to time, often with little lead time. Any
cancellation, reduction, rescheduling or significant delay of orders from
significant customers could have a material adverse effect on the Company's
business, results of operations and financial condition. Each of the Company's
customers has some unique product specification requirements which requires the
Company to provide semi-customized products. As a result, per unit sales prices
for the Company's products will generally vary by customer and sales order. If
development or service costs with respect to the customization work are
underestimated, there could be an adverse impact on the Company's gross profits.
In addition, the Company's products often require post-installation, on-site
customization and integration in order to tailor products to customer
specifications. Revenue and corresponding expenses for such post-installation
services is recognized in the period such services are provided. Inaccurate
estimation of such on-site service costs could have a material adverse impact on
the Company's business, results of operations and financial condition.
The Company sells its products primarily through its direct sales force.
The sales process for the Company's systems focuses on responding to each
customer's specific needs. As a result, the selling process for the Company's
products is often a multi-level, long-term process involving individuals from
marketing, engineering, operations, customer service and senior management. The
Company's other sales and marketing activities include participating in trade
shows, publishing articles in trade journals, presenting at technical meetings
and conferences, participating in industry trade groups and consortiums and
distributing promotional literature.
In 1995, 1996, 1997 and the six months ended June 30, 1998, the Company's
export sales to unaffiliated customers constituted approximately 23.0%, 57.0%,
49.0% and 41.9%, respectively, of net sales for such periods. The export sales
were primarily to domestic data storage companies with major production
facilities located in Singapore, Malaysia and other parts of Asia. Even though
the Company exports a majority of its products, the purchasing decision for such
sales is usually made by purchasing personnel located in the United States. The
Company's direct sales staff focuses on these types of sales as well as all of
the Company's sales in the United States. In Japan, the Company sells its
products both through its wholly-owned subsidiary and Nissho Iwai, a leading
distributor in Japan. In Southeast Asia and South Korea, the Company sells its
products directly through its wholly-owned subsidiaries. The Company's own
direct sales force and a third party distributer cover markets in Hong Kong and
China. The Company expects that export sales will continue to represent a
significant portion of its net sales in the foreseeable future. See "Risk
Factors -- International Operations."
CUSTOMER SERVICE AND SUPPORT
As of June 30, 1998, the Company had a world-wide customer service and
support staff of 84 persons, consisting of applications engineers, service
engineers and technicians. The Company believes that providing highly
responsive, uninterrupted, world-wide customer service and support is essential
to providing value-added solutions for its customers. The Company's commitment
to world-wide customer support and service is evidenced by its sales and
customer support offices in South Korea, Japan, Singapore, Malaysia, Thailand
and Taiwan. To supplement its direct service and support efforts, the Company's
distributors and sales representatives in Hong Kong and Japan offer a range of
other customer service and support using personnel trained by Phase Metrics.
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The Company has structured its direct service and support operations into
distinct service units based on its product lines. Each of these units offers
product installation, on-going process support, emergency system repair,
internal training programs, external customer training, documentation and
formation of customer user groups. In general, the Company provides a 90-day to
one-year warranty on all equipment it sells, depending on the sales contract and
geographic location of the sale.
BACKLOG
The Company's sales have historically been made pursuant to purchase orders
rather than long-term contracts. These purchase orders are generally subject to
cancellation, modification, quantity reductions or rescheduling on short notice
and with little or no penalty. Certain of the Company's customers have recently
begun to submit master purchase orders to the Company against which they
"release" specific product orders from time to time, often with little lead time
between the order date and the expected shipment date. The Company's backlog of
purchase orders requesting delivery in the following quarter was approximately
$18.9 million as of June 30, 1998. The Company does not believe its backlog as
of any particular date is indicative of sales or operating results for any
future period.
COMPETITION
The disk drive process and production-test equipment industry is highly
competitive. The Company believes that the most important competitive factors in
its industry are technological innovation; equipment reliability, throughput and
uptime; customer service and support and cost of ownership. The Company believes
it competes favorably with respect to each of these factors. In each of the
Company's product lines, the Company faces substantial competition from
established merchant suppliers of process and production-test equipment, some of
which have greater financial, engineering, manufacturing, research and
development and marketing resources than the Company. For example, the Company
faces competition from General Disk for servowriters; Hitachi DECO and Sony
Techtronics for disk certifiers; Swan Instruments for MR head testers; Zygo
Corporation for flying height testers; Technastar for automation technology and
Guzik Technical for spin-stands. Historically, there has also been competition
from entrepreneurs with focused market knowledge and new technology. The Company
also experiences competition world-wide from Hitachi DECO, a large, full-line
manufacturer of process and production-test equipment. Hitachi DECO, a
subsidiary of Hitachi, Limited, has substantially greater financial, technical,
marketing, manufacturing, research and development and other resources than the
Company. The Company also experiences competition from other full-line and
partial-line manufacturers of process and production-test equipment. There can
be no assurance that the Company's competitors will not develop enhancements to,
or future generations of, competitive products that will offer price or
performance features superior to the Company's products or that new competitors
will not enter the Company's markets.
Many of the Company's competitors are investing heavily in the development
of new and enhanced products aimed at applications currently addressed by the
Company's products. The Company expects its competitors to continue to improve
the design and performance of their products and to introduce new products with
competitive price/performance characteristics. Competitive pressures often
necessitate price reductions which can adversely affect operating results. The
Company will be required to make a continued high level of investment in product
development and research, sales and marketing and ongoing customer service and
support to remain competitive. There can be no assurance that the Company will
have sufficient resources to continue to make such investments or that the
Company will be able to achieve the technological advances necessary to maintain
its competitive position.
The Company believes that its future success will be dependent, in part,
upon its ability to compete successfully in the Japanese, South Korean and
Southeast Asian markets. The Company's largest competitor, Hitachi DECO, is
headquartered in Japan which gives it a competitive advantage over the Company
in that market to the extent buying decisions are influenced by its local
presence. In addition, the Company's ability to compete in Japan, South Korea
and Southeast Asia in the future is dependent upon continuing free trade between
these countries and the United States, the continuing ability of the Company to
develop in a timely manner products that meet the technical requirements of its
foreign customers and the continuing ability of
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the Company to develop and maintain satisfactory relationships with leading
companies in the data storage industry in these areas. Moreover, the Company's
sales in these areas will be affected by the overall economies of Japan, South
Korea and Southeast Asia.
In addition to the competition the Company faces from other merchant
manufacturers of process and production-test equipment, most of the Company's
customers develop at least a portion of their own process and production-test
equipment needs internally, especially servowriters and read/write head test
equipment. Accordingly, the Company must compete against the internal
development efforts of this captive market. Manufacturers within this captive
market are often reluctant to change their production lines to incorporate
merchant supplied process and production-test technology. Moreover, it is
possible that with the rapid changes in data storage technology, the development
of new process and production-test equipment will be so closely linked to the
Company's customers' product development cycles that certain customers and
potential customers will find it more efficient to fulfill their own process and
production-testing equipment needs internally, thereby placing the Company at a
competitive disadvantage.
RESEARCH AND DEVELOPMENT
The market for process and production-test equipment is characterized by
rapid technological changes and product innovation. The Company continually
endeavors to understand how changing data storage technology will impact its
customers' requirements for process and production-test equipment in the future.
The Company encourages its customers to work closely with its product
development and research personnel during the development cycle of new and
enhanced data storage products. In 1996, the Company formed an advanced research
department which is responsible for working with the Company's customers,
academic institutions and independent third parties to (i) identify emerging
data storage technology trends early in the development process, (ii) identify
and develop new core technologies for the Company's systems and (iii) contribute
to the development of process and production-test standards for the data storage
industry. The Company believes that continued and timely development of new
products and enhancements to its existing products are necessary to maintain its
competitive position. As of June 30, 1998 the Company employed a total of
approximately 170 degreed engineers focused on product development and research.
Research and development expenses were approximately $11.4 million, $31.1
million, $43.6 million and $19.2 million for 1995, 1996 and 1997, and the six
months ended June 30, 1998, respectively. The Company anticipates that it will
continue to devote a significant amount of financial resources to product
development and research for the foreseeable future.
MANUFACTURING
The Company conducts its manufacturing activities at its facilities in San
Diego, Fremont, Concord and Hayward, California. The Company's principal
manufacturing activities consist of quality assurance and assembling of
components designed and developed by the Company as well as other components and
subassemblies which are acquired from third party suppliers and then integrated
into the Company's finished products. Most of these components, including
substantially all of the electronic circuit boards and optical componentry
incorporated into the Company's systems, are made to the Company's exacting
specifications.
The Company's manufacturing strategy is to produce high precision,
technologically advanced, reliable products and replacement parts. To achieve
these goals, the Company must continually adjust to changes in technology. As a
result, the Company focuses on the engineering/manufacturing interface in its
product development efforts. The Company also continuously seeks to improve its
materials procurement and control processes to increase throughput and reduce
inventory levels. The Company enhanced its fully integrated computer system for
all materials procurement and control functions. The Company also continues to
consolidate its supplier base and increase its utilization of third-party
outsourcing arrangements for certain subassembly and performance test functions.
Such outsourcing arrangements provide for just-in-time delivery when possible.
In order to meet customer delivery requirements, the Company is working to
reduce the time required to manufacture its products. However, due to periodic
increases in the Company's backlog, technological advances that must be
incorporated into the Company's products, customization issues and other
reasons, the
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average time between order and shipment of the Company's products may increase
in the future. The Company's ability to quickly increase its manufacturing
capacity could be limited given (i) the complexity of the manufacturing process,
especially if the Company is partially customizing its products to its
customers' specifications; (ii) the lengthy lead times necessary to obtain
critical components and (iii) the need for highly skilled personnel.
In certain instances the Company relies on a single source or a limited
group of suppliers for certain components and subassemblies used in its
products. Although the Company seeks to reduce its dependence on sole and
limited source suppliers, the partial or complete loss of these sources could
have a material adverse effect on the Company's results of operations and damage
customer relationships due to the complexity of the products they supply and the
significant amount of time required to qualify new suppliers. In addition, long
lead times are often required to obtain critical components and subassemblies
used in certain of the Company's products from these and other suppliers which
could impede the Company's ability to quickly respond to changes in demand and
product specifications.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company believes that due to the rapid pace of innovation within the
data storage industry in general, the Company's protection of patent and other
intellectual property rights is less important than factors such as its
technological expertise, product innovation, the Company's installed base, the
marketing ability of its sales force and the ability to provide world-wide
support and service to its customers. The Company does attempt, however, to
protect its intellectual property rights through patents, copyrights, trade
secrets and other measures.
The Company currently holds 29 United States patents and has applied for 71
additional patents in the United States. The Company also holds a number of
foreign patents and has filed a number of foreign patent applications. No
assurance can be given that the claims allowed on any patents held by the
Company will be sufficiently broad to protect the Company's technology.
Moreover, there can be no assurance that any patent owned by the Company will
not be invalidated, deemed unenforceable, circumvented or challenged, that the
rights granted thereunder will provide competitive advantages to the Company or
that any of the Company's pending or future patent applications will be issued
with claims of the scope sought by the Company, if at all. Furthermore, there
can be no assurance that others will not develop similar products, duplicate the
Company's products or design around the patents owned by the Company. In
addition, there can be no assurance that foreign intellectual property laws or
the Company's agreements will protect the Company's intellectual property rights
in any foreign country. Any failure to protect the Company's intellectual
property rights could have a material adverse effect upon the Company's
business, financial condition and results of operations.
Although the Company does not believe any of its products or proprietary
rights infringe the rights of third parties, there can be no assurance that
infringement claims will not be asserted against the Company in the future. Any
such claims, with or without merit, could divert the attention of management,
result in costly litigation, cause product shipment delays or require the
Company to enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the
Company, or at all. If infringement were established, the Company could be
required to pay damages or be enjoined from making, using or selling the
infringing product. Likewise, there can be no assurance that a third party's
product, if infringing on the Company's proprietary rights, may be prevented
from doing so without litigation. Any of the foregoing could have a material
adverse effect upon the Company's business, financial condition and results of
operations.
The Company requires each of its employees to enter into a proprietary
rights and non-disclosure agreement in which the employee agrees to maintain the
confidentiality of all proprietary information of the Company and, subject to
certain exceptions, to assign to the Company all rights in any proprietary
information or technology made or contributed by the employee during his or her
employment. In addition, the Company regularly enters into non-disclosure
agreements with third parties, such as consultants, potential joint venture
partners and customers. In spite of these precautions, it may be possible for
third parties to copy, develop or
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otherwise obtain and use the Company's proprietary technology without
authorization or to develop similar technology independently.
EMPLOYEES
As of June 30, 1998, the Company had 601 full-time employees, including 169
in product development and research, 235 in manufacturing, 33 in sales and
marketing, 84 in service and support, and 80 in finance, information systems and
administration activities. Many of the Company's employees have specialized
skills of significant value to the Company, and the Company's future success
will depend in large part upon its ability to attract and retain highly skilled
technical, managerial, financial and marketing personnel, who are in great
demand. The Company believes that attracting and motivating skilled technical
personnel is vital to its success and there can be no assurance that the Company
will be successful in retaining or recruiting these and other key personnel. No
employee is represented by a union or covered by a collective bargaining
agreement, and the Company has not had a work stoppage or strike. The Company
considers its employee relations to be good.
PROPERTIES
The Company owns three buildings with a total of approximately 123,000
square feet on approximately nine acres of land in San Diego, California; leases
three buildings with a total of 175,000 square feet under leases expiring in
November and December 2000 and August 2003 in Fremont, California; leases two
buildings with a total of 38,000 square feet under leases expiring in September
1998 and May 1999 in Concord, California; and leases a 12,000 square foot
building under a month-to-month lease in Hayward, California. The Company
conducts manufacturing and research and development at all of these sites and
also has service and support capabilities at each of these locations, except
Hayward. The Company's domestic sales and marketing functions are headquartered
in its Fremont facility. For its Pacific Rim operations, the Company also leases
1,900 square feet in Tokyo, Japan; 2,700 square feet in AnSen City, South Korea;
3,300 square feet in Singapore; 800 square feet in Thailand and 1,000 square
feet in Taiwan. These facilities are primarily used as technical, applications,
and sales and service support centers for the Company's Pacific Rim customers.
The Company believes that its facilities are adequate for its current level of
business and does not anticipate any material difficulty in renewing any of its
leases as they expire or securing replacement facilities, in each case on
commercially reasonable terms. As part of a plan to restructure its operations,
the Company is relocating and consolidating much of its Concord, California
operations to the Company's Fremont, California facility and has listed for sale
the real estate that it owns in San Diego, California, on which its headquarters
is located. The real estate is listed in excess of its book value. Upon
completion of such sale, the Company intends to secure a smaller leased facility
in San Diego, in which to conduct its operations.
LEGAL PROCEEDINGS
The Company is not currently involved in any material legal proceedings.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Set forth below is certain information regarding the directors and
executive officers of the Company as of August 3, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
John F. Schaefer........................... 55 Chairman of the Board, President and Chief
Executive Officer
David L. Bultman........................... 50 Executive Vice President, Disk Drive and
Media Products
Wayne G. Erickson.......................... 41 Vice President, Sales and Marketing, Head
Products
Dennis J. Geurts........................... 48 Vice President, Fremont Operations
Dr. Michael R. Madden...................... 56 Vice President, San Diego Operations
Ronald Y. Miyahara......................... 49 Vice President and General Manager, Asia
Operations
Albertus H. Munnikhuis..................... 46 Vice President, Sales and Marketing, Disk
Drive and Media Products
Dr. Jun Zhu................................ 31 Vice President, Head Product Development
Michael G. Rogowski........................ 44 Vice President, Customer Engineering, Disk
Drive and Media Products
Brad LaLuzerne............................. 37 Vice President, Finance, Chief Financial
Officer and Assistant Secretary
Arthur J. Cormier(1)....................... 41 Director
Thompson Dean(1)(2)........................ 39 Director
Robert Finzi(1)(2)......................... 44 Director
Dr. Gilbert F. Amelio(1)................... 54 Director
William E. Terry(2)........................ 64 Director
Andrew T. Sheehan.......................... 40 Director
</TABLE>
- ---------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
John F. Schaefer has been Chairman of the Board and Chief Executive Officer
since November 1994 and President since February 1997. From 1992 to 1994, Mr.
Schaefer was President, Chief Operating Officer and Director of McGaw
Incorporated, a provider of intravenous products and devices. From 1989 to 1991,
Mr. Schaefer was President, Chief Executive Officer and Director of Levolor
Corporation ("Levolor"), a manufacturer of window blinds and similar products.
Prior to joining Levolor in 1989, Mr. Schaefer was employed by Baker Hughes,
Inc., where he was President of the Process Equipment Group, Executive Vice
President of the Corporation, and a Director.
David L. Bultman became Executive Vice President, Disk Drive and Media
Products in June 1998. Mr. Bultman was Vice President, Product Development, Disk
Drive and Media Products from July 1996 to June 1998. From December 1994 to July
1996, Mr. Bultman was employed by Storage Dimensions, Inc., serving as Senior
Vice President, Engineering. From November 1993 to October 1994, Mr. Bultman was
Vice President, Engineering at DKI. Prior to joining DKI, Mr. Bultman was Vice
President, Engineering at Ministor Peripherals.
Wayne G. Erickson became Vice President, Sales and Marketing, Head Products
in June 1998. Mr. Erickson was Vice President Sales and Marketing from November
1992 until June 1998. From January 1985 to November 1992, Mr. Erickson was
employed by Quantum/Plus Development Corporation ("Quantum"), a leading supplier
of read/write head systems, serving as OEM Marketing Manager, Product Line
Manager
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and National Sales Manager, Retail Channels. Prior to joining Quantum, Mr.
Erickson was Engineer and Program Manager at Shugart Corporation.
Dennis J. Geurts has been Director of Fremont Operations since October 1995
and was promoted in March 1996 to Vice President of Fremont Operations. Prior to
October 1995, Mr. Geurts held various senior management positions in the
operations, manufacturing and materials divisions of Applied Materials Inc., an
equipment supplier to the semiconductor industry, over a thirteen-year period.
Before joining Applied Materials, Mr. Geurts was Senior Manager at General
Electric -- Nuclear Division.
Dr. Michael R. Madden has been Director of Operations, San Diego since
February 1995 and was promoted to Vice President, Technology Transfer in June
1995. Prior to February 1995, Dr. Madden managed the High Reliability Products
Division of UDT Sensors, Inc. He also served as Vice President, Research
Development, for Advanced Photonix, Inc. From 1977 to 1987, Dr. Madden was the
Chief Executive Officer of Centronics Electro-Optics, Inc. and Silicon Detector
Corporation.
Ronald Y. Miyahara has been Vice President and General Manager, Asia
Operations for the Company since November 1995, having previously served as Vice
President, Operations from November 1994 through October 1995. Mr. Miyahara
previously served as President of ProQuip, Inc., a supplier of advanced process
and production-test equipment for disk manufacturers, which the Company acquired
in November 1994. Prior to the acquisition, Mr. Miyahara served in various
positions at ProQuip, Inc., including President and General Manager from 1991 to
1994, Vice President of Operations from 1989 to 1991, and Chief Financial
Officer from 1984 to 1991.
Bert Munnikhuis became Vice President, Sales and Marketing, Disk Drive and
Media Products in June 1998. He has been Senior Director of Media Products,
Sales & Marketing, since January 1997 and was Director, Media Products, Sales
and Marketing, from November 1994. Mr. Munnikhuis previously served in various
positions including Vice President of Marketing and Sales at Cambrian Systems,
Inc. from 1982 to 1994.
Brad LaLuzerne became Vice President, Finance and Chief Financial Officer
in June 1998. Prior to that, Mr. LaLuzerne was the Company's Controller, Fremont
Operations from March 1996 to June 1998. Between June 1986 and March 1996, Mr.
LaLuzerne held various positions at Harnischfeger Industries, Inc., including
Division Controller.
Dr. Jun Zhu became Vice President, Head Product Development in June 1998.
Dr. Zhu was Director, Quasistatic Products from June 1997 until June 1998. From
September 1996 to June 1997, he was a project manager for the Company. From June
1993 to September 1996, Dr. Zhu was employed by Read-Rite Corporation in various
engineering capacities.
Michael G. Rogowski has been Vice President, Customer Engineering, Disk
Drive and Media Products since November 1994 and was promoted in March 1996 to
Vice President of Customer Engineering. Prior to joining the Company, Mr.
Rogowski was Vice President of Manufacturing/Test Engineering for Cambrian
Systems, Inc., a supplier of advanced process and production-test equipment for
disk and read/write head manufacturers, which the Company acquired in November
1994. From 1992 to 1994, Mr. Rogowski was the Director of Test Engineering at
Akashic Memories. Between 1979 and 1992, Mr. Rogowski held various positions in
engineering and management in the Mechanical Integration, Test Equipment
Development, and Manufacturing Test Engineering organizations within IBM
Corporation.
Arthur J. Cormier has been a consultant to the Company since February 1997.
Mr. Cormier founded the Company and has served as a Director since the Company's
inception in 1989. He has served as President and Chief Operating Officer of the
Company since its inception until February 1997. He held the position of Chief
Executive Officer until the Company's recapitalization in November 1994. From
1987 to 1989, Mr. Cormier was Applications Engineer for National Micronetics
Incorporated. Prior to joining National Micronetics, Mr. Cormier was employed by
Eastman Kodak Company from 1985 to 1987, where he was an Engineering Program
Manager.
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Thompson Dean has been a Director of the Company since November 1994. Since
January 1997, Mr. Dean has been Managing Partner of DLJ Merchant Banking, Inc.,
an affiliate of DLJ. Prior to that Mr. Dean had been a Managing Director of DLJ
Merchant Banking, Inc. since May 1992. Prior to that time, Mr. Dean served as a
Managing Director of DLJ, and was employed by that firm in various capacities
from September 1988 until September 1992.
Robert Finzi has been a Director of the Company since November 1994. Since
May 1991, Mr. Finzi has been a Vice President of Sprout Group, a division of DLJ
Capital Corporation, which is the managing general partner of Sprout Growth II,
L.P. and an affiliate of DLJ. Mr. Finzi is also a general partner of a series of
investment funds managed by Sprout Group and a limited partner of the general
partner of ML Ventures II, L.P. From 1984 to 1991, Mr. Finzi was a Vice
President of Merrill Lynch Venture Capital. Mr. Finzi also serves on the Board
of Directors of The Cerplex Group, Inc., Gentle Dental Services Co. and four
privately-held companies.
Dr. Gilbert F. Amelio has been a Director of the Company since June 1995.
From 1994 until July 1997, Dr. Amelio served as a Director of Apple Computer,
Inc. ("Apple") and from February 1996 until July 1997 he served as Chairman of
the Board and Chief Executive Officer of Apple. Prior to joining Apple, Dr.
Amelio was Chairman of the Board, President and Chief Executive Officer of
National Semiconductor Corporation for five years. Dr. Amelio is an IEEE Fellow,
holder of 16 patents and is the co-author of two books, "Profit from Experience:
The National Semiconductor Story of Transformation Management" and "On the
Firing Line: My 500 Days at Apple." Dr. Amelio is currently Partner and Director
of The Parkside Group, LLC and serves on the Board of Directors of SBC
Communications.
William E. Terry has been a Director of the Company since August 1997. From
1986 until his retirement in November 1993, Mr. Terry served as Executive Vice
President and a Director of Hewlett-Packard. Prior to that, Mr. Terry served in
a number of other senior executive positions with Hewlett-Packard. Mr. Terry
currently serves on the Board of Directors of Keytronic Corporation and Altera
Corporation.
Andrew T. Sheehan has been a Director of the Company since August 1998. Mr.
Sheehan joined ABS Capital Partners II, L.P. ("ABS") in April 1998 as a General
Partner. Prior to joining ABS, Mr. Sheehan was a Managing Director in the
technology group of BT Alex. Brown and the co-head of West Coast investment
banking in San Francisco. Mr. Sheehan joined Alex. Brown in 1985. Mr. Sheehan
holds board membership on other privately held companies.
The Board of Directors has a Compensation Committee (the "Compensation
Committee") which is responsible for making determinations regarding salaries,
bonuses and other compensation matters for the Company's executive officers. The
members of the Compensation Committee are Mr. Dean, Mr. Finzi and Mr. Terry.
None of these individuals were at any time during 1996 an officer or employee of
the Company.
The Board of Directors also has an Audit Committee (the "Audit Committee")
which supervises and makes recommendations and decisions with respect to the
periodic audits of the Company's financial results. The members of the Audit
Committee are Mr. Cormier, Mr. Dean, Mr. Finzi and Dr. Amelio.
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DIRECTOR COMPENSATION
Except as described below, the directors do not receive cash compensation
for services on the Board of Directors or any Committee thereof.
Dr. Amelio and Mr. Terry are each paid a retainer by the Company of $1,000
per month for their services on the Board of Directors. Dr. Amelio and Mr. Terry
also each receive $1,000 for each meeting of the Board of Directors or committee
thereof that they attend. In addition, the Company granted Dr. Amelio an option
to purchase 100,000 shares of Common Stock under the 1995 Option Plan at an
exercise price of $1.00 per share when he joined the Board in June 1995 and Mr.
Terry was granted an option to purchase 50,000 shares of Common Stock under the
1995 Option Plan at an exercise price of $8.75 per share when he joined the
Board in August, 1997. These options are immediately exercisable for all the
option shares, but any shares purchased under the option will be subject to
repurchase by the Company at the option exercise price paid per share if Dr.
Amelio or Mr. Terry cease serving on the Board prior to vesting in their
respective shares. As of June 30, 1998, Dr. Amelio had vested in 60,000 option
shares and Mr. Terry had vested in no option shares. Dr. Amelio will vest in his
remaining option shares, as long as he remains as a member of the Board, in a
series of successive equal monthly installments upon completion of each
additional month of Board service. Mr. Terry will vest in 10,000 option shares
in August 1998, and will vest in the remaining option shares, as long as he
remains as a member of the Board, in a series of successive equal monthly
installments upon completion of each additional month of Board service. The
vesting period for the options granted to Dr. Amelio and Mr. Terry is five
years.
Mr. Cormier provides consulting services to the Company under an
arrangement which provides for payment of $1,500 per day plus expenses as
consulting services are provided, including attendance at Company meetings and
technical conferences. Under the consulting arrangement, Mr. Cormier also
receives an office and clerical assistance at the Company's facilities, and his
family receives health care insurance coverage.
All non-employee Board members are reimbursed for their out-of-pocket
expenses in serving on the Board of Directors.
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EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning the
compensation earned by the Company's Chief Executive Officer and its four other
most highly compensated executive officers (the "Named Executive Officers")
whose total salary and bonus for 1997 exceeded $100,000, for services rendered
to the Company in all capacities during that year. No executive who would
otherwise have been includable in such table on the basis of salary and bonus
earned for 1997 has resigned or otherwise terminated employment during 1997.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
NAME AND -------------------------------- UNDERLYING ALL OTHER
PRINCIPAL POSITION(S) SALARY BONUS OTHER(1) OPTIONS COMPENSATION(2)
<S> <C> <C> <C> <C> <C>
John F. Schaefer....................... $325,000 $105,000 -- -- $ 6,658
Chairman and Chief Executive Officer
Dr. Heiner Sussner(3).................. 230,000 19,688 2,850 -- 3,169
Vice President, R&D and Chief
Technical Officer
David L. Bultman....................... 230,000 190,000(4) 3,256 -- 2,569
Vice President, Product Development
Disk Drive and Media Products
Neil A. Brumberger(5).................. 200,000 75,000 2,483 -- 4,904
Vice President and President, Phase
Metrics Automation
R. Joseph Saunders(5).................. 200,000 21,558 3,360 -- 3,678
Vice President, Finance, Chief
Financial Officer and Assistant
Secretary
</TABLE>
- ---------------
(1) Includes the value of personal use of Company automobiles.
(2) Includes the Company's matching contribution under its 401(k) Plan.
(3) Dr. Sussner resigned from his position effective July 1998.
(4) Includes forgiven loans and signing bonuses totalling $150,000.
(5) The Company reached an agreement for the termination of Mr. Brumberger's and
Mr. Saunders' full-time employment with the Company, effective July and June
1998, respectively.
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<PAGE> 78
STOCK OPTIONS AND STOCK APPRECIATE RIGHTS
The following table contains information concerning the stock options
granted to the Named Executive Officers during 1997. All the grants were made
under the Company's 1995 Plan (as defined herein). No stock appreciation rights
were granted to the Named Executive Officers during 1997.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
------------------------------------------------------------------
MARKET POTENTIAL REALIZATION
NUMBER PRICE OF VALUE AT ASSUMED
OF PERCENT OF SECURITIES ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS EXERCISE UNDERLYING PRICE APPRECIATION FOR
UNDERLYING GRANTED TO PRICE OPTIONS OPTION TERM(3)
OPTIONS EMPLOYEES IN PER ON DATE EXPIRATION -----------------------
NAME GRANTED 1997 SHARE(2) OF GRANT(2) DATE 5% 10%
---- ---------- --------------- -------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
John F. Schaefer............ -- -- -- -- -- -- --
Dr. Heiner Sussner(4)....... 60,000 5.5% $8.75 $8.75 8/01/07 $330,170 $836,715
David L. Bultman............ 25,000 2.3 8.75 8.75 8/01/07 137,571 348,631
Neil A. Brumberger(5)....... -- -- -- -- -- -- --
R. Joseph Saunders(5)....... -- -- -- -- -- -- --
</TABLE>
- ---------------
(1) Option grants are immediately exercisable for all the option shares, but any
shares purchased under such option will be subject to repurchase by the
Company at the option exercise price paid per share.
(2) The exercise price is equal to the fair market value of the Common Stock on
the date of grant, as determined by the Board of Directors taking into
account a number of factors at the time of the grants, including, without
limitation, the current status of the Company and its future prospects, the
status of the disk drive industry, values of comparable companies and the
appraisals of an independent, third-party appraiser engaged by the Company.
(3) There can be no assurance provided to any executive officer or other holder
of the Company's securities that the actual stock price appreciation over
the ten-year option term will be at the assumed 5% and 10% levels or at any
other defined level. Unless the market price of the Common Stock appreciates
over the option term, no value will be realized from those option grants
which were made to the Named Executive Officers with an exercise price equal
to the fair market value of the option shares on the grant date.
(4) Dr. Sussner resigned from his position effective July 1998.
(5) The Company reached an agreement for the termination of Mr. Brumberger's and
Mr. Saunders' full-time employment with the Company, effective July and June
1998, respectively.
AGGREGATE OPTION EXERCISES IN 1997 AND YEAR-END VALUES
The following table provides information, with respect to each of the Named
Executive Officers, concerning the exercise of options during 1997 and
unexercised options held by them at the end of that fiscal year. None of the
Named Executive Officers exercised any options during 1997.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED IN-THE
NUMBER OF UNEXERCISED OPTIONS MONEY OPTIONS AT
AT DECEMBER 31, 1997(#) DECEMBER 31, 1997($)(1)
------------------------------- -------------------------------
NAME EXERCISABLE(2) UNEXERCISABLE EXERCISABLE(2) UNEXERCISABLE
---- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
John F. Schaefer...................... -- -- -- --
Dr. Heiner Sussner(4)................. 150,000(2) -- $112,500(2) --
David L. Bultman...................... 125,000(3) -- 125,000(3) --
Neil A. Brumberger(5)................. -- -- -- --
R. Joseph Saunders(5)................. -- -- -- --
</TABLE>
- ---------------
(1) Based upon the fair market value of $8.75 per share determined by the Board
of Directors at December 31, 1997, less the option exercise price (i.e., the
fair market value of the Common Stock on the date of grant, as determined by
the Board of Directors), payable per share. The Board of Directors takes
into account a number of factors in determining fair market value,
including, without limitation, the current status of the Company and its
future prospects, the status of the disk drive industry, values of
comparable companies and the appraisals of an independent, third-party
appraiser engaged by the Company.
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<PAGE> 79
(2) Although the options are fully exercisable, only 21,000 options had vested
as of December 31, 1997. The option shares issuable upon exercise of such
options are, prior to vesting, subject to a right of repurchase in favor of
the Company.
(3) Although the options are fully exercisable, only 28,333 options had vested
as of December 31, 1997. The option shares issuable upon exercise of such
options are, prior to vesting, subject to a right of repurchase in favor of
the Company.
(4) Dr. Sussner resigned from his position effective July 1998.
(5) The Company reached an agreement for the termination of Mr. Brumberger's and
Mr. Saunders' full-time employment with the Company, effective July and June
1998, respectively.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Mr. Dean, Mr. Finzi and Mr.
Terry. No executive officer of the Company serves as a member of the board of
directors or compensation committee of any entity which has one or more
executive officers serving as a member of the Company's Board of Directors or
Compensation Committee.
Mr. Dean is a Managing Director of DLJ Merchant Banking Partners, L.P., and
Mr. Finzi is a General Partner of Sprout Group, both of which are affiliates of
DLJ. DLJ is a principal stockholder of the Company. In each of 1995, 1996 and
1997 the Company paid DLJ $200,000 in fees for financial advisory and certain
investment banking services provided to the Company. DLJ acted as the Initial
Purchaser in the Note Offering and received an underwriting discount of $3.575
million in connection therewith. See "Principal Stockholders" "Certain
Transactions."
COMPENSATION PLANS AND ARRANGEMENTS
Employment Contracts and Change in Control Arrangements
In November 1994, the Company entered into an employment contract with Mr.
Schaefer providing for his employment as Chief Executive Officer and Chairman of
the Board of the Company. The employment contract is terminable at will by
either Mr. Schaefer or the Company upon 30-days' notice. The employment contract
provides for an annual minimum base salary of $325,000. In addition, beginning
in 1996, Mr. Schaefer became eligible to receive a bonus under the Company's
bonus plan for officers. If the employment contract is terminated by the Company
other than for cause or by Mr. Schaefer due to breach of the agreement or
certain other actions by the Company, the Company must pay Mr. Schaefer, in
addition to all accrued and unpaid salary and benefits, his salary and certain
benefits for a period of 12 months from the date of such termination. If the
Company terminates Mr. Schaefer's employment upon his permanent disability,
subject to reduction for any insurance benefits received, Mr. Schaefer is
entitled to receive his salary and benefits for 12 months from the date of such
termination.
In July 1995, in connection with the acquisition of ART, the Company
entered into an employment contract with Mr. Brumberger providing for his
employment as Vice President of the Company and President, Phase Metrics
Automation. The employment contract had a minimum term of three years and was
terminable at will by Mr. Brumberger upon 30-days notice. The employment
contract provided for an annual base salary of $200,000 and a minimum annual
bonus of $75,000. The Company reached an agreement for the termination of Mr.
Brumberger's full-time employment with the Company, effective July 1998.
In connection with any change of control of the Company, subject to certain
limitations, outstanding options held by Mr. Bultman (as well as certain other
senior executive officers) will either immediately vest in full, or will
subsequently vest in full upon the involuntary termination of the individual's
employment within 12 months thereafter.
Bonus Plan for Officers and Certain Key Employees
The Company has an established bonus plan for officers and certain key
employees, including the Named Executive Officers. Payment of bonuses under this
plan is dependent on the Company achieving its financial
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<PAGE> 80
goals established annually by the Compensation Committee, as well as the
employee achieving certain priorities as established by Company management.
Bonus targets range from a low of 10% of base salary for certain employees to a
high of 50% of base salary for the Chief Executive Officer. Employees can earn
up to 150% of their bonus targets, depending upon the performance of both the
employee and the Company.
1995 Stock Incentive Plan
The Company's 1995 Stock Option Plan (the "1995 Plan") became effective
when adopted by the Board of Directors (the "Board") and approved by the
Company's shareholders in April 1995. A total of 6,300,000 shares of Common
Stock have been authorized for issuance over the term of the 1995 Plan, subject
to adjustment in the event of any stock dividends, stock splits or other similar
changes affecting the Company's outstanding Common Stock.
Employees (including officers), non-employee Board members and consultants
and other advisors in the service of the Company or any parent or subsidiary
company may, at the discretion of the Plan Administrator, be granted options to
purchase shares of Common Stock at an exercise price not less than 85% of the
fair market value per share on the grant date.
The 1995 Plan is currently administered by the Board. However, the Board
may at any time delegate such administration to the Compensation Committee. The
Plan Administrator (whether the Board or such committee) has complete discretion
to determine which eligible persons are to receive option grants, the time or
times when such grants are to be made, the number of shares subject to each such
grant, the status of an option as either an incentive stock option or a
non-statutory stock option under the federal tax laws, the vesting or exercise
schedule in effect for the option and the maximum term for which any option will
remain outstanding. No option granted under the 1995 Plan may have a term in
excess of 10 years and will be subject to earlier termination following the
optionee's cessation of service with the Company.
Option grants under the 1995 Plan may either become exercisable for the
option shares in a series of installments over the optionee's period of service
with the Company or may be immediately exercisable for all the option shares,
but any shares purchased under such an immediately exercisable option will be
subject to repurchase by the Company, at the option exercise price paid per
share, should the optionee leave the Company's service prior to vesting in those
shares. The Company will also have a right of first refusal with respect to any
proposed sales or transfers of the shares of Common Stock issued under the 1995
Plan. Accordingly, the Company will have the opportunity to match any
third-party offer to acquire those shares. However, all first refusal rights
under the 1995 Plan will terminate in the event the Company's Common Stock is
publicly held.
The option exercise price will normally be payable in cash at the time of
exercise. However, the Plan Administrator may allow the optionee to deliver a
promissory note in payment of the exercise price and any withholding taxes
incurred in connection with the exercise. Any such note will bear interest at
the minimum rate required under the federal tax laws and will be secured by the
purchased shares. Following an initial public offering of the Common Stock, the
exercise price may be paid in shares of Common Stock valued at fair market value
or through a cashless exercise procedure pursuant to which the purchased option
shares are sold immediately and a portion of the sale proceeds equal to the
option exercise price for those shares are remitted to the Company.
Should the Company be acquired by merger or asset sale, all outstanding
options will immediately vest in full, except to the extent those options are
assumed by the successor entity. In the event the price payable per share of
Common Stock in the acquisition (determined on a fully-diluted basis) is at
least $7.00, the shares subject to the outstanding options under the 1995 Plan
will, whether or not those options are to be assumed by the successor entity,
vest for some option holders immediately upon such acquisition and will vest for
the remaining option holders upon the subsequent termination of their service
with the Company or the successor entity within 18 months following such
acquisition.
As of June 30, 1998, options for 2,336,851 shares of Common Stock were
outstanding under the 1995 Plan, options for 1,446,060 shares had been
exercised, and 2,517,089 shares of Common Stock were
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<PAGE> 81
available for future option grant. To the extent any outstanding options
terminate or expire unexercised, the shares of Common Stock subject to those
options will be available for subsequent option grants.
The Plan Administrator has the authority to effect the cancellation of
outstanding options under the 1995 Plan in return for the grant of new options
for the same or different number of option shares with an exercise price per
share based upon the fair market value of the Common Stock on the new grant
date.
The Board may amend or modify the 1995 Plan at any time. The 1995 Plan will
terminate on April 1, 2005, unless sooner terminated by the Board.
CERTAIN TRANSACTIONS
Since January 1, 1997, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which the Company was or is
to be a party in which the amount involved exceeds $60,000 and in which any
director, executive officer or holder of more than five percent of the
outstanding capital stock of the Company had or will have a direct or indirect
material interest other than compensation and other arrangements, which are
described where required under "Management" and the transactions described
below.
RECAPITALIZATION
In November 1994, the Company completed a recapitalization (the
"Recapitalization") and in connection therewith entered into a Securities
Purchase Agreement (the "Securities Purchase Agreement") with DLJ Merchant
Banking Partners, L.P., a Delaware limited partnership ("DLJMBP"), DLJ
International Partners, C.V., a Netherlands Antilles limited partnership
("DLJIP"), DLJ Offshore Partners, C.V., a Netherlands Antilles limited
partnership ("DLJOP"), DLJ Merchant Banking Funding, Inc., a Delaware
corporation ("DLJMBF"), DLJ Capital Corporation, a Delaware corporation
("DLJCC"), Sprout Growth II, L.P., a Delaware limited partnership and venture
capital affiliate of DLJ ("Sprout II") and Sprout Capital VI, L.P., a Delaware
limited partnership and venture capital affiliate of DLJ ("Sprout VI")
(collectively, "DLJ and the Sprout Entities"), Mr. Arthur J. Cormier and Mr.
John F. Schaefer. In connection with the Recapitalization, the Company also (i)
entered into a Securityholders Agreement with DLJ and the Sprout Entities, Mr.
Cormier and Mr. Schaefer (the "Securityholders Agreement"), (ii) exchanged its
existing capital stock for shares of its Series A and B Preferred Stock, (iii)
issued and sold shares of its Common Stock and (iv) issued and sold $8.0 million
aggregate principal amount of its Convertible Subordinated Notes. As part of the
Recapitalization, Mr. Cormier sold his Series B Preferred Stock and certain
shares of his Series A Preferred Stock to DLJ and the Sprout Entities and Mr.
Schaefer. See "Description of Capital Stock."
In 1995, DLJMBF transferred $671,975 in aggregate principal amount of its
Convertible Subordinated Notes and 3,238,400 shares of its Series B Preferred
Stock to DLJ First ESC, L.L.C., a Delaware limited liability corporation ("DLJ
First"). As part of that transaction, DLJ First became a party to the Securities
Purchase Agreement and the Securityholders Agreement and is one of the "DLJ and
the Sprout Entities" as defined herein.
The outstanding shares of Series A Preferred Stock and Series B Preferred
Stock are convertible into an aggregate of 12,107,280 shares of Common Stock.
The Convertible Subordinated Notes issued to DLJ and the Sprout Entities are
convertible into an aggregate of 5,142,720 shares of Common Stock of the Company
and are subordinated in right of payment and with respect to certain other
rights to all senior debt of the Company, including indebtedness evidenced by
the New Notes and outstanding indebtedness under the New Credit Facility. See
"Description of Capital Stock."
BRIDGE FINANCING
In November 1994, the Company entered into a Bridge Securities Purchase
Agreement (the "Bridge Financing Agreement") with PM Funding, Inc., a Delaware
corporation ("PM Funding"), an affiliate of DLJ and the Sprout Entities. Under
the Bridge Financing Agreement, the Company borrowed $20.0 million from PM
Funding and issued warrants to PM Funding, DLJCC, Sprout II and Sprout VI, which
are exercisable for
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<PAGE> 82
an aggregate of 800,000 shares of Common Stock at an exercise price of $1.55 per
share, subject to adjustment (the "Bridge Note Warrants"). The Bridge Note
Warrants expire on November 23, 2004. The loan with PM Funding was repaid by the
Company in March 1995.
SERIES C PREFERRED STOCK FINANCING
In August 1998, the Company issued and sold an aggregate of 6,360,000
shares of its Series C Preferred Stock for $4.00 per share to a group of
investors, which included a number of its current stockholders and two members
of the Company's Board of Directors. The Company received aggregate proceeds of
approximately $25.4 million in connection with the Series C Financing.
Immediately following the consummation of the Series C Financing, the Company
used $7.1 million of the net proceeds therefrom to repay the indebtedness and
accrued interest outstanding under the New Credit Facility.
Subject to the receipt of regulatory approval under the Hart-Scott-Rodino
Antitrust Improvements Act of 1996 and any other necessary approvals, but in no
event no later than 120 days from the date of the Series C Financing, one of the
investors in the Series C Financing has agreed to purchase an additional $5.0
million of Series C Preferred Stock, representing 1,250,000 shares at a purchase
price of $4.00 per share. There can be no assurance that the Company will be
able to successfully close this subsequent round of equity financing. See
"Description of Capital Stock -- Series C Preferred Stock."
SECURITYHOLDERS AGREEMENT
The Amended and Restated Securityholders Agreement (the "Securityholders
Agreement") provides that each of Messrs. Schaefer and Cormier, DLJMBP, Sprout
II and ABS, shall be entitled to designate one director to the Company's Board,
and Messrs. Schaefer and Cormier, with the consent of DLJ and the Sprout
Entities, shall have the right to designate the sixth director and DLJ and the
Sprout Entities shall have the right to designate the seventh director to the
Company's Board. The Securityholders Agreement also contains certain
restrictions on the ability of the parties thereto to sell their shares of
stock; registration rights; preemptive rights in connection with the issuance by
the Company of additional equity securities other than upon certain defined
events, including an initial public offering by the Company; certain rights of
first refusal between the stockholders who are party to such agreement providing
each such party the right to purchase any equity securities that any of the
other parties to the agreement desire to sell to third parties and other matters
customary for such agreements. The rights of the parties to the Securityholders
Agreement with respect to certain restrictions on transfer and the preemptive
rights under such Agreement terminate in connection with certain public
offerings of Common Stock by the Company. Under the Securityholders Agreement,
the Company is obligated until November 23, 1998, to use DLJ as its exclusive
financial advisor and investment banker. In consideration for DLJ's services,
the Company has agreed to pay DLJ an annual retainer of $200,000. In each of
1995, 1996 and 1997, the Company paid DLJ $200,000 in fees for financial
advisory and certain investment banking services provided to the Company.
DLJ acted as the initial purchaser in the Note Offering and received an
underwriting discount of $3.575 million in connection therewith.
FORMER CREDIT FACILITY
In connection with the refinancing of its then-outstanding indebtedness in
December of 1996, the Company paid fees of $1.2 million for debt issuance costs
to DLJ Capital Funding, Inc. ("DLJCF"), the syndicate agent. DLJCF is an
affiliate of DLJ.
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<PAGE> 83
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's capital stock as of August 3, 1998, by (i)
each person (or group of affiliated persons) known by the Company to
beneficially own more than five percent of any class of its capital stock, (ii)
each of the Company's directors, (iii) each of the Named Executive Officers and
(iv) all directors and executive officers of the Company as a group. Unless
otherwise indicated, the address for each stockholder is c/o Phase Metrics,
Inc., 10260 Sorrento Valley Road, San Diego, California 92121.
<TABLE>
<CAPTION>
COMMON SERIES A SERIES B SERIES C
STOCK(2) PREFERRED(3) PREFERRED(4) PREFERRED(5)
------------------- ------------------- ------------------- --------------------
BENEFICIAL OWNER(1) NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DLJ and the Sprout Entities (7)..... 5,942,720 51.5% 2,000,000 24.2% 3,857,280 100.0% 2,500,000 39.3%
Arthur J. Cormier (8)............... -- -- 4,500,000 54.5 -- -- -- --
John F. Schaefer (9)................ 2,750,000 49.1 1,750,000 21.2 -- -- -- --
ABS Capital Partners II, L.P.(10)... -- -- -- -- 3,750,000 59.0
Neil A. Brumberger(11).............. 450,000 7.3 -- -- -- -- -- --
Wayne G. Erickson(12)............... 300,000 5.4 -- -- -- -- -- --
David L. Bultman(13)................ 250,000 4.3 -- -- -- -- -- --
Dr. Gilbert F. Amelio(14)........... 100,000 1.8 -- -- -- -- 100,000 1.6
R. Joseph Saunders(15).............. 150,000 2.7 -- -- -- -- -- --
William E. Terry(16)................ 50,000 * -- -- -- -- 10,000 *
Dr. Heiner Sussner(17).............. 30,000 * -- -- -- -- -- --
Thompson Dean(7).................... -- -- -- -- -- -- -- --
Robert Finzi(7)..................... -- -- -- -- -- -- -- --
Andrew T. Sheehan(10)............... -- -- -- -- -- -- -- --
All directors and executive officers
as a group (15 persons) (18)...... 4,110,000 63.7 6,250,000 75.8 -- -- 110,000 1.7
<CAPTION>
TOTAL(6)
--------------------
BENEFICIAL OWNER(1) NUMBER PERCENT
<S> <C> <C>
DLJ and the Sprout Entities (7)..... 14,300,000 37.2%
Arthur J. Cormier (8)............... 4,500,000 13.9
John F. Schaefer (9)................ 4,500,000 13.9
ABS Capital Partners II, L.P.(10)... 3,750,000 11.6
Neil A. Brumberger(11).............. 450,000 1.3
Wayne G. Erickson(12)............... 300,000 *
David L. Bultman(13)................ 250,000 *
Dr. Gilbert F. Amelio(14)........... 200,000 *
R. Joseph Saunders(15).............. 150,000 *
William E. Terry(16)................ 60,000 *
Dr. Heiner Sussner(17).............. 30,000 *
Thompson Dean(7).................... -- --
Robert Finzi(7)..................... -- --
Andrew T. Sheehan(10)............... -- --
All directors and executive officers
as a group (15 persons) (18)...... 10,810,000 31.4
</TABLE>
- ---------------
* Less than one percent.
(1) Except as indicated by footnote, the Company understands that the persons
named in the table above have sole voting and investment power with respect
to all shares shown as beneficially owned by them, subject to community
property laws where applicable.
(2) Reflects the beneficial ownership of the Company's Common Stock, assuming
the conversion of the Convertible Subordinated Notes and the Bridge Note
Warrants. Shares of Common Stock subject to options, warrants or notes
which are currently exercisable or exercisable within 60 days of August 3,
1998, are deemed outstanding for computing the percentages of the person
holding such options, warrants or notes, but are not deemed outstanding for
computing the percentages of any other person. Percentage ownership is
based on 5,600,060 shares of Common Stock outstanding as of August 3, 1998.
(3) The number of shares reflects the number of shares of Common Stock in the
aggregate issuable upon the conversion of the Series A Preferred Stock held
by each person. Each share of Series A Preferred Stock is convertible into
one share of Common Stock. See "Description of Capital Stock -- Series A
Preferred Stock."
(4) The number of shares reflects the number of shares of Common Stock in the
aggregate issuable upon the conversion of the Series B Preferred Stock held
by each person. Each share of Series B Preferred Stock is convertible into
one share of Common Stock. See "Description of Capital Stock -- Series B
Preferred Stock."
(5) The number of shares reflects the number of shares of Common Stock in the
aggregate issuable upon the conversion of the Series C Preferred Stock held
by each person. Each share of Series C Preferred Stock is convertible into
one share of Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
(6) Reflects the beneficial ownership of the Company's capital stock, assuming
the conversion of the Series A Preferred Stock, Series B Preferred Stock,
Convertible Subordinated Notes and the Bridge Note Warrants. Shares of
Common Stock subject to options, warrants or notes which are currently
exercisable or exercisable within 60 days of August 3, 1998, are deemed
outstanding for computing the percentage of the person holding such
options, warrants or notes, but are not deemed outstanding for computing
the percentage of any other person.
(7) Consists of shares held directly by DLJMBP, DLJIP, DLJOP, DLJMBF, DLJCC,
DLJ First, PM Funding, Sprout II and Sprout VI. See "Certain Transactions."
The address of each of DLJMBP, DLJMBF, DLJCC, DLJ First
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<PAGE> 84
and PM Funding is 277 Park Avenue, New York, New York 10172. The address of
DLJIP and DLJOP is John B. Gorsiraweg 14, Willemstad, Curacao, Netherlands
Antilles. The address of Sprout II and Sprout VI (the "Sprout Group") is 3000
Sand Hill Road, Building 3, Suite 170, Menlo Park, California 94025. Mr.
Dean, as a Managing Director of DLJMBP, and Mr. Finzi, as a General Partner
of the Sprout Group, may be deemed to share voting and investment power
over such shares. Messrs. Dean and Finzi disclaim beneficial interest in
such shares, except to the extent of their respective interests in DLJ and
the Sprout Entities. Includes 800,000 shares of Common Stock issuable upon
the exercise of the Bridge Note Warrants at an exercise price of $1.55 per
share held by DLJCC and PM Funding. Includes an aggregate of 5,142,720
shares of Common Stock issuable upon the exercise of the Convertible
Subordinated Notes.
(8) Includes 130,000 shares held by Mr. Cormier's children and other relatives
for which Mr. Cormier maintains voting control.
(9) Includes 98,700 shares of Common Stock which are held by Mr. Schaefer's
children and other relatives for which Mr. Schaefer maintains voting
control and 657,500 shares held by Mr. Schaefer's wife as her separate
property.
(10) Mr. Sheehan, as a General Partner of ABS, may be deemed to share voting and
investment power over such shares. Mr. Sheehan disclaims beneficial
interest in such shares, except to the extent of his interests in ABS. The
address of ABS is 101 California Street, 47th Floor, San Francisco,
California 94111.
(11) The Company reached an agreement for the termination of Mr. Brumberger's
full-time employment with the Company, effective July 1998. As of July,
1998, Mr. Brumberger had vested in approximately 60,000 options to purchase
shares. These options must be exercised within 90 days of the separation
date or these options will automatically cancel.
(12) Includes 8,000 shares held in trust for Mr. Erickson's children for which
Mr. Erickson maintains voting control. Includes 70,000 shares that are
subject to a right of repurchase in favor of the Company that lapse in a
series of monthly installments ending in November 1999.
(13) Includes immediately exercisable options to purchase 250,000 shares.
Because of limitations under the federal tax laws for Incentive Stock
Options, only options to purchase 217,449 shares are currently exercisable
or exercisable within 60 days of August 3, 1998. The option shares issuable
upon exercise of such option are, prior to vesting, subject to a right of
repurchase in favor of the Company that lapse in a series of monthly
installments ending in July 2001.
(14) Includes immediately exercisable options to purchase 100,000 shares. The
option shares issuable upon exercise of such option are, prior to vesting,
subject to a right of repurchase in favor of the Company that lapse in a
series of monthly installments ending in June 2000.
(15) Mr. Saunders resigned from his position as Vice-President Finance, Chief
Financial Officer and Assistant Secretary on June 26, 1998. Subsequently on
July 3, 1998, Mr. Saunders' death occurred, upon which date all outstanding
options became fully vested.
(16) Includes immediately exercisable options to purchase 50,000 shares. The
option shares issuable upon exercise of such option are, prior to vesting,
subject to a right of repurchase in favor of the Company that will lapse in
a series of annual and monthly installments ending in August 2002.
(17) Mr. Sussner resigned from his position as Vice-President Research and
Development and Chief Technical Officer on July 1, 1998. As of July 1,
1998, Dr. Sussner had vested in approximately 30,000 options to purchase
shares. These options must be exercised within 90 days of the separation
date or these options will automatically cancel.
(18) See Notes 8, 9, 10, 11, 12, 13, 14, 15 and 16. Includes options exercisable
for 850,000 shares of Common Stock under the 1995 Option Plan of which
options to purchase 747,021 shares are currently exercisable or exercisable
within 60 days of August 3, 1998, because of limitations under the Federal
tax laws for Incentive Stock Options. Also includes 720,000 shares of
Common Stock of which 148,667 shares are subject to a right of repurchase
in favor of the Company that lapses in a series of monthly installments
ending in August 2002. Excludes shares held by DLJ and the Sprout Entities
and ABS. See Notes 7 and 10 above.
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DESCRIPTION OF INDEBTEDNESS
CONVERTIBLE SUBORDINATED NOTES
In connection with the Recapitalization, the Company issued and sold $8.0
million principal amount of its Convertible Subordinated Notes (the "Convertible
Subordinated Notes") to DLJ and the Sprout Entities, pursuant to the Securities
Purchase Agreement.
The Convertible Subordinated Notes mature in July 2005. Interest accrued at
an annual rate of 25.0% for the three-year period between November 23, 1994 (the
"Original Issue Date") and November 23, 1997, and thereafter accrues at an
annual rate equal to the greater of 12.5% and the prime rate plus 2.0%. Interest
is payable at maturity. In the event the Company enters into any transaction
constituting a liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, the Company is obligated to redeem the Convertible
Subordinated Notes in cash at a price equal to the aggregate principal amount
thereof plus accrued interest (the "Accreted Amount"). The Convertible
Subordinated Notes (including all accrued interest thereon) are convertible into
an aggregate of 5,142,720 shares of the Company's Common Stock at the option of
the holders thereof, and, upon the Company's initial public offering, are
automatically convertible into that number of shares of Common Stock.
The Convertible Subordinated Notes also contain customary anti-dilution
rights and protective voting provisions that, among other things and subject to
certain qualifications, limit the Company's ability to (i) amend, alter or
repeal its Certificate of Incorporation or the charter documents of its
subsidiaries in any manner adverse to the preferences, privileges, voting rights
and powers of the holders of the Convertible Subordinated Notes; (ii)
voluntarily liquidate, dissolve or wind up the Company or any of its
subsidiaries; (iii) voluntarily convey, exchange or transfer all or
substantially all of the Company's assets; (iv) other than indebtedness
outstanding under the New Notes and the New Credit Facility, incur, assume,
refinance, renew, discharge, repay (other than pursuant to regularly scheduled
payments thereof) or cancel any indebtedness of the Company or any of its
subsidiaries, (v) pay dividends or make distributions on capital stock of the
Company and its subsidiaries and (vi) except as required under the terms of the
Indenture related to the New Notes, redeem or repurchase any shares of capital
stock of the Company, without the written consent of the holders of at least 75%
in aggregate Accreted Amount of the Convertible Subordinated Notes.
Events of default under the Convertible Subordinated Notes include, among
other things, (i) a default continuing in payment of all or any part of the
principal or interest payable thereunder when due; (ii) a default under other
Material Debt (as defined in the Convertible Subordinated Notes) of the Company
or any of its subsidiaries or under any mortgage, indenture or other instrument
under which there may be issued or by which there may be secured or evidenced
any Material Debt of the Company or any of its subsidiaries which results in the
acceleration of such indebtedness prior to its stated maturity and (iii) certain
events of bankruptcy or insolvency with respect to the Company or any of its
subsidiaries. Upon the occurrence of an event of default, the holders of a
majority of the aggregate Accreted Amount of the Convertible Subordinated Notes
may declare all outstanding amounts under the Convertible Subordinated Notes to
be immediately due and payable.
The Convertible Subordinated Notes are expressly subordinated to all senior
debt of the Company, including the indebtedness outstanding under the New Notes.
The Convertible Subordinated Notes may be amended with the written consent of
the holders of a majority in aggregate Accreted Amount of the Convertible
Subordinated Notes then outstanding.
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<PAGE> 86
DESCRIPTION OF NEW NOTES
GENERAL
The Notes were, and the New Notes will be, issued pursuant to the Indenture
dated as of January 30, 1998, among the Company, the direct or indirect domestic
Restricted Subsidiaries of the Company (together, the "Subsidiary Guarantors")
and State Street Bank and Trust Company of California, N.A., as trustee (the
"Trustee"). The terms of the New Notes include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"). The New Notes are subject to all
such terms, and Holders of New Notes are referred to the Indenture and the Trust
Indenture Act for a statement thereof. The terms of the New Notes are identical
in all material respects to the Notes, except that the New Notes have been
registered under the Securities Act and, therefore, will not bear restrictive
legends with respect to such registration and will not contain certain
provisions providing for an increase in the interest rate thereon under certain
circumstances described in the Registration Rights Agreement, the provisions of
which will terminate upon the consummation of the Exchange Offer. The following
summary of the material provisions of the Indenture does not purport to be
complete and is qualified by reference to the Indenture, including the
definitions therein of certain terms used below. Copies of the proposed form of
Indenture are available as set forth below under "-- Additional Information."
The definitions of certain terms used in the following summary are set forth
below under "-- Certain Definitions." For purposes of this summary, the term
"Company" refers only to Phase Metrics, Inc. and not to any of its Subsidiaries.
The New Notes will be general unsecured obligations of the Company and will
rank pari passu in right of payment with all current and future unsecured senior
Indebtedness of the Company. The Company's obligations under the New Notes will
be fully and unconditionally guaranteed on an unsecured senior basis by, and
will be joint and several obligations of, the Subsidiary Guarantors. See
"-- Note Guarantees." As of June 30, 1998, the New Notes and the New Note
Guarantees are effectively subordinated to approximately $2.8 million of secured
obligations of the Company and the Subsidiary Guarantors. The Indenture will
permit the incurrence of additional secured Indebtedness in the future. A copy
of the Indenture has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part.
The operations of the Company are conducted in part through its
Subsidiaries, and the Company may, therefore, be dependent upon the cash flow of
its Subsidiaries to meet its debt obligations, including its obligations under
the New Notes. All of the existing domestic Restricted Subsidiaries of the
Company are, and all future domestic Restricted Subsidiaries are expected to be,
Subsidiary Guarantors. As of the date of the Indenture, all of the Company's
Subsidiaries will be Restricted Subsidiaries. However, under certain
circumstances, the Company will be able to designate current or future
Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be
subject to many of the restrictive covenants set forth in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The New Notes will be limited in aggregate principal amount to $110.0
million and will mature on February 1, 2005. Interest on the New Notes will
accrue at the rate of 10 3/4% per annum and will be payable semiannually in
arrears on February 1 and August 1 of each year, commencing on August 1, 1998,
to Holders of record on the immediately preceding January 15 and July 15.
Interest on the New Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from the date of
original issuance. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months. Principal, premium and Liquidated Damages, if
any, and interest on the New Notes will be payable at the office or agency of
the Company maintained for such purpose within the City and State of New York
or, at the option of the Company, payment of interest and Liquidated Damages, if
any, may be made by check mailed to the Holders of the New Notes at their
respective addresses set forth in the register of Holders of New Notes; provided
that all payments of principal, premium and Liquidated Damages, if any, and
interest with respect to New Notes the Holders of which have given wire transfer
instructions to the Company will be required to be made by wire transfer of
immediately available funds to the accounts specified by the Holders thereof.
Until
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otherwise designated by the Company, the Company's office or agency in New York
will be the office of the Trustee maintained for such purpose. The New Notes
will be issued in denominations of $1,000 and integral multiples thereof.
NEW NOTE GUARANTEES
The Company's payment obligations under the New Notes will be fully and
unconditionally guaranteed by the Subsidiary Guarantors on a joint and several
basis. The New Note Guarantees will be general unsecured obligations of the
Subsidiary Guarantors, will rank senior in right of payment to all subordinated
Indebtedness of the Subsidiary Guarantors and pari passu in right of payment to
all existing and future senior Indebtedness of the Subsidiary Guarantors, if
any. The obligations of any Subsidiary Guarantor under its New Note Guarantee
will be limited so as not to constitute a fraudulent conveyance under applicable
law.
The Indenture will provide that no Subsidiary Guarantor may consolidate
with or merge with or into (whether or not such Subsidiary Guarantor is the
surviving Person), another corporation, Person or entity whether or not
affiliated with such Subsidiary Guarantor unless, subject to the provisions of
the following paragraph, (i) the Person formed by or surviving any such
consolidation or merger (if other than such Subsidiary Guarantor) assumes all
the obligations of such Subsidiary Guarantor pursuant to a supplemental
indenture in form and substance reasonably satisfactory to the Trustee, under
the New Notes and the Indenture; (ii) immediately after giving effect to such
transaction, no Default or Event of Default exists; (iii) such Subsidiary
Guarantor, or any Person formed by or surviving any such consolidation or
merger, would have Consolidated Net Worth (immediately after giving effect to
such transaction) equal to or greater than the Consolidated Net Worth of such
Subsidiary Guarantor immediately preceding the transaction and (iv) the Company
would be permitted by virtue of its pro forma Fixed Charge Coverage Ratio,
immediately after giving effect to such transaction, to incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
Fixed Charge Coverage Ratio test set forth in the covenant described below under
the caption "-- Certain Covenants -- Incurrence of Indebtedness and Issuance of
Preferred Stock." The requirements of clauses (i), (iii) and (iv) of this
paragraph will not apply in the case of a consolidation with or merger with or
into the Company or another Subsidiary Guarantor.
The Indenture will provide that (i) in the event of a sale or other
disposition of all of the assets of any Subsidiary Guarantor, by way of merger,
consolidation or otherwise, or a sale or other disposition of all of the capital
stock of any Subsidiary Guarantor, or (ii) in the event that the Company
designates a Subsidiary Guarantor to be an Unrestricted Subsidiary, or such
Subsidiary Guarantor ceases to be a Subsidiary of the Company, then such
Subsidiary Guarantor (in the event of a sale or other disposition, by way of
such a merger, consolidation or otherwise, of all of the capital stock of such
Subsidiary Guarantor or any such designation) or the entity acquiring the
property (in the event of a sale or other disposition of all of the assets of
such Subsidiary Guarantor) will be released and relieved of any obligations
under its New Note Guarantee; provided, that the Net Proceeds of such sale or
other disposition are applied in accordance with the applicable provisions of
the Indenture. See "--Repurchase at the Option of Holders." In the case of a
sale, assignment, lease, transfer, conveyance or other disposition of all or
substantially all of the assets of a Subsidiary Guarantor, upon the assumption
provided for in clause (ii) of the covenant described under the caption
"-- Certain Covenants -- Merger, Consolidation, or Sale of Assets," such
Subsidiary Guarantor shall be discharged from all further liability and
obligation under the Indenture.
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OPTIONAL REDEMPTION
The New Notes will not be redeemable at the Company's option prior to
February 1, 2002. Thereafter, the New Notes will be subject to redemption at any
time at the option of the Company, in whole or in part, upon not less than 30
nor more than 60 days' notice, at the redemption prices (expressed as
percentages of principal amount) set forth below plus accrued and unpaid
interest and Liquidated Damages thereon, if any, to the applicable redemption
date, if redeemed during the twelve-month period beginning on February 1 of the
years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002........................................................ 105.375%
2003........................................................ 102.688%
2004 and thereafter......................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to February 1, 2001, the
Company may redeem up to 33% of the original aggregate principal amount of New
Notes at a redemption price of 110.75% of the principal amount thereof, plus
accrued and unpaid interest and Liquidated Damages thereon, if any, to the
redemption date, with the net cash proceeds of a Public Equity Offering;
provided, that at least 67% of the original aggregate principal amount of New
Notes remains outstanding immediately after the occurrence of such redemption;
and provided, further, that such redemption shall occur within 90 days of the
date of the closing of such Public Equity Offering.
SELECTION AND NOTICE
If less than all of the New Notes are to be redeemed at any time, selection
of New Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
New Notes are listed, or, if the New Notes are not so listed, on a pro rata
basis, by lot or by such method as the Trustee shall deem fair and appropriate;
provided, that no New Notes of $1,000 or less shall be redeemed in part. Notices
of redemption shall be mailed by first class mail at least 30 but not more than
60 days before the redemption date to each Holder of New Notes to be redeemed at
its registered address. Notices of redemption may not be conditional. If any New
Note is to be redeemed in part only, the notice of redemption that relates to
such New Note shall state the portion of the principal amount thereof to be
redeemed. A new note in principal amount equal to the unredeemed portion thereof
will be issued in the name of the Holder thereof upon cancellation of the
original New Note. New Notes called for redemption become due on the date fixed
for redemption. On and after the redemption date, interest ceases to accrue on
New Notes or portions of them called for redemption.
MANDATORY REDEMPTION
Except as set forth below under "-- Repurchase at the Option of Holders,"
the Company is not required to make mandatory redemption or sinking fund
payments with respect to the New Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each Holder of New Notes will
have the right to require the Company to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such Holder's New Notes pursuant to
the offer described below (the "Change of Control Offer") at an offer price in
cash equal to 101% of the aggregate principal amount thereof plus accrued and
unpaid interest and Liquidated Damages thereon, if any, to the date of purchase
(the "Change of Control Payment"). Within 30 days following any Change of
Control, the Company will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase New Notes on the date specified in such notice, which date shall
be no earlier than 30 days and no later than 60 days from the date such notice
is mailed (the "Change of Control Payment Date"), pursuant to the procedures
required by the Indenture and described in such notice. The Company will comply
with the requirements of Rule 14e-1 under the Exchange
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Act and any other securities laws and regulations thereunder to the extent such
laws and regulations are applicable in connection with the repurchase of the New
Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all New Notes or portions thereof properly
tendered pursuant to the Change of Control Offer, (2) deposit with the Paying
Agent an amount equal to the Change of Control Payment in respect of all New
Notes or portions thereof so tendered and (3) deliver or cause to be delivered
to the Trustee the New Notes so accepted together with an Officers' Certificate
stating the aggregate principal amount of New Notes or portions thereof being
purchased by the Company. The Paying Agent will promptly mail to each Holder of
New Notes so tendered the Change of Control Payment for such New Notes, and the
Trustee will promptly authenticate and mail (or cause to be transferred by book
entry) to each Holder a new note equal in principal amount to any unpurchased
portion of the New Notes surrendered, if any; provided, that each such new note
will be in a principal amount of $1,000 or an integral multiple thereof.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the New Notes to require that the Company
repurchase or redeem the New Notes in the event of a takeover, recapitalization
or similar transaction.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all New Notes validly tendered and not withdrawn under such Change of
Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of that phrase under applicable
law. Accordingly, the ability of a Holder of New Notes to require the Company to
repurchase such Notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of the assets of the Company and its
Subsidiaries taken as a whole to another Person or group may be uncertain.
Asset Sales
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) at least 75% of the
consideration therefor received by the Company or such Restricted Subsidiary is
in the form of (a) cash or Cash Equivalents or (b) property or assets that are
used or useful in a Permitted Business, or Capital Stock of any Person primarily
engaged in a Permitted Business if, as a result of the acquisition by the
Company or any Restricted Subsidiary thereof, such Person becomes a Restricted
Subsidiary; provided, that the amount of (x) any liabilities of the Company or
any Restricted Subsidiary (other than contingent liabilities and liabilities of
the Company that are by their terms subordinated to the New Notes or any
guarantee thereof) that are assumed by the transferee of any such assets
pursuant to the customary novation agreement that releases the Company or such
Restricted Subsidiary from further liability and (y) any notes or other
obligations received by the Company or any such Restricted Subsidiary from such
transferee that are converted by the Company or such Restricted Subsidiary into
cash or Cash Equivalents (to the extent of the cash or Cash Equivalents
received) within 180 days following the closing of such Asset Sale, will be
deemed to be cash for purposes of this provision; provided, further, that the
75% limitation referred to above shall not apply to any sale, transfer or other
disposition of assets in which the cash portion of the consideration received
therefor, determined in accordance with the foregoing proviso, is equal to or
greater than what the after-tax net proceeds would have been had such
transaction complied with the aforementioned 75% limitation.
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Within 270 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds, at its option, (a) to permanently repay
Indebtedness outstanding under the New Credit Facility (and to correspondingly
reduce commitments with respect to the revolving borrowings thereunder) or other
Pari Passu Indebtedness; provided, that if the Company shall so repay other Pari
Passu Indebtedness, it will equally and ratably reduce Indebtedness under the
New Notes if the New Notes are then redeemable or, if the New Notes may not be
then redeemed, the Company shall make an offer to all Holders to purchase at
100% of the principal amount thereof the amount of New Notes that would
otherwise be redeemed or (b) to an investment in property, capital expenditures
or assets that are used or useful in a Permitted Business, or Capital Stock of
any Person primarily engaged in a Permitted Business if, as a result of the
acquisition by the Company or any Restricted Subsidiary thereof, such Person
becomes a Restricted Subsidiary. Any Net Proceeds from Asset Sales that are not
applied or invested as provided in the preceding sentence of this paragraph will
be deemed to constitute "Excess Proceeds." Pending the final application of any
such Net Proceeds, the Company may temporarily reduce the revolving Indebtedness
under the New Credit Facility or otherwise invest such Net Proceeds in any
manner that is not prohibited by the Indenture. Any Net Proceeds from Asset
Sales that are not applied or invested as provided in the first sentence of this
paragraph will be deemed to constitute "Excess Proceeds." When the aggregate
amount of Excess Proceeds exceeds $15.0 million, the Company will be required to
make an offer to all Holders of New Notes (an "Asset Sale Offer") to purchase
the maximum principal amount of New Notes that may be purchased out of the
Excess Proceeds, at an offer price in cash in an amount equal to 100% of the
principal amount thereof plus accrued and unpaid interest and Liquidated
Damages, if any, thereon, to the date of purchase, in accordance with the
procedures set forth in the Indenture. To the extent that the aggregate amount
of New Notes tendered pursuant to an Asset Sale Offer is less than the Excess
Proceeds, the Company may use any remaining Excess Proceeds for general
corporate purposes. If the aggregate principal amount of New Notes surrendered
by Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall
select the New Notes to be purchased on a pro rata basis. Upon completion of
such offer to purchase, the amount of Excess Proceeds shall be reset at zero.
The Company will comply with the requirements of Rule 14e-1 under the Exchange
Act and any other securities laws and regulations thereunder to the extent such
laws and regulations are applicable in connection with the repurchase of the New
Notes as a result of an Asset Sale Offer.
CERTAIN COVENANTS
Restricted Payments
The Indenture will provide that from and after the date of the Indenture
the Company will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly: (i) declare or pay any dividend or make any other
payment or distribution on account of the Company's or any of its Restricted
Subsidiaries' Equity Interests (including, without limitation, any payment in
connection with any merger or consolidation involving the Company) or to the
direct or indirect holders of the Company's or any of its Restricted
Subsidiaries' Equity Interests in their capacity as such (other than dividends
or distributions payable in Equity Interests (other than Disqualified Stock) of
the Company); (ii) purchase, redeem or otherwise acquire or retire for value
(including without limitation, in connection with any merger or consolidation
involving the Company) any Equity Interests of the Company or any direct or
indirect parent of the Company; (iii) make any payment on or with respect to, or
purchase, redeem, defease or otherwise acquire or retire for value any Pari
Passu Indebtedness or any Indebtedness which is subordinated to the New Notes,
except scheduled payments of interest or principal at Stated Maturity of such
Indebtedness or (iv) make any Restricted Investment (all such payments and other
actions set forth in clauses (i) through (iv) above being collectively referred
to as "Restricted Payments"), unless, at the time of and after giving effect to
such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed
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Charge Coverage Ratio test set forth in the first paragraph of the covenant
described below under caption "--Incurrence of Indebtedness and Issuance of
Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Subsidiaries after
the date of the Indenture (excluding Restricted Payments permitted by
clause (ii) of the next succeeding paragraph), is less than the sum of (i)
50% of the Consolidated Net Income of the Company for the period (taken as
one accounting period) from the beginning of the first fiscal quarter
commencing after the date of the Indenture to the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such Consolidated
Net Income for such period is a deficit, less 100% of such deficit), plus
(ii) 100% of the aggregate net cash proceeds received by the Company from
the issue or sale since the date of the Indenture of Equity Interests of
the Company (other than Disqualified Stock) or of Disqualified Stock or
debt securities of the Company that have been converted into such Equity
Interests (other than Equity Interests (or Disqualified Stock or
convertible debt securities) sold to a Subsidiary of the Company and other
than Disqualified Stock or convertible debt securities that have been
converted into Disqualified Stock), plus (iii) to the extent that any
Restricted Investment that was made after the date of the Indenture is sold
for cash or otherwise liquidated or repaid for cash, the lesser of (A) the
cash return of capital with respect to such Restricted Investment (less the
cost of disposition, if any) and (B) the initial amount of such Restricted
Investment, plus (iv) if any Unrestricted Subsidiary (A) the assets of
which are used or useful in, or which is engaged in, one or more Permitted
Businesses is redesignated as a Restricted Subsidiary, the fair market
value of such redesignated Subsidiary (as determined in good faith by the
Board of Directors) as of the date of its redesignation or (B) pays any
cash dividends or cash distributions to the Company or any of its
Restricted Subsidiaries, 50% of any such cash dividends or cash
distributions made after the date of the Indenture.
The provisions of the immediately preceding paragraph will not prohibit (i)
the payment of any dividend within 60 days after the date of declaration
thereof, if at said date of declaration such payment would have complied with
the provisions of the Indenture; (ii) the redemption, repurchase, retirement,
defeasance or other acquisition of any Indebtedness subordinated to the New
Notes or Equity Interests of the Company in exchange for, or out of the net cash
proceeds of the substantially concurrent sale or issuance (other than to a
Restricted Subsidiary of the Company) of, other Equity Interests of the Company
(other than any Disqualified Stock); (iii) the defeasance, redemption,
repurchase or other acquisition of Pari Passu Indebtedness or Indebtedness
subordinated to the New Notes with the net cash proceeds from an incurrence of
Permitted Refinancing Indebtedness; (iv) the payment of any dividend by a
Restricted Subsidiary of the Company to the holders of its Equity Interests on a
pro rata basis; (v) optional and mandatory prepayments on any revolving credit
Indebtedness incurred under the New Credit Facility or (vi) any other Restricted
Payment which, together with all other Restricted Payments made pursuant to this
clause (vi) after the date of the Indenture, does not exceed $5.0 million in the
aggregate (in each case, after giving effect to all subsequent reductions in the
amount of any Restricted Investment made pursuant to this clause (vi) either as
a result of (A) the repayment of disposition thereof for cash or (B) the
redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary (valued
proportionate to the Company's equity interest in such Subsidiary at the time of
such redesignation), but, in the case of clauses (A) and (B), not to exceed the
amount of such Restricted Investment previously made pursuant to this clause
(vi); provided that in the case of each of clauses (i) through (vi) no Default
or Event of Default shall have occurred and be continuing after making such
Restricted Payment.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default or Event
of Default; provided, that in no event shall the business currently operated by
any Subsidiary Guarantor be transferred to or held by an Unrestricted
Subsidiary. For purposes of making such determination, all outstanding
Investments by the Company and its Restricted Subsidiaries (except to the extent
repaid in cash) in the Subsidiary so designated will be deemed to be Restricted
Payments at the time of such designation and will reduce the amount available
for Restricted Payments under the first paragraph of this covenant. All such
outstanding Investments will be deemed to
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constitute Investments in an amount equal to the fair market value of such
Investments at the time of such designation (as determined in good faith by the
Board of Directors). Such designation will only be permitted if such Restricted
Payment would be permitted at such time and if such Restricted Subsidiary
otherwise meets the definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company or such Subsidiary, as the
case may be, pursuant to the Restricted Payment. The fair market value of any
non-cash Restricted Payment shall be determined in good faith by the Board of
Directors whose resolution with respect thereto shall be delivered to the
Trustee; such determination will be based upon an opinion or appraisal issued by
an accounting, appraisal or investment banking firm of national standing if such
fair market value exceeds $1.0 million. Not later than the date of making any
Restricted Payment, the Company shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by the covenant "-- Restricted
Payments" were computed, together with a copy of any fairness opinion or
appraisal required by the Indenture.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Debt) and that the Company will not issue any Disqualified Stock and
will not permit any of its Subsidiaries to issue any shares of preferred stock;
provided, however, that the Company may incur Indebtedness (including Acquired
Debt) or issue shares of Disqualified Stock if the Fixed Charge Coverage Ratio
for the Company's most recently ended four full fiscal quarters for which
internal financial statements are available immediately preceding the date on
which such additional Indebtedness is incurred or such Disqualified Stock is
issued would have been at least 2.0 to 1 if the date on which the Indebtedness
is incurred is prior to February 1, 2000, and at least 2.5 to 1 if the date on
which the Indebtedness is incurred is on or after February 1, 2000, determined
on a pro forma basis (including a pro forma application of the net proceeds
therefrom), as if the additional Indebtedness had been incurred, or the
Disqualified Stock had been issued, as the case may be, at the beginning of such
four-quarter period.
The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Company and the Subsidiary Guarantors of
Indebtedness pursuant to the New Credit Facility; provided, that the
aggregate principal amount of all such Indebtedness (with letters of credit
being deemed to have a principal amount equal to the maximum potential
liability of the Company thereunder) outstanding under the New Credit
Facility after giving effect to such incurrence does not exceed the sum of
$40.0 million;
(ii) the incurrence by the Company and its Restricted Subsidiaries of
the Existing Indebtedness;
(iii) the incurrence by the Company and the Subsidiary Guarantors of
Indebtedness represented by the New Notes and the New Note Guarantees,
respectively;
(iv) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness represented by Capital Lease Obligations,
mortgage financings or purchase money obligations, in each case (other than
in the case of a mortgage financing secured by the real estate (and
personal property associated with such real estate) owned by the Company in
San Diego, California on which the Company's headquarters is located on the
date of the Indenture) incurred for the purpose of financing all or any
part of the purchase price or cost of construction or improvement of
property, plant or equipment used in the business of the Company or such
Restricted Subsidiary (whether through the direct purchase of assets or the
Capital Stock of any Person owning such Assets), in an aggregate principal
amount not to exceed $10.0 million at any time outstanding;
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(v) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness in connection with the acquisition of assets
or a new Restricted Subsidiary; provided, that such Indebtedness was
incurred by the prior owner of such assets or such Restricted Subsidiary
prior to such acquisition by the Company or one of its Subsidiaries and was
not incurred in connection with, or in contemplation of, such acquisition
by the Company or one of its Subsidiaries; provided, further, that the
principal amount (or accreted value, as applicable) of such Indebtedness,
together with any other outstanding Indebtedness incurred pursuant to this
clause (v), does not exceed $5.0 million;
(vi) the incurrence by the Company or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the
net proceeds of which are used to refund, refinance or replace Indebtedness
that was permitted by the Indenture to be incurred;
(vii) the incurrence by the Company or any of its Restricted
Subsidiaries of intercompany Indebtedness between the Company and any of
its Wholly Owned Restricted Subsidiaries or between one Wholly Owned
Restricted Subsidiary and another Wholly Owned Restricted Subsidiary;
provided, however, that (a) if the Company is the obligor on such
Indebtedness and the payee is not a Subsidiary Guarantor, such Indebtedness
is expressly subordinated to the prior payment in full in cash of all
Obligations with respect to the Notes; (b) if a Wholly Owned Restricted
Subsidiary that is not a Subsidiary Guarantor is the obligor on such
Indebtedness, such Indebtedness, to the extent owing to the Company or any
Subsidiary Guarantor, does not exceed $5.0 million in aggregate principal
amount at any time outstanding and (c) (x) any subsequent issuance or
transfer of Equity Interests that results in any such Indebtedness being
held by a Person other than the Company or a Wholly Owned Restricted
Subsidiary and (y) any sale or other transfer of any such Indebtedness to a
Person that is not either the Company or a Wholly Owned Restricted
Subsidiary shall be deemed, in each case, to constitute an incurrence of
such Indebtedness by the Company or such Restricted Subsidiary, as the case
may be, that was not permitted by this clause (vii);
(viii) the incurrence by the Company or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the purpose of
fixing or hedging (a) currency risk or interest rate risk with respect to
any floating rate Indebtedness that is permitted by the terms of this
Indenture to be outstanding or (b) exchange rate risk with respect to
agreements or Indebtedness of such Person payable denominated in a currency
other than U.S. dollars; provided, that such agreements do not increase the
Indebtedness of the obligor outstanding at any time other than as a result
of fluctuations in foreign currency exchange rates or interest rates or by
reason of fees, indemnities and compensation payable thereunder;
(ix) the Guarantee by the Company or any of its Restricted
Subsidiaries of Indebtedness of the Company or a Restricted Subsidiary of
the Company that was permitted to be incurred by another provision of this
covenant;
(x) the incurrence by the Company's Unrestricted Subsidiaries of
Non-Recourse Debt; provided, however, that if any such Indebtedness ceases
to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be
deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of the Company;
(xi) Indebtedness incurred by the Company or any of its Restricted
Subsidiaries constituting reimbursement obligations with respect to letters
of credit issued in the ordinary course of business, including without
limitation to letters of credit in respect to workers' compensation claims
or self-insurance, or other Indebtedness with respect to reimbursement type
obligations regarding workers' compensation claims; provided, however, that
upon the drawing of such letters of credit or the incurrence of such
Indebtedness, such obligations are reimbursed within 30 days following such
drawing or incurrence;
(xii) Indebtedness arising from agreements of the Company or a
Restricted Subsidiary providing for indemnification, adjustment of purchase
price or similar obligations, in each case, incurred or assumed in
connection with the disposition of any business, asset or Subsidiary, other
than guarantees of Indebtedness incurred by any Person acquiring all or any
portion of such business, assets or Subsidiary for
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the purpose of financing such acquisition; provided, that (a) such
Indebtedness is not reflected on the balance sheet of the Company or any
Restricted Subsidiary (contingent obligations referred to in a footnote to
financial statements and not otherwise reflected on the balance sheet will
not be deemed to be reflected on such balance sheet for purposes of this
clause (a)) and (b) the maximum assumable liability in respect of all such
Indebtedness shall at no time exceed the gross proceeds including non-cash
proceeds (the fair market value of such non-cash proceeds being measured at
the time received and without giving effect to any subsequent changes in
value) actually received by the Company and its Restricted Subsidiaries in
connection with such disposition;
(xiii) Obligations in respect of performance and surety bonds and
completion guarantees provided by the Company or any Restricted Subsidiary
in the ordinary course of business;
(xiv) the incurrence by Foreign Subsidiaries which are not Guarantors
of Indebtedness in connection with the financing of accounts or notes
receivable outside of the United States in an aggregate principal amount at
any time outstanding, including all Permitted Refinancing Indebtedness
incurred to refund, refinance or replace any other Indebtedness incurred
pursuant to this clause (xiv) not to exceed $10.0 million; provided, that
neither the Company nor any Guarantor shall have guaranteed or provided
credit support of any kind (including any undertaking, agreement or
instrument which would constitute Indebtedness) with respect to such
Indebtedness; and
(xv) the incurrence by the Company or any of its Restricted
Subsidiaries of additional Indebtedness, incurred after the date of the
Indenture, in an aggregate principal amount (or accreted value, as
applicable) at any time outstanding, including all Permitted Refinancing
Indebtedness incurred to refund, refinance or replace any other
Indebtedness incurred pursuant to this clause (xv), not to exceed $15.0
million.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (xv) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company shall, in its sole discretion, classify such item of Indebtedness in any
manner that complies with this covenant and such item of Indebtedness will be
treated as having been incurred pursuant to only one of such clauses or pursuant
to the first paragraph hereof. Accrual of interest and the accretion of accreted
value will not be deemed to be an incurrence of Indebtedness for purposes of
this covenant.
Liens
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, create, incur, assume or otherwise cause or
suffer to exist or become effective any Lien (other than Permitted Liens) upon
any of their property or assets, now owned or hereafter acquired.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (i) (a) pay dividends or make any
other distributions to the Company or any of its Restricted Subsidiaries (1) on
its Capital Stock or (2) with respect to any other interest or participation in,
or measured by, its profits, or (b) pay any indebtedness owed to the Company or
any of its Restricted Subsidiaries, (ii) make loans or advances to the Company
or any of its Restricted Subsidiaries or (iii) transfer any of its properties or
assets to the Company or any of its Restricted Subsidiaries, except for such
encumbrances or restrictions existing under or by reason of (a) Existing
Indebtedness as in effect on the date of the Indenture, (b) the New Credit
Facility as in effect as of the date of the Indenture, and any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings thereof; provided, that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings are no more restrictive in the aggregate with
respect to such dividend and other payment restrictions than those contained in
the New Credit Facility as in effect on the date of the Indenture, (c) the
Indenture and the Notes, (d) any applicable
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law, rule, regulation or order, (e) any instrument governing Indebtedness or
Capital Stock of a Person acquired by the Company or any of its Restricted
Subsidiaries as in effect at the time of such acquisition (except to the extent
such Indebtedness was incurred in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any Person,
or the properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired; provided, that, in the case of
Indebtedness, such Indebtedness was permitted by the terms of the Indenture to
be incurred, (f) customary non-assignment provisions in leases entered into in
the ordinary course of business and consistent with past practices, (g) purchase
money obligations for property acquired in the ordinary course of business that
impose restrictions of the nature described in clause (iii) above on the
property so acquired, (h) Permitted Refinancing Indebtedness; provided, that the
material restrictions contained in the agreements governing such Permitted
Refinancing Indebtedness are no more restrictive than those contained in the
agreements governing the Indebtedness being refinanced, and (i) contracts for
the sale of assets, including without limitation customary restrictions with
respect to a Subsidiary pursuant to an agreement that has been entered into for
the sale or disposition of all or substantially all of the Capital Stock or
assets of such Subsidiary.
Merger, Consolidation, or Sale of Assets
The Indenture provides that the Company may not consolidate or merge with
or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions, to another
Person unless (i) the Company is the surviving corporation or the Person formed
by or surviving any such consolidation or merger (if other than the Company) or
to which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia; (ii) the
Person formed by or surviving any such consolidation or merger (if other than
the Company) or the Person to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made assumes all the obligations
of the Company under the Notes and the Indenture pursuant to a supplemental
indenture in a form reasonably satisfactory to the Trustee; (iii) immediately
after such transaction no Default or Event of Default exists; (iv) except in the
case of a merger of the Company with or into a Wholly Owned Restricted
Subsidiary of the Company, the Company or the entity or Person formed by or
surviving any such consolidation or merger (if other than the Company), or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made will, at the time of such transaction and after giving pro
forma effect thereto as if such transaction had occurred at the beginning of the
applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described above under the caption
"-- Incurrence of Indebtedness and Issuance of Preferred Stock," and (v) each
Subsidiary Guarantor, unless it is the other party to the transactions described
above, shall have by supplemental indenture confirmed that its New Note
Guarantee shall apply to such Person's obligations under the Indenture and the
New Notes.
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer
or otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction")
unless (i) such Affiliate Transaction is on terms that are no less favorable to
the Company or the relevant Restricted Subsidiary than those that would have
been obtained in a comparable transaction by the Company or such Restricted
Subsidiary with an unrelated Person and (ii) the Company delivers to the Trustee
(a) with respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $1.0 million, a
resolution of the Board of Directors set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (i) above and
that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate
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consideration in excess of $5.0 million, an opinion as to the fairness to the
Holders of such Affiliate Transaction from a financial point of view issued by
an accounting, appraisal or investment banking firm of national standing;
provided, that the following shall not be deemed Affiliate Transactions: (1) any
employment agreement entered into by the Company or any of its Restricted
Subsidiaries in the ordinary course of business and consistent with the past
practice of the Company or such Restricted Subsidiary, (2) transactions between
or among the Company and/or its Restricted Subsidiaries, (3) Permitted
Investments and Restricted Payments that are permitted by the provisions of the
Indenture described above under the caption "--Restricted Payments," (4)
customary loans, advances, fees and compensation paid to, and indemnity provided
on behalf of, officers, directors, employees or consultants of the Company or
any of its Restricted Subsidiaries, (5) transactions in accordance with the
Securityholders Agreement, as amended; provided, that no such amendment contains
any provisions that are materially adverse to the Holders of the New Notes, and
(6) transactions between the Company or its Restricted Subsidiaries on the one
hand, and DLJ or its Affiliates, on the other hand, involving the provision of
financial, advisory, placement or underwriting services by DLJ; provided, that
fees payable to DLJ do not exceed the usual and customary fees of DLJ for
similar services.
Limitation on Issuances and Sales of Capital Stock of Wholly Owned Restricted
Subsidiaries
The Indenture provides that the Company (i) will not, and will not permit
any Wholly Owned Restricted Subsidiary of the Company to, transfer, convey,
sell, lease or otherwise dispose of any Capital Stock of any Wholly Owned
Subsidiary of the Company to any Person (other than the Company or a Wholly
Owned Restricted Subsidiary of the Company), unless (a) such transfer,
conveyance, sale, lease or other disposition is of all the Capital Stock of such
Wholly Owned Restricted Subsidiary and (b) the cash Net Proceeds from such
transfer, conveyance, sale, lease or other disposition are applied in accordance
with the covenant described above under the caption "--Asset Sales," and (ii)
will not permit any Wholly Owned Restricted Subsidiary of the Company to issue
any of its Equity Interests (other than, if necessary, shares of its Capital
Stock constituting directors' qualifying shares) to any Person other than to the
Company or a Wholly Owned Restricted Subsidiary of the Company.
Limitations on Issuances of Guarantees of Indebtedness
The Indenture provides that the Company will not permit any Restricted
Subsidiary, directly or indirectly, to Guarantee or pledge any assets to secure
the payment of any other Indebtedness of the Company unless either such
Restricted Subsidiary (x) is a Subsidiary Guarantor or (y) simultaneously
executes and delivers a supplemental indenture to the Indenture providing for
the Guarantee of the payment of the New Notes by such Restricted Subsidiary,
which Guarantee shall be senior to or pari passu with such Restricted
Subsidiary's Guarantee of or pledge to secure such other Indebtedness.
Notwithstanding the foregoing, any such Guarantee by a Restricted Subsidiary of
the New Notes shall provide by its terms that it shall be automatically and
unconditionally released and discharged upon any sale, exchange or transfer, to
any Person not an Affiliate of the Company, of all of the Company's stock in, or
all or substantially all the assets of, such Restricted Subsidiary, which sale,
exchange or transfer is made in compliance with the applicable provisions of the
Indenture. The form of such Guarantee is attached as an exhibit to the
Indenture.
Business Activities
The Company will not, and will not permit any Restricted Subsidiary to,
engage in any business other than a Permitted Business, except to such extent as
would not be material to the Company and its Restricted Subsidiaries taken as a
whole.
Additional Note Guarantees
The Indenture provides that (i) if the Company or any of its Restricted
Subsidiaries shall, after the date of the Indenture, transfer or cause to be
transferred, including by way of any Investment, in one or a series of
transactions (whether or not related), any assets, businesses, divisions, real
property or equipment having an aggregate fair market value (as determined in
good faith by the Board of Directors) in excess of $1.0 million
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to any Restricted Subsidiary that is neither a Subsidiary Guarantor nor a
Foreign Subsidiary, (ii) if the Company or any of its Restricted Subsidiaries
shall acquire another Restricted Subsidiary other than a Foreign Subsidiary
having total assets with a fair market value (as determined in good faith by the
Board of Directors) in excess of $1.0 million or (iii) if any Restricted
Subsidiary other than a Foreign Subsidiary shall incur Acquired Debt in excess
of $1.0 million, then the Company shall, at the time of such transfer,
acquisition or incurrence, (i) cause such transferee, acquired Restricted
Subsidiary or Restricted Subsidiary incurring Acquired Debt (if not then a
Subsidiary Guarantor) to execute a New Note Guarantee of the Obligations of the
Company under the New Notes in the form set forth in the Indenture and (ii)
deliver to the Trustee an Opinion of Counsel, in form reasonably satisfactory to
the Trustee, that such New Note Guarantee is a valid, binding and enforceable
obligation of such transferee, acquired Restricted Subsidiary or Restricted
Subsidiary incurring Acquired Debt, subject to customary exceptions for
bankruptcy, fraudulent conveyance and equitable principles. Notwithstanding the
foregoing, the Company or any of its Restricted Subsidiaries may make a
Restricted Investment in any Wholly Owned Restricted Subsidiary of the Company
without compliance with this covenant provided that such Restricted Investment
is permitted by the covenant described under the caption, "-- Restricted
Payments."
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any New Notes are outstanding, the
Company will furnish to the Holders of New Notes (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and, with respect to the annual information only, a
report thereon by the Company's certified independent accountants and (ii) all
current reports that would be required to be filed with the Commission on Form
8-K if the Company were required to file such reports. In addition, whether or
not required by the rules and regulations of the Commission, the Company will
file a copy of all such information and reports with the Commission for public
availability (unless the Commission will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request. In addition, the Company has agreed that, for so long as any New Notes
remain outstanding, it will furnish to the Holders and to securities analysts
and prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages, if any, with respect to, the New Notes; (ii) default in
payment when due of the principal of or premium, if any, on the New Notes; (iii)
failure by the Company to comply with the provisions described under the
captions "-- Repurchase at the Option of Holders -- Change of Control,"
"-- Repurchase at the Option of Holders -- Asset Sales," or "-- Certain
Covenants -- Merger, Consolidation, or Sale of Assets"; (iv) failure by the
Company for 30 days after notice from the Trustee or at least 25% in principal
amount of the New Notes then outstanding to comply with the provisions described
under the captions "-- Restricted Payments" or "-- Incurrence of Indebtedness
and Issuance of Preferred Stock"; (v) failure by the Company for 60 days after
notice from the Trustee or at least 25% in principal amount of the New Notes
then outstanding to comply with any of its other agreements in the Indenture or
the New Notes; (vi) default under any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Subsidiaries (or
the payment of which is guaranteed by the Company or any of its Subsidiaries)
whether such Indebtedness or Guarantee now exists, or is created after the date
of the Indenture, which default (a) is caused by a failure to pay principal of
or premium, if any, or interest on such Indebtedness prior to the expiration of
the grace period provided in such Indebtedness on the date of such default (a
"Payment Default") or (b) results in the acceleration of such Indebtedness prior
to its express maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such Indebtedness
under which there has been a Payment Default or the maturity of which has
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been so accelerated, aggregates $5.0 million or more; (vii) failure by the
Company or any of its Subsidiaries to pay final judgments aggregating in excess
of $5.0 million, which judgments are not paid, discharged or stayed for a period
of 60 days and (viii) certain events of bankruptcy or insolvency with respect to
the Company or any of its Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding New Notes
may declare all the New Notes to be due and payable immediately. Notwithstanding
the foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company or any of its Subsidiaries
all outstanding New Notes will become due and payable without further action or
notice. Holders of the New Notes may not enforce the Indenture or the New Notes
except as provided in the Indenture. If any Event of Default occurs and is
continuing, subject to certain limitations, Holders of a majority in principal
amount of the then outstanding New Notes may direct the Trustee in its exercise
of any trust or power. The Trustee may withhold from Holders of the New Notes
notice of any continuing Default or Event of Default (except a Default or Event
of Default relating to the payment of principal or interest) if it determines
that withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the New Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the New Notes. If an Event of Default occurs prior to
February 1, 2002 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the New Notes prior to February 1, 2002, then the
premium specified in the Indenture shall also become immediately due and payable
to the extent permitted by law upon the acceleration of the New Notes.
The Holders of a majority in aggregate principal amount of the New Notes
then outstanding by notice to the Trustee may on behalf of the Holders of all of
the New Notes waive any existing Default or Event of Default and its
consequences under the Indenture except a continuing Default or Event of Default
in the payment of interest on, or the principal of, the New Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or the Subsidiary Guarantors, as such, shall have any liability for any
obligations of the Company or any Subsidiary Guarantor under the New Notes, the
Indenture, the New Note Guarantees or for any claim based on, in respect of, or
by reason of, such obligations or their creation. Each Holder of New Notes, by
accepting a New Note, waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the New Notes. Such waiver
is unenforceable to the extent it comports to waive compliance with the federal
securities laws and the rules and regulations thereunder and it is the view of
the Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding New Notes and all
obligations of the Subsidiary Guarantors under the New Note Guarantees ("Legal
Defeasance") except for (i) the rights of Holders of outstanding New Notes to
receive payments in respect of the principal of, premium and Liquidated Damages,
if any, and interest on such New Notes when such payments are due from the trust
referred to below, (ii) the Company's obligations with respect to the New Notes
concerning issuing temporary New Notes, registration of New Notes, mutilated,
destroyed, lost or stolen New Notes and the maintenance of an office or agency
for payment and money for
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security payments held in trust, (iii) the rights, powers, trusts, duties and
immunities of the Trustee, and the Company's obligations in connection therewith
and (iv) the Legal Defeasance provisions of the Indenture. In addition, the
Company may, at its option and at any time, elect to have the obligations of the
Company and the Subsidiary Guarantors released with respect to certain covenants
that are described in the Indenture ("Covenant Defeasance") and thereafter any
omission to comply with such obligations shall not constitute a Default or Event
of Default with respect to the New Notes. In the event Covenant Defeasance
occurs, certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "-- Events of Default"
will no longer constitute an Event of Default with respect to the New Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the New Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium and Liquidated Damages, if any, and interest on
the outstanding New Notes on the stated maturity or on the applicable redemption
date, as the case may be, and the Company must specify whether the New Notes are
being defeased to maturity or to a particular redemption date; (ii) in the case
of Legal Defeasance, the Company shall have delivered to the Trustee an opinion
of counsel in the United States reasonably acceptable to the Trustee confirming
that (A) the Company has received from, or there has been published by the
Internal Revenue Service a ruling or (B) since the date of the Indenture, there
has been a change in the applicable federal income tax law, in either case to
the effect that, and based thereon such opinion of counsel shall confirm that,
the Holders of the outstanding New Notes will not recognize income, gain or loss
for federal income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Legal Defeasance had not
occurred; (iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that the Holders of the outstanding New
Notes will not recognize income, gain or loss for federal income tax purposes as
a result of such Covenant Defeasance and will be subject to federal income tax
on the same amounts, in the same manner and at the same times as would have been
the case if such Covenant Defeasance had not occurred; (iv) no Default or Event
of Default shall have occurred and be continuing on the date of such deposit
(other than a Default or Event of Default resulting from the borrowing of funds
to be applied to such deposit) or insofar as Events of Default from bankruptcy
or insolvency events are concerned, at any time in the period ending on the 91st
day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance
will not result in a breach or violation of, or constitute a default under any
material agreement or instrument (other than the Indenture) to which the Company
or any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound; (vi) the Company must have delivered to the Trustee an
opinion of counsel to the effect that after the 91st day following the deposit,
the trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; (vii) the Company must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the intent
of preferring the Holders of New Notes over the other creditors of the Company
with the intent of defeating, hindering, delaying or defrauding creditors of the
Company or others and (viii) the Company must deliver to the Trustee an
Officers' Certificate and an opinion of counsel, each stating that all
conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange New Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or exchange
any New Note selected for redemption. Also, the Company is not required to
transfer or exchange any New Note for a period of 15 days before a selection of
New Notes to be redeemed.
The registered Holder of a New Note will be treated as the owner of it for
all purposes.
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AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture,
the New Notes or the New Note Guarantees may be amended or supplemented with the
consent of the Holders of at least a majority in principal amount of the New
Notes then outstanding (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, New
Notes), and any existing default or compliance with any provision of the
Indenture, the New Notes or the New Note Guarantees may be waived with the
consent of the Holders of a majority in principal amount of the then outstanding
New Notes (including consents obtained in connection with a tender offer or
exchange offer for New Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any New Notes held by a non-consenting Holder): (i) reduce the
principal amount of New Notes whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed maturity
of any New Note or alter the provisions with respect to the redemption of the
New Notes (other than provisions relating to the covenants described above under
the caption "-- Repurchase at the Option of Holders"); (iii) reduce the rate of
or change the time for payment of interest on any New Note; (iv) waive a Default
or Event of Default in the payment of principal of or premium or Liquidated
Damages, if any, or interest on the New Notes (except a rescission of
acceleration of the New Notes by the Holders of at least a majority in aggregate
principal amount of the New Notes and a waiver of the payment default that
resulted from such acceleration); (v) make any New Note payable in money other
than that stated in the New Notes; (vi) make any change in the provisions of the
Indenture relating to waivers of past Defaults or the rights of Holders of Notes
to receive payments of principal of or premium, if any, or interest on the New
Notes; (vii) waive a redemption payment with respect to any New Note (other than
a payment required by one of the covenants described above under the caption
"-- Repurchase at the Option of Holders") or (viii) make any change in the
foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of New
Notes, the Company, the Subsidiary Guarantors and the Trustee may amend or
supplement the Indenture, the New Notes or the New Note Guarantees to cure any
ambiguity, defect or inconsistency, to provide for uncertificated New Notes in
addition to or in place of certificated New Notes, to provide for the assumption
of the Company's and the Subsidiary Guarantors' obligations to Holders of New
Notes in the case of a merger or consolidation, to make any change that would
provide any additional rights or benefits to the Holders of New Notes or that
does not adversely affect the legal rights under the Indenture of any such
Holder, to comply with requirements of the Commission in order to effect or
maintain the qualification of the Indenture under the Trust Indenture Act or to
allow any Subsidiary to guarantee the New Notes.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; provided, that if it acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue or resign.
The Holders of a majority in principal amount of the then outstanding New
Notes will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of New Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
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ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to Phase Metrics, Inc.,
10260 Sorrento Valley Road, San Diego, California 92121; Attention: Chief
Financial Officer.
BOOK-ENTRY; DELIVERY; FORM AND TRANSFER
The New Notes exchanged by QIBs initially will be in the form of one or
more registered global notes without interest coupons (collectively, the "U.S.
Global Notes"). Upon issuance, the U.S. Global Notes will be deposited with the
Trustee, as custodian for The Depository Trust Company ("DTC"), in New York, New
York, and registered in the name of DTC or its nominee, in each case for credit
to the accounts of DTC's Direct and Indirect Participants (as defined below).
The New Notes exchanged for Notes that were offered and sold in offshore
transactions in reliance on Regulation S, if any, will be in the form of one or
more permanent global notes (the "Regulation S Global Notes") and deposited with
the Trustee, as custodian for DTC, in New York, New York, and registered in the
name of a nominee of DTC (a "Nominee") for credit to the accounts of Indirect
Participants at Euroclear and Cedel Bank. Beneficial interests in the Regulation
S Permanent Global Notes may be transferred to a Person that takes delivery in
the form of an interest in the U.S. Global Notes and beneficial interests in the
U.S. Global Notes may be transferred to a Person that takes delivery in the form
of an interest in the Regulation S Permanent Global Notes; provided, that in
each case, that the certification requirements described below are complied
with. See "Transfers of Interests in One Global Note for Interests in Another
Global Note." All registered global notes are referred to herein collectively as
"Global Notes."
In addition, transfer of beneficial interests in any Global Notes will be
subject to the applicable rules and procedures of DTC and its Direct or Indirect
Participants (including, if applicable, those of Euroclear and Cedel Bank),
which may change from time to time.
The Global Notes may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee in certain
limited circumstances. Beneficial interests in the Global Notes may be exchanged
for New Notes in certificated form in certain limited circumstances. See
"--Transfer of Interests in Global Notes for Certificated Notes."
Initially, the Trustee will act as Paying Agent and Registrar. The New
Notes may be presented for registration of transfer and exchange at the offices
of the Registrar.
Depository Procedures
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Direct Participants") and to facilitate the clearance and settlement of
transactions in those securities between Direct Participants through electronic
book-entry changes in accounts of Direct Participants. The Direct Participants
include securities brokers and dealers (including DLJ), banks, trust companies,
clearing corporations and certain other organizations, including Euroclear and
Cedel Bank. Access to DTC's system is also available to other entities that
clear through or maintain a direct or indirect custodial relationship with a
Direct Participant (collectively, the "Indirect Participants"). DTC may hold
securities beneficially owned by other Persons only through the Direct
Participants or Indirect Participants and such other Persons' ownership interest
and transfer of ownership interest will be recorded only on the records of the
Direct Participant and/or Indirect Participant, and not on the records
maintained by DTC.
DTC has also advised the Company that, pursuant to DTC's procedures, DTC
will maintain records of the ownership interests of each Direct Participants in
the Global Notes and the transfer of ownership interests by and between Direct
Participants. DTC will not maintain records of the ownership interests of, or
the transfer of ownership interests by and between, Indirect Participants or
other owners of beneficial interests in the Global Notes. Direct Participants
and Indirect Participants must maintain their own records of the
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ownership interests of, and the transfer of ownership interests by and between,
Indirect Participants and other owners of beneficial interests in the Global
Notes.
Investors in the U.S. Global Notes may hold their interests therein
directly through DTC if they are Direct Participants in DTC or indirectly
through organizations that are Direct Participants in DTC. Investors in the
Regulation S Global Notes may hold their interests therein directly through
Euroclear or Cedel Bank or through organizations other than Euroclear and Cedel
Bank that are Direct Participants in the DTC system. Morgan Guaranty Trust
Company of New York, Brussels office is the operator and depository of Euroclear
and Citibank, N.A. is the operator and depository of Cedel Bank (each a
"Nominee" of Euroclear and Cedel Bank, respectively). Therefore, they will each
be recorded on DTC's records as the holders of all ownership interests held by
them on behalf of Euroclear and Cedel Bank, respectively. Euroclear and Cedel
Bank will maintain on their records the ownership interests, and transfers of
ownership interests by and between, their own customer's securities accounts.
DTC will not maintain records of the ownership interests of, or the transfer of
ownership interests by and between, customers of Euroclear or Cedel Bank. All
ownership interests in any Global Notes, including those of customers'
securities accounts held through Euroclear or Cedel Bank, may be subject to the
procedures and requirements of DTC.
The laws of some states require that certain Persons take physical delivery
in definitive, certificated form, of securities that they own. This may limit or
curtail the ability to transfer beneficial interests in a Global Note to such
Persons. Because DTC can act only on behalf of Direct Participants, which in
turn act on behalf of Indirect Participants and others, the ability of a Person
having a beneficial interest in a Global Note to pledge such interest to Persons
or entities that are not Direct Participants in DTC, or to otherwise take
actions in respect of such interests, may be affected by the lack of physical
certificates evidencing such interests. For certain other restrictions on the
transferability of the Notes, See "-- Regulation S Permanent Global Notes" and
"-- Transfers of Interests in Global Notes for Certificated Notes."
EXCEPT AS DESCRIBED IN "--TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR
CERTIFICATED NOTES", OWNERS OF BENEFICIAL INTERESTS IN THE GLOBAL NOTES WILL NOT
HAVE NEW NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NEW NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS
OR HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Under the terms of the Indenture, the Company, the Subsidiary Guarantors
and the Trustee will treat the Persons in whose names the New Notes are
registered (including New Notes represented by Global Notes) as the owners
thereof for the purpose of receiving payments and for any and all other purposes
whatsoever. Payments in respect of the principal, premium, Liquidated Damages,
if any, and interest on Global Notes registered in the name of DTC or its
nominee will be payable by the Trustee to DTC or its nominee as the registered
holder under the Indenture. Consequently, neither the Company, the Subsidiary
Guarantors, the Trustee nor any agent of the Company, the Subsidiary Guarantors
or the Trustee has or will have any responsibility or liability for (i) any
aspect of DTC's records or any Direct Participant's or Indirect Participant's
records relating to or payments made on account of beneficial ownership
interests in the Global Notes or for maintaining, supervising or reviewing any
of DTC's records or any Direct Participant's or Indirect Participant's records
relating to the beneficial ownership interests in any Global Note or (ii) any
other matter relating to the actions and practices of DTC or any of its Direct
Participants or Indirect Participants.
DTC has advised the Company that its current payment practice (for payments
of principal, interest and the like) with respect to securities such as the New
Notes is to credit the accounts of the relevant Direct Participants with such
payment on the payment date in amounts proportionate to such Direct
Participant's respective ownership interests in the Global Notes as shown on
DTC's records. Payments by Direct Participants and Indirect Participants to the
beneficial owners of the New Notes will be governed by standing instructions and
customary practices between them and will not be the responsibility of DTC, the
Trustee, the Company or the Subsidiary Guarantors. Neither the Company, the
Subsidiary Guarantors nor the Trustee will be liable for any delay by DTC or its
Direct Participants or Indirect Participants in identifying the beneficial
owners of the New Notes, and the Company and the Trustee may conclusively rely
on and will be protected in relying on instructions from DTC or its nominee as
the registered owner of the New Notes for all purposes.
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The Global Notes will trade in DTC's Same-Day Funds Settlement System and,
therefore, transfers between Direct Participants in DTC will be effected in
accordance with DTC's procedures, and will be settled in immediately available
funds. Transfers between Indirect Participants (other than Indirect Participants
who hold an interest in the New Notes through Euroclear or Cedel Bank) who hold
an interest through a Direct Participant will be effected in accordance with the
procedures of such Direct Participant but generally will settle in immediately
available funds. Transfers between and among Indirect Participants who hold
interests in the New Notes through Euroclear and Cedel Bank will be effected in
the ordinary way in accordance with their respective rules and operating
procedures.
Subject to compliance with the transfer restrictions applicable to the New
Notes described herein, cross-market transfers between Direct Participants in
DTC, on the one hand, and Indirect Participants who hold interests in the New
Notes through Euroclear or Cedel Bank, on the other hand, will be effected by
Euroclear or Cedel Bank's respective Nominee through DTC in accordance with
DTC's rules on behalf of Euroclear or Cedel Bank; provided, that delivery of
instructions relating to crossmarket transactions must be made directly to
Euroclear or Cedel Bank, as the case may be, by the counterparty in accordance
with the rules and procedures of Euroclear or Cedel Bank and within their
established deadlines (Brussels time for Euroclear and UK time for Cedel Bank).
Indirect Participants who hold interest in the New Notes through Euroclear and
Cedel Bank may not deliver instructions directly to Euroclear's or Cedel Bank's
Nominee. Euroclear or Cedel Bank will, if the transaction meets its settlement
requirements, deliver instructions to its respective Nominee to deliver or
receive interests on Euroclear's or Cedel Bank's behalf in the relevant Global
Note in DTC, and make or receive payment in accordance with normal procedures
for same-day fund settlement applicable to DTC.
Because of time zone differences, the securities accounts of an Indirect
Participant who holds an interest in the New Notes through Euroclear or Cedel
Bank purchasing an interest in a Global Note from a Direct Participant in DTC
will be credited, and any such crediting will be reported to Euroclear or Cedel
Bank during the European business day immediately following the settlement date
of DTC in New York. Although recorded in DTC's accounting records as of DTC's
settlement date in New York, Euroclear and Cedel Bank customers will not have
access to the cash amount credited to their accounts as a result of a sale of an
interest in a Regulation S Global Note to a DTC Participant until the European
business day for Euroclear or Cedel Bank immediately following DTC's settlement
date.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of New Notes only at the direction of one or more Direct
Participants to whose account interests in the Global Notes are credited and
only in respect of such portion of the aggregate principal amount of the New
Notes as to which such Direct Participant or Direct Participants has or have
given direction. However, if there is an Event of Default under the New Notes,
DTC reserves the right to exchange Global Notes (without the direction of one or
more of its Direct Participants) for New Notes in certificated form, and to
distribute such certificated forms of New Notes to its Direct Participants. See
"-- Transfers of Interests in Global Notes for Certificated Notes."
Although DTC, Euroclear and Cedel Bank have agreed to the foregoing
procedures to facilitate transfers of interests in the Regulation S Global Notes
and in the U.S. Global Notes among Direct Participants, Euroclear and Cedel
Bank, they are under no obligation to perform or to continue to perform such
procedures, and such procedures may be discontinued at any time. None of the
Company, the Subsidiary Guarantors, DLJ or the Trustee will have any
responsibility for the performance by DTC, Euroclear or Cedel Bank or their
respective Direct and Indirect Participants of their respective obligations
under the rules and procedures governing any of their operations.
The information in this section concerning DTC, Euroclear and Cedel Bank
and their book-entry systems has been obtained from sources that the Company
believes to be reliable, but the Company takes no responsibility for the
accuracy thereof.
"U.S. Person" means (i) any individual resident in the United States, (ii)
any partnership or corporation organized or incorporated under the laws of the
United States, (iii) any estate of which an executor or administrator is a U.S.
Person (other than an estate governed by foreign law and of which at least one
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executor or administrator is a non-U.S. Person who has sole or shared investment
discretion with respect to its assets), (iv) any trust of which any trustee is a
U.S. Person (other than a trust of which at least one trustee is a non-U.S.
Person who has sole or shared investment discretion with respect to its assets
and no beneficiary of the trust (and no settler, if the trust is revocable) is a
U.S. Person), (v) any agency or branch of a foreign entity located in the United
States, (vi) any non-discretionary or similar account (other than an estate or
trust) held by a dealer or other fiduciary for the benefit or account of a U.S.
Person, (vii) any discretionary or similar account (other than an estate or
trust) held by a dealer or other fiduciary organized, incorporated or (if an
individual) resident in the United States (other than such an account held for
the benefit or account of a non-U.S. Person), (viii) any partnership or
corporation organized or incorporated under the laws of a foreign jurisdiction
and formed by a U.S. Person principally for the purpose of investing in
securities not registered under the Securities Act (unless it is organized or
incorporated and owned, by "accredited investors" within the meaning of Rule
501(a) under the Securities Act who are not natural persons, estates or trusts);
provided, however that the term "U.S. Person" shall not include (A) a branch or
agency of a U.S. Person that is located and operating outside the United States
for valid business purposes as a locally regulated branch or agency engaged in
the banking or insurance business, (B) any employee benefit plan established and
administered in accordance with the law, customary practices and documentation
of a foreign country and (C) the international organizations set forth in
Section 902(o)(7) of Regulation S under the Securities Act and any other similar
international organizations, and their agencies, affiliates and pension plans.
Transfers of Interests in One Global Note for Interests in Another Global Note
An Indirect Participant who holds an interest in Regulation S Global Notes
will be permitted to transfer its interest to a U.S. Person who takes delivery
in the form of an interest in U.S. Global Notes only upon receipt by the Trustee
of any necessary written certification from the transferor.
A Direct or Indirect Participant who holds an interest in U.S. Global Notes
may transfer its interests to a Person who takes delivery in the form of an
interest in Regulation S Global Notes only upon receipt by the Trustee of a
written certification from the transferor to the effect that such transfer is
being made in accordance with Rule 904 of Regulation S.
Transfers involving an exchange of a beneficial interest in Regulation S
Global Notes for a beneficial interest in U.S. Global Notes or vice versa will
be effected by DTC by means of an instruction originated by the Trustee through
DTC/Deposit Withdraw at Custodian (DWAC) system. Accordingly, in connection with
such transfer, appropriate adjustments will be made to reflect a decrease in the
principal amount of the one Global Note and a corresponding increase in the
principal amount of the other Global Note, as applicable. Any beneficial
interest in the one Global Note that is transferred to a Person who takes
delivery in the form of the other Global Note will, upon transfer, cease to be
an interest in such first Global Note and become an interest in such other
Global Note and, accordingly, will thereafter be subject to all transfer
restrictions and other procedures applicable to beneficial interests in such
other Global Note for as long as it remains such an interest.
Transfers of Interests in Global Notes for Certificated Notes
An entire Global Note may be exchanged for definitive New Notes in
registered, certificated form without interest coupons ("Certificated Notes") if
(i) DTC (x) notifies the Company that it is unwilling or unable to continue as
depositary for the Global Notes and the Company thereupon fails to appoint a
successor depositary within 90 days or (y) has ceased to be a clearing agency
registered under the Exchange Act, (ii) the Company, at its option, notifies the
Trustee in writing that it elects to cause the issuance of Certificated Notes or
(iii) there shall have occurred and be continuing a Default or an Event of
Default with respect to the Notes. In any such case, the Company will notify the
Trustee in writing that, upon surrender by the Direct and Indirect Participants
of their interest in such Global Note, Certificated Notes will be issued to each
Person that such Direct and Indirect Participants and the DTC identify as being
the beneficial owner of the New Related Notes.
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Beneficial interests in Global Notes held by any Direct or Indirect
Participant may be exchanged for Certificated Notes upon request to DTC, by such
Direct Participant (for itself or on behalf of an Indirect Participant), to the
Trustee in accordance with customary DTC procedures. Certificated Notes
delivered in exchange for any beneficial interest in any Global Note will be
registered in the names, and issued in any approved denominations, requested by
DTC on behalf of such Direct or Indirect Participants (in accordance with DTC's
customary procedures).
Neither the Company, the Subsidiary Guarantors nor the Trustee will be
liable for any delay by the holder of the Global Notes or DTC in identifying the
beneficial owners of New Notes, and the Company, the Subsidiary Guarantors and
the Trustee may conclusively rely on, and will be protected in relying on,
instructions from the holder of the Global Note or DTC for all purposes.
Transfers of Certificated Notes
Certificated Notes may only be transferred if the transferor first delivers
to the Trustee a written certificate (and in certain circumstances, an opinion
of counsel) confirming that, in connection with such transfer, it has complied
with the restrictions on transfer described under "Notice to Investors."
Same Day Settlement and Payment
The Indenture will require that payments in respect of the New Notes
represented by the Global Notes (including principal, premium, if any, interest
and Liquidated Damages, if any) be made by wire transfer of immediately
available same day funds to the accounts specified by the holder of interests in
such Global Note. With respect to Certificated Notes, the Company will make all
payments of principal, premium, if any, interest and Liquidated Damages, if any,
by wire transfer of immediately available same day funds to the accounts
specified by the holders thereof or, if no such account is specified, by mailing
a check to each such holder's registered address. The Company expects that
secondary trading in the Certificated Notes will also be settled in immediately
available funds.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Company, the Subsidiary Guarantors and DLJ entered into the
Registration Rights Agreement on the date of the Note Closing. In the
Registration Rights Agreement, the Company and the Subsidiary Guarantors agreed
to file an Exchange Offer Registration Statement with the Commission within 60
days of the date of the Note Closing, and use their respective best efforts to
have it declared effective at the earliest possible time. The Company and the
Subsidiary Guarantors also agreed to use their best efforts to cause the
Exchange Offer Registration Statement to be effective continuously, to keep the
Exchange Offer open for a period of not less than 20 business days and cause the
Exchange Offer to be consummated no later than the 30th business day after it is
declared effective by the Commission. Pursuant to the Exchange Offer, the
Company is offering to the Holders of Transfer Restricted Securities who are
able to make certain representations, the opportunity to exchange their Transfer
Restricted Securities for New Notes. To participate in the Exchange Offer, each
Holder must represent that it is not an affiliate of the Company, it is not
engaged in, and does not intend to engage in, and has no arrangement or
understanding with any Person to participate in, a distribution of the New Notes
that are issued in the Exchange Offer and it is acquiring the New Notes in the
Exchange Offer in its ordinary course of business.
If (i) the Exchange Offer is not permitted by applicable law or Commission
policy or (ii) any Holder of Notes which are Transfer Restricted Securities
notifies the Company prior to the 20th business day following the consummation
of the Exchange Offer that (a) it is prohibited by law or Commission policy from
participating in the Exchange Offer, (b) it may not resell the New Notes
acquired by it in the Exchange Offer to the public without delivering a
prospectus, and the prospectus contained in the Exchange Offer Registration
Statement is not appropriate or available for such resales by it or (c) it is a
broker-dealer and holds New Notes acquired directly from the Company or any of
the Company's affiliates, the Company and the Subsidiary Guarantors will file
with the Commission a Shelf Registration Statement to register for public
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resale the Transfer Restricted Securities held by any such Holder who provide
the Company with certain information for inclusion in the Shelf Registration
Statement.
For the purposes of the Registration Rights Agreement, "Transfer Restricted
Securities" means each Note until the earliest of the date of which (i) such
Note is exchanged in the Exchange Offer and entitled to be resold to the public
by the Holder thereof without complying with the prospectus delivery
requirements of the Securities Act, (ii) such Note has been disposed of in
accordance with the Shelf Registration Statement, (iii) such Note is disposed of
by a Broker-Dealer pursuant to the "Plan of Distribution" contemplated by the
Exchange Offer Registration Statement (including delivery of the Prospectus
contained therein) or (iv) such Note is distributed to the public pursuant to
Rule 144 under the Securities Act.
The Registration Rights Agreement provides that (i) if the Company or the
Subsidiary Guarantors fail to file an Exchange Offer Registration Statement with
the Commission on or prior to the 60th day after the date of the Note Closing,
(ii) if the Exchange Offer Registration Statement is not declared effective by
the Commission on or prior to the 120th day after the date of the Note Closing,
(iii) the Exchange Offer is not consummated on or before the 30th business day
after the Exchange Offer Registration Statement is declared effective (iv) if
obligated to file the Shelf Registration Statement and the Company or the
Subsidiary Guarantors fail to file the Shelf Registration Statement with the
Commission on or prior to the 30th day after such filing obligation arises, (v)
if obligated to file a Shelf Registration Statement and the Shelf Registration
Statement is not declared effective on or prior to the 60th day after the
obligation to file a Shelf Registration Statement arises or (vi) if the Exchange
Offer Registration Statement or the Shelf Registration Statement, as the case
may be, is declared effective but thereafter ceases to be effective or useable
in connection with resales of the Transfer Restricted Securities, such time of
non-effectiveness or non-usability (each, a "Registration Default"), the Company
and the Subsidiary Guarantors agree to pay to each Holder of Transfer Restricted
Securities affected thereby liquidated damages ("Liquidated Damages") in an
amount equal to $0.05 per week per $1,000 in principal amount of Transfer
Restricted Securities held by such Holder for each week or portion thereof that
the Registration Default continues for the first 90 day period immediately
following the occurrence of such Registration Default. The amount of the
Liquidated Damages shall increase by an additional $0.05 per week per $1,000 in
principal amount of Transfer Restricted Securities with respect to each
subsequent 90 day period until all Registration Defaults have been cured, up to
a maximum amount of Liquidated Damages of $0.25 per week per $1,000 in principal
amount of Transfer Restricted Securities. The Company and the Subsidiary
Guarantors shall not be required to pay liquidated damages for more than one
Registration Default at any given time. Following the cure of all Registration
Defaults, the accrual of Liquidated Damages will cease.
All accrued Liquidated Damages shall be paid by the Company or the
Subsidiary Guarantors to Holders entitled thereto by wire transfer to the
accounts specified by them or by mailing checks to their registered address if
no such accounts have been specified.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
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ownership of voting securities, by agreement or otherwise; provided, that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of inventory in the ordinary course of business
consistent with past practices (provided, that the sale, lease, conveyance or
other disposition of all or substantially all of the assets of the Company and
its Restricted Subsidiaries taken as a whole will be governed by the provisions
of the Indenture described above under the caption "-- Repurchase at Option of
Holders -- Change of Control" and/or the provisions described above under the
caption "-- Certain Covenants -- Merger, Consolidation or Sale of Assets" and
not by the provisions of the Asset Sale covenant), and (ii) the issue or sale by
the Company or any of its Restricted Subsidiaries of Equity Interests of any of
the Company's Restricted Subsidiaries, in the case of either clause (i) or (ii),
whether in a single transaction or a series of related transactions (a) that
have a fair market value in excess of $1.0 million or (b) for net proceeds in
excess of $1.0 million. Notwithstanding the foregoing: (i) a transfer of assets
by the Company to a Wholly Owned Restricted Subsidiary or by a Wholly Owned
Restricted Subsidiary to the Company or to another Wholly Owned Restricted
Subsidiary, (ii) an issuance of Equity Interests by a Wholly Owned Restricted
Subsidiary to the Company or to another Wholly Owned Restricted Subsidiary,
(iii) a sale and leaseback of the real estate (and personal property associated
with such real estate) owned by the Company in San Diego, California on which
the Company's headquarters is located on the date of the Indenture and (iv) a
Restricted Payment that is permitted by the covenant described above under the
caption "-- Certain Covenants -- Restricted Payments" will not be deemed to be
Asset Sales.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than one
year from the date of acquisition, (iii) certificates of deposit and Eurodollar
time deposits with maturities of one year or less from the date of acquisition,
bankers' acceptances with maturities not exceeding six months and overnight bank
deposits, in each case with any lender party to the New Credit Facility or with
any domestic commercial bank having capital and surplus in excess of $500
million and a Thompson Bank Watch Rating of "B" or better, (iv) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clauses (ii) and (iii) above entered into with any
financial institution meeting the qualifications specified in clause (iii)
above, and (v) commercial paper having the highest rating obtainable from
Moody's Investors Service, Inc. or Standard & Poor's Rating Services and in each
case maturing within 270 days after the date of acquisition.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange
Act) other than the Principals or their Related Parties (as defined below), (ii)
the adoption of a plan relating to the liquidation or dissolution of the
Company, (iii) the consummation of any transaction (including, without
limitation, any merger or consolida-
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tion) the result of which is that any "person" (as defined above), other than
the Principals and their Related Parties, becomes the "beneficial owner" (as
such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except
that a person shall be deemed to have "beneficial ownership" of all securities
that such person has the right to acquire, whether such right is currently
exercisable or is exercisable only upon the occurrence of a subsequent
condition), directly or indirectly, of more than 50% of the Voting Stock of the
Company (measured by voting power rather than number of shares), (iv) the first
day on which a majority of the members of the Board of Directors of the Company
are not Continuing Directors or (v) the Company consolidates with, or merges
with or into, any Person or sells, assigns, conveys, transfers, leases or
otherwise disposes of all or substantially all of its assets to any Person, or
any Person consolidates with, or merges with or into, the Company, in any such
event pursuant to a transaction in which any of the outstanding Voting Stock of
the Company is converted into or exchanged for cash, securities or other
property, other than any such transaction where the Voting Stock of the Company
outstanding immediately prior to such transaction is converted into or exchanged
for Voting Stock (other than Disqualified Stock) of the surviving or transferee
Person constituting a majority of the outstanding shares of such Voting Stock of
such surviving or transferee Person (immediately after giving effect to such
issuance).
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person and its Restricted Subsidiaries for
such period, plus, to the extent deducted in computing Consolidated Net Income,
(i) provision for taxes based on income or profits of such Person and its
Restricted Subsidiaries for such period, (ii) Fixed Charges of such Person for
such period, (iii) depreciation and amortization (including amortization of
goodwill and other intangibles) and all other non-cash charges (excluding any
such non-cash charge to the extent that it represents (A) an accrual of or
reserve for cash charges in any future period, or (B) amortization of a prepaid
cash expense that was paid in a prior period), (iv) any gain realized in
connection with any Asset Sale and any extraordinary or non-recurring gain, in
each case, on a consolidated basis determined in accordance with GAAP and (v)
the amount of any non-cash compensation expense incurred in connection with
issuances of securities under stock option, stock purchase and other
equity-based incentive plans. Notwithstanding the foregoing, the provision for
taxes based on the income or profits of, the Fixed Charges of, and the
depreciation and amortization and other non-cash charges of a Restricted
Subsidiary of, a Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent (and in same proportion) that the Net
Income of such Restricted Subsidiary was included in calculating the
Consolidated Net Income of such Person.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of: (i) the interest expense of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP (including amortization of original issue discount, non-cash interest
payments, the interest component of all payments associated with Capital Lease
Obligations, imputed interest with respect to Attributable Debt, commissions,
discounts and other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and net payments (if any) pursuant to Hedging
Obligations; provided, that in no event shall any amortization of deferred
financing costs be included in Consolidated Interest Expense) and (ii)
consolidated interest expense of such Person and its Restricted Subsidiaries
that was capitalized during such period, whether paid or accrued.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided, that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly Owned Restricted
Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (that
has not been obtained) or, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute, rule
or governmental regulation applicable to that Subsidiary or its stockholders,
(iii) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded, (iv) the cumulative effect of a change in
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accounting principles shall be excluded and (v) the Net Income of any
Unrestricted Subsidiary shall be excluded, whether or not distributed to the
Company or one of its Restricted Subsidiaries for purposes of the covenant
described under the caption "-- Incurrence of Indebtedness and Issuance of
Preferred Stock" and shall be included for purposes of the covenant described
under the caption "Restricted Payments" only to the extent of the amount of
dividends or distributions paid in cash to the Company or one of its Restricted
Subsidiaries.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Subsidiaries as of such date plus (ii) the respective
amounts reported on such Person's balance sheet as of such date with respect to
any series of preferred stock (other than Disqualified Stock) that by its terms
is not entitled to the payment of dividends unless such dividends may be
declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the date of the Indenture in the book value of
any asset owned by such Person or a consolidated Subsidiary of such Person, (y)
all investments as of such date in unconsolidated Subsidiaries and in Persons
that are not Subsidiaries (except, in each case, Permitted Investments) and (z)
all unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the Holder thereof, in whole or in part, on or prior to the date
that is 91 days after the date on which the Notes mature; provided, that any
Capital Stock that would not qualify as Disqualified Stock but for change of
control provisions shall not constitute Disqualified Stock if the provisions are
not more favorable to the holders of such Capital Stock than the provisions
described under "-- Change of Control" applicable to the Holders of the Notes.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the New Credit Facility) in
existence on the date of the Indenture, until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the Consolidated Interest Expense of such Person for
such period and (ii) any interest expense on Indebtedness of another Person that
is guaranteed by the referent Person or one of its Restricted Subsidiaries or
secured by a Lien on assets of such Person or one of its Restricted Subsidiaries
(whether or not such guarantee or Lien is called upon) and (iii) the product of
(A) all cash dividend payments of the Company and any Subsidiary Guarantor on
any series of preferred stock of the Company or such Guarantor times (B) a
fraction, the numerator of which is one and the denominator of which is one
minus the then current combined federal, state and local statutory tax rate of
such Person, expressed as a decimal, in each case, on a consolidated basis and
in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person and
its Restricted Subsidiaries for such period. In the event that the Company or
any of its
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Restricted Subsidiaries incurs, assumes, guarantees, redeems or repays any
Indebtedness (other than revolving credit borrowings) or issues or redeems
preferred stock subsequent to the commencement of the period for which the Fixed
Charge Coverage Ratio is being calculated but on or prior to the date on which
the calculation of the Fixed Charge Coverage Ratio is made (the "Calculation
Date"), then the Fixed Charge Coverage Ratio shall be calculated giving pro
forma effect to such incurrence, assumption, guarantee, redemption or repayment
of Indebtedness, or such issuance or redemption of preferred stock, as if the
same had occurred at the beginning of the applicable four-quarter reference
period. In addition, for purposes of making the computation referred to above,
(i) acquisitions that have been made by the Company or any of its Subsidiaries,
including through mergers or consolidations and including any related financing
transactions, during the four-quarter period or subsequent to such reference
period and on or prior to the Calculation Date shall be deemed to have occurred
on the first day of the four-quarter reference period and Consolidated Cash Flow
for such reference period shall be calculated without giving effect to clause
(iii) of the proviso set forth in the definition of Consolidated Net Income, and
(ii) the Consolidated Cash Flow attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, shall be excluded and (iii) the Fixed Charges
attributable to discontinued operations, as determined in accordance with GAAP,
or operations or businesses disposed of prior to the Calculation Date, shall be
excluded, but only to the extent that the obligations giving rise to such Fixed
Charges will not be obligations of the referent Person or any of its
Subsidiaries following the Calculation Date.
"Foreign Subsidiary" means a Subsidiary that is formed under the laws of
the United States of America or of a state or territory thereof, but shall
exclude any Subsidiary which is treated as a partnership or branch for United
States federal income tax purposes.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
"Global Notes" means the U.S. Global Note, the Regulation S Temporary
Global Notes and the Regulation S Permanent Global Notes.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates or currency rates.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or bankers' acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing indebtedness (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all indebtedness of others
secured by a Lien on any asset of such Person (whether or not such indebtedness
is assumed by such Person) and, to the extent not otherwise included, the
Guarantee by such Person of any indebtedness of any other Person. The amount of
any Indebtedness outstanding as of any date shall be (i) the accreted value
thereof, in the case of any Indebtedness that does not require current
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payments of interest, and (ii) the principal amount thereof, together with any
interest thereon that is more than 30 days past due, in the case of any other
Indebtedness.
"Insolvency or Liquidation Proceedings" means (i) any insolvency or
bankruptcy case or proceeding, or any receivership, liquidation, reorganization
or other similar case or proceeding, relative to the Company or to the creditors
of the Company, as such, or to the assets of the Company, or (ii) any
liquidation, dissolution, reorganization or winding up of the Company, whether
voluntary or involuntary, and involving insolvency or bankruptcy or (iii) any
assignment for the benefit of creditors or any other marshaling of assets and
liabilities of the Company.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted Subsidiary
of the Company such that, after giving effect to any such sale or disposition,
such Person is no longer a Restricted Subsidiary of the Company, the Company
shall be deemed to have made an Investment on the date of any such sale or
disposition equal to the fair market value of the Equity Interests of such
Restricted Subsidiary not sold or disposed of in an amount determined as
provided in the final paragraph of the covenant described above under the
caption "-- Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP, excluding, however, (i) any
gain (but not loss), together with any related provision for taxes on such gain
(but not loss), realized in connection with (a) any Asset Sale (including,
without limitation, dispositions pursuant to sale and leaseback transactions) or
(b) the disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but
not loss), together with any related provision for taxes on such extraordinary
or nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), and any reserve for adjustment in respect of the sale price of
such asset or assets established in accordance with GAAP.
"New Credit Facility" means that certain Amended and Restated Credit
Agreement, dated as of January 30, 1998, by and among the Company, certain
financial institutions and Fleet National Bank, as agent, including any related
notes, guarantees, collateral documents, instruments and agreements executed in
connection therewith, and, in each case, as amended, modified, renewed,
refunded, replaced or refinanced from time to time.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or
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(c) constitutes the lender, (ii) as to which no default with respect to which
(including any rights that the holders thereof may have to take enforcement
action against an Unrestricted Subsidiary) would permit (upon notice, lapse of
time or both) any holder of any other Indebtedness (other than the New Notes
being offered hereby) of the Company or any of its Restricted Subsidiaries to
declare a default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity; and (iii) as to which the
lenders have been notified in writing that they will not have any recourse to
the stock or assets of the Company or any of its Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Pari Passu Indebtedness" means Indebtedness of the Company that ranks pari
passu in right of payment to the New Notes.
"Permitted Business" means any of the businesses and any other businesses
related to the businesses engaged in by the Company and its respective
Restricted Subsidiaries on the date of the Indenture.
"Permitted Investments" means (i) any Investment in the Company or in a
Subsidiary Guarantor and Investments in Wholly-Owned Restricted Subsidiaries
which are not Subsidiary Guarantors permitted under clauses (vii) or (ix) of the
covenant described under the caption "-- Incurrence of Indebtedness and Issuance
of Preferred Stock", (ii) any Investment in Cash Equivalents, (iii) any
Investment by the Company or any Restricted Subsidiary of the Company in a
Person, if as a result of such Investment (a) such Person becomes a Guarantor or
(b) such Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is liquidated into,
the Company or a Guarantor, (iv) any Investment made as a result of the receipt
of non-cash consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption "-- Repurchase at
the Option of Holders -- Asset Sales", (v) any acquisition of assets solely in
exchange for the issuance of Equity Interests (other than Disqualified Stock) of
the Company and (vi) other Investments made after the date of the Indenture in
any Person having an aggregate fair market value (measured on the date each such
Investment was made and without giving effect to subsequent changes in value),
when taken together with all other Investments made pursuant to this clause (vi)
that are at the time outstanding, not in excess of $5.0 million.
"Permitted Liens" means (i) Liens securing Indebtedness under the New
Credit Facility that was permitted by the terms of the Indenture to be incurred
or other Indebtedness allowed to be incurred under clause (i) of the covenant
described above under the caption "Incurrence of Indebtedness and Issuance of
Preferred Stock", (ii) Liens in favor of the Company, (iii) Liens on property of
a Person existing at the time such Person is merged into or consolidated with
the Company or any Restricted Subsidiary of the Company; provided, that such
Liens were in existence prior to the contemplation of such merger or
consolidation and do not extend to any assets other than those of the Person
merged into or consolidated with the Company, (iv) Liens on property existing at
the time of acquisition thereof by the Company or any Restricted Subsidiary of
the Company; provided, that such Liens were in existence prior to the
contemplation of such acquisition; (v) Liens to secure the performance of
statutory obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of business, (vi)
Liens existing on the date of the Indenture, (vii) Liens for taxes, assessments
or governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently concluded; provided, that any reserve or other appropriate provision
as shall be required in conformity with GAAP shall have been made therefor,
(viii) Liens incurred in the ordinary course of business of the Company or any
Restricted Subsidiary of the Company with respect to obligations that do not
exceed $5.0 million at any one time outstanding and that (a) are not incurred in
connection with the borrowing of money or the obtaining of advances or credit
(other than trade credit in the ordinary course of business) and (b) do not in
the aggregate materially detract from the value of the property or materially
impair the use thereof in the operation of business by the Company or such
Restricted Subsidiary, (ix) Liens to secure Indebtedness (including Capital
Lease Obligations) permitted by clause (iv) of the covenant described under the
caption "-- Incurrence of Indebtedness and Issuance of Preferred Stock" covering
only the assets acquired with such Indebtedness, together with any additions and
accessions thereto and replacements, substitutions and proceeds
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(including insurance proceed(s) thereof), (x) carriers', warehousemen's,
mechanics', landlords', materialmen's, repairmen's, or other like Liens arising
in the ordinary course of business in respect of obligations not overdue for a
period in excess of 30 days or which are being contested in good faith by
appropriate proceedings promptly instituted and diligently prosecuted; provided,
that any reserve or other appropriate provisions as shall be required to conform
with GAAP shall have been made therefor, (xi) easements, rights-of-way, zoning
and similar restrictions and other similar encumbrances or title defects
incurred, or leases or subleases granted to others, in the ordinary course of
business, which do not in any case materially detract from the value of the
property subject thereto or do not interfere with or adversely affect in any
material respect the ordinary conduct of the business of the Company and its
Restricted Subsidiaries taken as a whole, (xii) Liens (other than any Lien
imposed by ERISA or any rule or regulation promulgated thereunder) incurred or
deposits made in the ordinary course of business in connection with workers'
compensation, unemployment insurance, and other types of social security, (xiii)
Liens in favor of a trustee under any indenture securing amounts due to the
trustee in connection with its services under such indenture, (xiv) Liens under
licensing agreements for use of intellectual property entered into in the
ordinary course of business and (xv) Liens on inventory or cash to secure cash
advances made by customers for the purchase price of inventory.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries;
provided that: (i) except for Indebtedness used to extend, refinance, renew,
replace, defease or refund the New Credit Facility, the principal amount (or
accreted value, if applicable) of such Permitted Refinancing Indebtedness does
not exceed the principal amount of (or accreted value, if applicable), plus
accrued interest on, the Indebtedness so extended, refinanced, renewed,
replaced, defeased or refunded (plus the amount of reasonable expenses incurred
in connection therewith and the amount of any market-based premium paid in
connection therewith), (ii) such Permitted Refinancing Indebtedness has a final
maturity date later than the final maturity date of, and has a Weighted Average
Life to Maturity equal to or greater than the Weighted Average Life to Maturity
of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded, (iii) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the New
Notes, such Permitted Refinancing Indebtedness has a final maturity date later
than the final maturity date of, and is subordinated in right of payment to, the
New Notes on terms at least as favorable to the Holders of New Notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded and (iv) such Indebtedness
is incurred either by the Company or by the Restricted Subsidiary who is the
obligor on the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded.
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust, limited liability company,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Principals" means DLJ Merchant Banking, Inc. and its Affiliates, the
Sprout Group and its Affiliates, John F. Schaefer and Arthur J. Cormier.
"Public Equity Offering" means a public offering of Equity Interests (other
than Disqualified Stock) of the Company that results in the net proceeds to the
Company of at least $25.0 million.
"Regulation S" means Regulation S promulgated under the Securities Act.
"Regulation S Global Notes" means the permanent global notes that are
deposited with and registered in the name of the Depositary or its nominee,
representing a series of Notes sold in reliance on Regulation S.
"Related Party" with respect to any Principal means (i) any controlling
stockholder, 80% (or more) owned Subsidiary, or spouse or immediate family
member (in the case of an individual) of such Principal or (ii) any trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partners, owners or Persons beneficially holding an 80% or more controlling
interest of which consist of such Principal and/or such other Persons referred
to in the immediately preceding clause (i).
"Restricted Investment" means an Investment other than a Permitted
Investment.
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"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Rule 144A" means Rule 144A promulgated under the Securities Act.
"Securityholders Agreement" means the Securityholders Agreement, dated as
of November 23, 1994, among the Company, John F. Schaefer, Arthur J. Cormier,
and DLJ and the Sprout Entities.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"Subsidiary Guarantors" means each of (i) Helios Incorporated, Applied
Robotic Technologies, Inc., Air Bearings Incorporated and Santa Barbara Metric,
Inc. and (ii) any other Subsidiary that executes a New Note Guarantee in
accordance with the provisions of the Indenture, and their respective successors
and assigns.
"Unrestricted Subsidiary" means (i) any Subsidiary that is designated by a
resolution of the Board of Directors of the Company as an Unrestricted
Subsidiary; but only to the extent that such Subsidiary: (a) has no Indebtedness
other than Non-Recourse Debt; (b) is not party to any agreement, contract,
arrangement or understanding with the Company or any Restricted Subsidiary of
the Company unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to the Company or such Restricted Subsidiary
than those that might be obtained at the time from Persons who are not
Affiliates of the Company; (c) is a Person with respect to which neither the
Company nor any of its Restricted Subsidiaries has any direct or indirect
obligation (x) to subscribe for additional Equity Interests or (y) to maintain
or preserve such Person's financial condition or to cause such Person to achieve
any specified levels of operating results; (d) has not guaranteed or otherwise
directly or indirectly provided credit support for any Indebtedness of the
Company or any of its Restricted Subsidiaries and (e) has at least one director
on its board of directors that is not a director or executive officer of the
Company or any of its Restricted Subsidiaries and has at least one executive
officer that is not a director or executive officer of the Company or any of its
Restricted Subsidiaries. Any such designation by the Board of Directors of the
Company shall be evidenced to the Trustee by filing with the Trustee a certified
copy of the resolutions of the Board of Directors giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions and was permitted by the covenant
described above under the caption "Certain Covenants -- Restricted Payments."
If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing
requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an
Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of
such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the
Company as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date under the covenant described under the caption
"Incurrence of Indebtedness and Issuance of Preferred Stock," the Company shall
be in default of such covenant). The Board of Directors of the Company may at
any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary;
provided, that such designation shall be deemed to be an incurrence of
Indebtedness by a Restricted Subsidiary of the Company of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall be
permitted only if (i) such Indebtedness is permitted under the covenant
described under the caption "Certain Covenants -- Incurrence of Indebtedness and
Issuance of Preferred Stock," and (ii) no Default or Event of Default would be
in existence following such designation.
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"U.S. Global Note" means a permanent global note that is deposited with and
registered in the name of the Depositary or its nominee, representing a series
of New Notes sold in reliance on Rule 144A.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" means a Subsidiary that is both a
Wholly Owned Subsidiary and a Restricted Subsidiary.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person.
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CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
The following is a general discussion of certain United States federal
income and estate tax considerations relating to the acquisition, ownership and
disposition of New Notes by the original holders of the New Notes. This
discussion is based upon the Internal Revenue Code of 1986, as amended (the
"Code"), and judicial decisions and administrative interpretations thereunder,
as of the date hereof, and such authorities may be repealed, revoked, modified
or otherwise interpreted or applied so as to result in federal income tax
consequences different from those discussed below. There can be no assurance
that the Internal Revenue Service (the "IRS") will not challenge one or more of
the tax consequences described herein, and the Company has not obtained, nor
does it intend to obtain, a ruling from the IRS or an opinion of counsel with
respect to the U.S. federal tax consequences of acquiring or holding the Notes
or the New Notes.
This discussion does not purport to deal with all aspects of U.S. federal
income taxation that may be relevant to a particular holder in light of the
holder's circumstances (for example, persons subject to the alternative minimum
tax provisions of the Code). Also, certain holders (including insurance
companies, tax exempt organizations, financial institutions, subsequent
purchasers of New Notes and broker-dealers) may be subject to special rules not
discussed below. In addition, this discussion does not describe any tax
consequences arising under the laws of any state, locality or taxing
jurisdiction other than the United States federal government. In general, the
discussion assumes that a holder acquired a Note at original issuance and holds
such Note and the New Notes as a capital asset and not as part of a "hedge,"
"straddle," "conversion transaction," "synthetic security" or other integrated
investment. Prospective investors are urged to consult their tax advisors
regarding the United States federal tax consequences of acquiring, holding and
disposing of New Notes, as well as any tax consequences that may arise under the
laws of any foreign, state, local or other taxing jurisdiction.
As used herein, the term "United States Holder" means a beneficial owner of
a New Note that is, for United States federal income tax purposes, a citizen or
resident (within the meaning of Section 7701(b) of the Code) of the United
States, a corporation, partnership or other entity created or organized in the
United States or under the laws of the United States or of any political
subdivision thereof, an estate whose income is included in gross income for
United States federal income tax purposes, regardless of its source or a trust,
if a U.S. court is able to exercise primary supervision over the administration
of the trust and one or more U.S. persons have the authority to control all
substantial decisions of the trust.
UNITED STATES HOLDERS
Exchange of Notes for New Notes The exchange of a Note, by a United
States Holder, for a New Note will not constitute a taxable exchange of the
Note. As a result, a United States Holder will not recognize taxable gain or
loss upon receipt of a New Note. A United States Holder's holding period for a
New Note will generally include the holding period for the Note so exchanged and
such holder's adjusted tax basis in a New Note will generally be the same as
such holder's adjusted tax basis in the Note so exchanged.
Stated Interest. Stated interest on a New Note will be taxable to a United
States Holder as ordinary interest income at the time that such interest accrues
or is received, in accordance with the United States Holder's regular method of
accounting for federal income tax purposes. The Company expects that the New
Notes will not be considered to be issued with original issue discount for
federal income tax purposes.
Bond Premium on the New Notes. If a United States Holder of a New Note
purchased a Note for an amount in excess of the amount payable at the maturity
date (or a call date, if appropriate) of the Notes, the United States Holder may
deduct such excess as amortizable bond premium over the aggregate terms of the
Notes and the New Notes (taking into account earlier call dates, as
appropriate), under a yield-to-maturity formula. The deduction is available only
if an election is made by the United States Holder or is in effect. This
election is revocable only with the consent of the IRS. The election applies to
all obligations owned or subsequently acquired by the United States Holder. The
United States Holder's adjusted tax basis in the Notes and the New Notes will be
reduced to the extent of the deduction of amortizable bond premium. Except as
may otherwise be provided in future regulations, under the Code the amortizable
bond premium is treated as an offset to interest income on the Notes and the New
Notes rather than as a separate deduction item.
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Market Discount on the New Notes. The tax consequences of a disposition of
the New Notes may be affected by the market discount provisions of the Code.
These rules generally provide that if a United States Holder acquired the Notes
(other than in an original issue) or the New Notes at a market discount which
equals or exceeds 1/4 of 1% of the stated redemption price of the Notes at
maturity multiplied by the number of remaining complete years to maturity and
thereafter recognizes gain upon a disposition (or makes a gift) of the New
Notes, the lesser of (i) such gain (or appreciation, in the case of a gift) or
(ii) the portion of the market discount which accrued while the Notes or New
Notes were held by such United States Holder will be treated as ordinary income
at the time of the disposition (or gift). For these purposes, market discount
means the excess (if any) of the stated redemption price at maturity over the
basis of such Notes immediately after their acquisition by the United States
Holder. A United States Holder of the New Notes may elect to include any market
discount (whether accrued under the Notes or the New Notes) in income currently
rather than upon disposition of the New Notes. This election once made applies
to all market discount obligations acquired on or after the first taxable year
to which the election applies, and may not be revoked without the consent of the
IRS.
A United States Holder of any New Note who acquired a Note or a New Note at
a market discount generally will be required to defer the deduction of a portion
of the interest on any indebtedness incurred or maintained to purchase or carry
such Note or New Note until the market discount is recognized upon a subsequent
disposition of the New Note. Such a deferral is not required, however, if the
United States Holder elects to include accrued market discount in income
currently.
Sale, Exchange or Retirement of the New Notes. Upon the sale, exchange,
redemption, retirement, maturity or other disposition of a New Note, a United
States Holder will generally recognize taxable gain or loss equal to the
difference between the sum of cash plus the fair market value of all other
property received on such disposition (except to the extent such cash or
property is attributable to accrued interest which will be taxable as ordinary
income) and such holder's adjusted tax basis in the New Note. Gain or loss
recognized on the disposition of a New Note generally will be capital gain or
loss (except to the extent of any accrued market discount). Long-term capital
gains tax rates will apply to dispositions by individuals of New Notes held for
more than 18 months. The maximum long-term capital gains tax rate applicable to
individuals is currently 20% (10% for individuals in the 15% tax bracket).
Mid-term capital gains tax rates will apply to dispositions by individuals of
New Notes held for more than one year but not more than 18 months. The maximum
mid-term capital gains tax rate applicable to individuals is currently 28% (15%
for individuals in the 15% tax bracket).
Backup Withholding and Information Reporting. In general, a United States
Holder of a New Note will be subject to backup withholding at the rate of 31%
with respect to interest, principal and premium, if any, paid on a New Note,
unless the holder (a) is an entity (including corporations, tax-exempt
organizations and certain qualified nominees) that is exempt from withholding
and, when required, demonstrates this fact, or (b) provides the Company with its
Taxpayer Identification Number ("TIN") (which, for an individual, would be the
holder's Social Security number), certifying that the TIN provided to the
Company is correct and that the holder has not been notified by the IRS that it
is subject to backup withholding due to underreporting of interest or dividends,
and otherwise complies with applicable requirements of the backup withholding
rules. In addition, such payments of interest, principal and premium to United
States Holders that are not corporations, tax-exempt organizations or qualified
nominees will generally be subject to information reporting requirements.
The amount of any backup withholding from a payment to a United States
Holder will be allowed as a credit against such holder's federal income tax
liability and may entitle such holder to a refund, provided that the required
information is furnished to the IRS.
NON-UNITED STATES HOLDERS
Stated Interest. Interest paid by the Company to any beneficial owner of a
New Note that is not a United States Holder ("Non-United States Holder") will
generally not be subject to United States federal income or withholding tax if
such interest is not effectively connected with the conduct of a trade or
business within the United States by such Non-United States Holder and (a) such
Non-United States Holder (i) does not actually or constructively own 10% or more
of the total combined voting power of all classes of stock of the
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Company; (ii) is not a controlled foreign corporation with respect to which the
Company is a "related person" within the meaning of the Code and (iii) satisfies
certain certification requirements or (b) such Non-United States Holder is
entitled to the benefits of an income tax treaty under which the interest is
exempt from United States withholding tax, and such Non-United States Holder
provides a properly executed IRS Form 1001 claiming the exemption (or, after
December 31, 1998, a properly executed IRS Form W-8, which may require obtaining
a Taxpayer Identification Number and making certain certifications). Interest
effectively connected with the conduct of a United States trade or business by a
Non-United States Holder will be subject to the United States federal income tax
on net income that applies to United States persons generally (and, with respect
to corporate holders, under certain circumstances, may also be subject to the
branch profits tax).
Sale, Exchange or Retirement of the New Notes. A Non-United States Holder
will generally not be subject to United States federal income tax on gain
recognized on a sale, redemption, retirement at maturity or other disposition of
a New Note unless (i) the gain is effectively connected with the conduct of a
trade or business within the United States by the Non-United States Holder, (ii)
in the case of a Non-United States Holder who is a nonresident alien individual
and holds the Note as a capital asset, such holder is present in the United
States for 183 or more days in the taxable year and certain other requirements
are met or (iii) the Non-United States Holder is subject to tax pursuant to the
provisions of U.S. tax law applicable to certain United States expatriates.
Federal Estate Taxes. If interest on the New Notes is exempt from
withholding of United States federal income tax under clause (a) of the rules
described under "Stated Interest," the New Notes will not be included in the
estate of a deceased Non-United States Holder for United States federal estate
tax purposes.
Backup Withholding and Information Reporting. The Company will, where
required, report to the holders of New Notes and the IRS the amount of any
interest paid on the New Notes in each calendar year and the amounts of tax
withheld, if any, with respect to such payments. Copies of these information
returns may also be made available under the provisions of a specific treaty or
agreement to the tax authorities of the country in which the Non-United States
Holder resides.
Information reporting and backup withholding requirements will apply to the
gross proceeds paid to a Non-United States Holder on the disposition of the New
Notes by or through a United States office of a United States or foreign broker,
unless certain certification requirements are met or the holder otherwise
establishes an exemption. Information reporting requirements, but not backup
withholding, will also apply to a payment of the proceeds of a disposition of
the New Notes by or through a foreign office of a broker that is either a U.S.
person or a U.S. related person, unless the holder is an exempt recipient (as
demonstrated through appropriate certification) or such broker has documentary
evidence in its file that the holder of the New Notes is not a United States
person and has no actual knowledge to the contrary and certain other conditions
are met. Neither information reporting nor backup withholding generally will
apply to a payment of the proceeds of a disposition of the New Notes by or
through a foreign office of a foreign broker that is not a United States related
person. For purposes of this paragraph, a United States related person is (i) a
"controlled foreign corporation" for United States federal income tax purposes,
(ii) a foreign person 50% or more of whose gross income from all sources for the
three-year period ending with the close of its taxable year preceding the
payment (or for such part of the period that the broker has been in existence)
is derived from activities that are effectively connected with the conduct of a
United States trade or business, or (iii) with respect to payments made after
December 31, 1998, a foreign partnership that, at any time during its taxable
year is 50% or more (by income or capital interest) owned by United States
persons or is engaged in the conduct of a United States trade or business.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules may be refunded or credited against the Non-United
States Holder's United States federal income tax liability, provided that the
required information is furnished to the IRS. Non-United States Holders are
urged to consult their tax advisors with respect to the application of the
backup withholding rules, as revised under the recently adopted Treasury
Regulations that will generally be effective with respect to payments made
beginning January 1, 1999, to their particular situations.
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NOTICE TO INVESTORS
Unless and until a New Note is exchanged for a Note pursuant to the
Exchange Offer, each Note will bear a legend to the following effect unless
otherwise agreed by the Company and the holder thereof.
"THIS NOTE (OR ITS PREDECESSOR) HAS NOT BEEN REGISTERED UNDER THE
UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE
TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT
OF, U.S. PERSONS, EXCEPT AS SET FORTH IN THE SECOND SENTENCE HEREOF. BY ITS
ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST HEREIN, THE HOLDER (1)
REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN
RULE 144A UNDER THE SECURITIES ACT) (A "QIB"), (B) IT IS ACQUIRING THIS
NOTE IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE
SECURITIES ACT OR (C) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS
DEFINED IN RULE 501(A)(1), (2), (3) OR (7) OF REGULATION D UNDER THE
SECURITIES ACT (AN "IAI")); (2) AGREES THAT IT WILL NOT RESELL OR OTHERWISE
TRANSFER THIS NOTE EXCEPT (A) TO THE COMPANY OR ANY OF ITS SUBSIDIARIES,
(B) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QIB PURCHASING FOR
ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QIB IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 144A, (C) IN AN OFFSHORE TRANSACTION MEETING THE
REQUIREMENTS OF RULE 903 OR 904 OF THE SECURITIES ACT, (D) IN A TRANSACTION
MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (E) TO AN
IAI THAT, PRIOR TO SUCH TRANSFER, FURNISHES THE TRUSTEE A SIGNED LETTER
CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE TRANSFER
OF THIS NOTE (THE FORM OF WHICH CAN BE OBTAINED FROM THE TRUSTEE) AND, IF
SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL AMOUNT OF NOTES LESS
THAN $250,000, AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH
TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, (F) IN ACCORDANCE WITH
ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT
(AND BASED UPON AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY) OR (G)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN
ACCORDANCE WITH THE APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED
STATES OR ANY OTHER APPLICABLE JURISDICTION AND (3) AGREES THAT IT WILL
DELIVER TO EACH PERSON TO WHOM THIS NOTE OR AN INTEREST HEREIN IS
TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. AS USED
HEREIN, THE TERMS "OFFSHORE TRANSACTION" AND "UNITED STATES" HAVE THE
MEANINGS GIVEN TO THEM BY RULE 902 OF REGULATION S UNDER THE SECURITIES
ACT. THE INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO
REGISTER ANY TRANSFER OF THIS NOTE IN VIOLATION OF THE FOREGOING.
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PLAN OF DISTRIBUTION
Based on interpretations by the staff of the SEC enunciated in Exxon
Capital Holdings Corporation (available May 13, 1988), Morgan Stanley & Co.
Incorporated (available June 5, 1991), Shearman & Sterling (available July 2,
1993), K-III Communications Corporation (available May 14, 1993), and similar
no-action or interpretive letters issued to third parties, the Company believes
that the New Notes issued pursuant to the Exchange Offer in exchange for Notes
may be offered for resale, resold and otherwise transferred by any Holder
thereof (other than any such Holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act), without compliance
with the registration and prospectus delivery provisions of the Securities Act;
provided, that such New Notes are acquired in the ordinary course of such
Holder's business and such Holder is not participating, does not intend to
participate and has no arrangement or understanding with any person to
participate in a distribution of such New Notes. Accordingly, any Holder using
the Exchange Offer or intending to participate in a distribution of the New
Notes will not be able to rely on such no-action letters. Notwithstanding the
foregoing, each Participating Broker-Dealer that receives New Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with the initial sales of such New Notes to third
parties. This Prospectus, as it may be amended or supplemented from time to
time, may be used by a Participating Broker-Dealer in connection with such sales
of New Notes where such Notes were acquired as a result of market-making
activities or other trading activities. The Company has agreed that it will
under certain circumstances make this Prospectus, as amended or supplemented,
available to any Participating Broker-Dealer for use in connection with any such
resale and Participating Broker-Dealers shall be authorized to deliver this
Prospectus for a period not exceeding one year after the Expiration Date. In
addition, until 90 days after the date of this Prospectus, all dealers effecting
transactions in the New Notes may be required to deliver a prospectus.
The Company and the Subsidiary Guarantors will not receive any proceeds
from any sales of the New Notes by Participating Broker-Dealers. New Notes
received by Participating Broker-Dealers for their own account pursuant to the
Exchange Offer may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the New Notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or at negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such Participating Broker-Dealer
that resells the New Notes that were received by it for its own account pursuant
to the Exchange Offer or the purchasers of the New Notes. Any Participating
Broker-Dealer that acquired Notes as a result of market making activities or
other trading activities and who resells New Notes that were received by it
pursuant to the Exchange Offer and any broker or dealer that participates in a
distribution of such New Notes may be deemed to be an "underwriter" within the
meaning of the Securities Act and any profit on any such resale of New Notes and
any commission or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a Participating Broker-Dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. By acceptance of the
Exchange Offer, each broker-dealer that receives New Notes pursuant to the
Exchange Offer hereby agrees to notify the Company prior to using this
Prospectus in connection with the sale or transfer of New Notes and acknowledges
and agrees that, upon receipt of notice from the Company of the happening of any
event which makes any statement in this Prospectus untrue in any material
respect or which requires the making of any changes in this Prospectus in order
to make the statements herein not misleading (which notice the Company agrees to
deliver promptly to such broker-dealer), such broker-dealer will suspend use of
this Prospectus until the Company has amended or supplemented this Prospectus to
correct such misstatement or omission and has furnished copies of the amended or
supplemented prospectus to such broker-dealer.
The Company will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any Participating Broker-Dealer
that requests such documents in the Letter of Transmittal. See "The Exchange
Offer."
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There is no existing market for the New Notes and there can be no assurance
as to the liquidity of any market that may develop for the New Notes, the
ability of Holders of the New Notes to sell their New Notes or the price at
which Holders would be able to sell their New Notes. Future trading prices of
the New Notes will depend on many factors, including, among other things,
prevailing interest rates, the Company's operating results, the market for
similar securities and general economic conditions. The Company has been advised
by DLJ that it intends to make a market in the New Notes, subject to the limits
imposed by the Securities Act and the Exchange Act and subject to any limits
imposed during the pendency of any registration statement or shelf registration
statement; however, DLJ is not obligated to do so, and may discontinue such
market-making at any time without notice. The Company does not currently intend
to list the New Notes on any securities exchange or the National Association of
Securities Dealers Automated Quotation System. Therefore, no assurance can be
given as to the liquidity of any trading market for the New Notes. In addition,
such market-making activities may be limited during the Exchange Offer. See
"Risk Factors -- Absence of Trading Market; Restrictions on Transfer."
Entities affiliated with DLJ (i) hold 14,300,000 shares of Common Stock of
the Company, including shares of the Company's Series A Preferred Stock, Series
B Preferred Stock and Series C Preferred Stock which are convertible into an
aggregate of 2,000,000 shares, 3,857,280 shares and 2,500,000 shares of the
Company's Common Stock, respectively, Convertible Subordinated Notes which are
convertible into an aggregate of 5,142,720 shares of the Company's Common Stock,
and Bridge Financing Warrants which are exercisable for an aggregate of 800,000
shares of the Company's Common Stock and (ii) pursuant to the Securityholders
Agreement, are entitled to elect two member to the Company's Board of Directors.
In consideration for DLJ's services, the Company paid to DLJ, in each of
1996 and 1997, $200,000 in fees for financial advisory and certain investment
banking services provided to the Company.
In connection with the refinancing of its then-outstanding indebtedness in
January and December of 1996, the Company paid fees of $1.2 million in the
aggregate for debt issuance costs to DLJCF. DLJCF is an affiliate of DLJ.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 70,000,000 shares
of Common Stock, $.0001 par value per share, of which 5,600,060 shares were
outstanding as of August 3, 1998, and 19,717,280 shares of Preferred Stock,
$.0001 par value per share, 8,250,000 of which have been designated Series A
Preferred Stock, 3,857,280 of which have been designated Series B Preferred
Stock and 7,610,000 of which have been designated Series C Preferred Stock, all
of which shares of Series A and B and 6,360,000 of which Series C Preferred
Stock are outstanding.
SERIES A PREFERRED STOCK
Each share of Series A Preferred Stock is entitled to receive dividends to
the same extent as the Common Stock. In the event of any liquidation,
dissolution or winding up of the Company, the holders of Series A Preferred
Stock are entitled to receive, subsequent to any distributions required to be
made to the holders of the Series B and C Preferred Stock, but prior and in
preference to any distribution of assets of the Company to the holders of Common
Stock, the amount of $1.091 per share. Each share of Series A Preferred Stock is
convertible at any time into Common Stock on a one-for-one basis, subject to
adjustment with respect to certain dilutive issuances by the Company. In
addition, all of the shares of Series A Preferred Stock will be converted
automatically into Common Stock upon the occurrence of (i) the initial public
offering of the Company's Common Stock at a minimum price per share of $6.00 and
net proceeds to the Company of at least $15.0 million or (ii) the conversion
into Common Stock of the Convertible Subordinated Notes and/or shares of Series
B Preferred Stock and/or shares of Series C Preferred Stock representing at
least 30% of the aggregate number of shares of Common Stock into which all
Convertible Subordinated Notes and shares of Series B and C Preferred Stock
could be converted. The holders of Series A Preferred Stock are entitled to vote
with the holders of Common Stock on an as-converted basis on all matters
presented for stockholder vote. In addition, the Series A Preferred Stock
contains customary antidilution rights in the event of certain dilutive
issuances by the Company of shares or rights to acquire shares of its capital
stock and protective voting provisions that, among other things, limit the
Company's ability to, without the affirmative vote of the holders of at least a
majority of the outstanding shares of Series A Preferred Stock, (i) create,
authorize or issue any senior class or series of stock other than the Series B
Preferred Stock or any securities on parity with the Series A Preferred Stock,
or increase the authorized number of shares of any such class or series of
stock, or reclassify any authorized stock of the Company into any such class or
series of stock, or create, authorize or issue any obligation or security
convertible into or evidencing the right to purchase any such class or series of
stock; (ii) issue additional shares of Series A Preferred Stock; (iii) amend,
alter or repeal the Certificate of Incorporation or Bylaws of the Company in any
manner adverse to the preferences, privileges, voting rights and powers of the
holders of Series A Preferred Stock and (iv) voluntarily liquidate, dissolve or
wind up the Company unless payments of liquidation preferences are paid in
accordance with the Company's Certificate of Incorporation. Notwithstanding
anything to the contrary contained above, no payments of any kind payable on the
Series A Preferred Stock shall be made unless and until 95% of the Series C
Preferred Stock shall have first been redeemed or converted; provided, however,
after August 3, 2000, the Company may pay dividends on the Series A Preferred
Stock in certain circumstances.
SERIES B PREFERRED STOCK
Subject to the rights of the holders of Series C Preferred Stock, each
share of Series B Preferred Stock is entitled to receive cumulative dividends at
(i) a rate of 25% of $1.5555 per share per annum from the date of issuance of
such shares until November 23, 1997 and (ii) the greater of (A) 12.5% of $1.5555
per share per annum and (B) $1.5555 multiplied by the prime rate plus 2%,
thereafter. Subject to the rights of the holders of Series C Preferred Stock, in
the event of any liquidation, dissolution or winding up of the Company, the
holders of Series B Preferred Stock shall be entitled to receive, in preference
to the holders of Series A Preferred Stock and Common Stock, an amount equal to
the greater of (A) $1.5555 per share plus all accrued and unpaid dividends and
(B) the amount that would have been received by a holder of one share of Series
B Preferred Stock had such share been converted into Common Stock. Subject to
the rights of the holders of the Series C Preferred Stock, the Company's
Certificate of Incorporation requires the Company to redeem the
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<PAGE> 123
Series B Preferred Stock on or after July 15, 2005, to the extent the Company
has funds legally available for such payment, at a redemption price of $1.5555
per share in cash, together with accrued and unpaid dividends. Each share of
Series B Preferred Stock is convertible into Common Stock at any time on a
one-for-one basis, subject to adjustment with respect to certain dilutive
issuances by the Company. In addition, all of the shares of Series B Preferred
Stock shall be converted automatically into Common Stock upon the occurrence of
the initial public offering of the Company's Common Stock at a minimum price per
share of $6.00 and net proceeds to the Company of at least $15.0 million. The
holders of Series B Preferred Stock shall be entitled to vote with the holders
of Common Stock on an as-converted basis on all matters presented for
stockholder vote. In addition, the Series B Preferred Stock contains customary
antidilution rights in the event of certain dilutive issuances by the Company of
shares or rights to acquire shares of its capital stock and protective voting
provisions that, among other things, (x) limit the Company's ability to, without
the affirmative vote of the holders of at least 66 2/3% of the outstanding
shares of Series B Preferred Stock (so long as there remains outstanding at
least 25% of the aggregate number of shares of Common Stock issuable upon
conversion of the Series B Preferred Stock and Convertible Subordinated Notes),
(i) amend, alter or repeal the Certificate of Incorporation of the Company or
any significant subsidiary in any manner adverse to the preferences, privileges,
voting rights and powers of the holders of the Series B Preferred Stock, (ii)
voluntarily sell, convey, exchange or transfer all or substantially all of the
Company's property or assets or merge or consolidate with any other corporation
unless the holders of Common Stock would receive in connection therewith at
least $4.67 per share, or (iii) create, authorize, or issue any class or series
of stock ranking prior to the Series B Preferred Stock or any securities on
parity with Series B Preferred Stock, or increase the authorized number of
shares of any such class or series of stock, or reclassify any authorized stock
of the Company into any such class or series of stock, or create, authorize or
issue and obligation or security convertible into or evidencing the right to
purchase any such class or series of stock; and (y) limit the Company's ability
to, without the affirmative vote of the holders of at least 66 2/3% of the
outstanding shares of Series B Preferred Stock and Series C Preferred Stock (so
long as there remains outstanding at least 25% of the aggregate number of shares
of Common Stock issuable upon conversion of the Series B and C Preferred Stock
and the Convertible Subordinated Notes), (i) voluntarily liquidate, dissolve, or
wind up the Company or any significant subsidiary, (ii) increase the size of the
Board of Directors of the Company or any significant subsidiary, (iii) other
than indebtedness under the New Notes, incur, assume, refinance, renew,
discharge, repay (other than pursuant to regularly scheduled payments thereof)
or cancel any indebtedness of the Company or any of its subsidiaries, (iv)
except as expressly permitted or required in the Certificate of Incorporation,
pay dividends or distributions on capital stock of the Company and its
subsidiaries and (v) except as expressly permitted or required in the
Certificate of Incorporation, redeem or repurchase any shares of capital stock
of the Company. Notwithstanding anything to the contrary contained above, no
payments of any kind payable on the Series B Preferred Stock shall be made
unless and until 95% of the Series C Preferred Stock shall have first been
redeemed or converted; provided, however, after August 3, 2000, the Company may
pay dividends on the Series B Preferred Stock in certain circumstances.
SERIES C PREFERRED STOCK
After August 3, 2000, each share of Series C Preferred Stock is entitled to
receive cumulative dividends at a rate per annum equal to the greater of (A)
$0.50 per share per annum and (B) $4.00 multiplied by the prime rate plus 2%. In
the event of any liquidation, dissolution or winding up of the Company, the
holders of Series C Preferred Stock shall be entitled to receive in preference
to the holders of Series A and B Preferred Stock and Common Stock an amount
equal to the greater of (A) $5.00 per share plus all accrued and unpaid
dividends and (B) the amount that would have been received by a holder of one
share of Series C Preferred Stock had such share been converted into Common
Stock. The Company's Certificate of Incorporation requires the Company to redeem
the Series C Preferred Stock on or after July 15, 2005, to the extent the
Company has funds legally available for such payment, at a redemption price of
$5.00 per share in cash, together with accrued and unpaid dividends. Each share
of Series C Preferred Stock is convertible into Common Stock at any time on a
one-for-one basis, subject to adjustment with respect to certain dilutive
issuances by the Company. In addition, all of the shares of Series C Preferred
Stock shall be converted automatically into Common Stock upon the occurrence of
the initial public offering of the Company's
115
<PAGE> 124
Common Stock at a minimum price per share of $6.00 and net proceeds to the
Company of at least $15.0 million. The holders of Series C Preferred Stock shall
be entitled to vote with the holders of Common Stock on an as-converted basis on
all matters presented for stockholder vote. In addition, the Series C Preferred
Stock contains customary antidilution rights in the event of certain dilutive
issuances by the Company of shares or rights to acquire shares of its capital
stock and protective voting provisions that, among other things, (x) limit the
Company's ability to, without the affirmative vote of the holders of at least a
majority of the outstanding shares of Series C Preferred Stock (so long as there
remains outstanding at least 25% of the aggregate number of shares of Common
Stock issuable upon conversion of the Series C Preferred Stock), (i) amend,
alter or repeal the Certificate of Incorporation of the Company or any
significant subsidiary in any manner adverse to the preferences, privileges,
voting rights and powers of the holders of the Series C Preferred Stock and (ii)
create, authorize, or issue any class or series of stock ranking prior to the
Series C Preferred Stock or any securities on a parity with the Series C
Preferred Stock, or increase the authorized number of shares of any such class
or series, or reclassify any authorized stock of the Company into any such class
or series of stock or create, authorize or issue any obligation or security
convertible into or evidencing the right to purchase any such class or series of
stock; and (y) limit the Company's ability to, without the affirmative vote of
at least 66 2/3% of the outstanding shares of Series B Preferred Stock and
Series C Preferred Stock (so long as there remains outstanding at least 25% of
the aggregate number of shares of Common Stock issuable upon conversion of the
Series B Preferred Stock, Series C Preferred Stock and Convertible Subordinated
Notes), (i) voluntarily liquidate, dissolve or wind up the Company or any
significant subsidiary, (ii) increase the size of the Board of Directors of the
Company or any significant subsidiary, (iii) other than indebtedness under the
New Notes, incur, assume, refinance, renew, discharge, repay (other than
pursuant to regularly scheduled payments thereof) or cancel any indebtedness of
the Company or any of its subsidiaries, (iv) except as expressly permitted or
required in the Certificate of Incorporation, pay dividends or distributions on
capital stock of the Company and its subsidiaries and (v) except as expressly
permitted or required in the Certificate of Incorporation, redeem or repurchase
any shares of capital stock of the Company.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share held.
Holders of Common Stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available therefor. In
the event of a liquidation, dissolution or winding up of the Company, holders of
Common Stock would be entitled to share ratably in the Company's assets
remaining after the payment of liabilities and the satisfaction of any
liquidation preference granted to the holders of any outstanding shares of
Preferred Stock, including the Series A, B and C Preferred Stock. Holders of
Common Stock have no preemptive or other subscription rights. The shares of
Common Stock are not convertible into any other security.
REGISTRATION RIGHTS
Pursuant to the Securityholders Agreement, holders (the "Registration
Rights Holders") of approximately 22.7 million shares of Common Stock (including
Common Stock issuable upon the conversion of the Series A, B and C Preferred
Stock), 5.1 million shares of Common Stock issuable upon the conversion of the
Convertible Subordinated Notes and 800,000 shares of Common Stock issuable upon
the exercise of the Bridge Note Warrants are entitled to certain demand and
piggy-back registration rights with respect to such shares. Pursuant to the
Securityholders Agreement, certain of the Registration Rights Holders may
currently and certain other Registration Rights Holders may, commencing six
months after a public offering by the Company of its Common Stock, request that
the Company file a registration statement under the Securities Act and, upon
such request and subject to certain conditions and restrictions, the Company
generally will be required to use its best efforts to effect each such
registration up to a maximum of four such registrations (requests for
registration on Form S-3 do not count towards the number of permitted requests
for registration). In addition, if the Company proposes to register any of its
Common Stock either for its own account or for the account of other
stockholders, the Company is required, with certain exceptions, to notify the
Registration Rights Holders and, subject to certain limitations, including in
any underwritten registration the ability to limit the number of shares included
in any such registration, to include in such registration all of the shares of
Common Stock requested to be included by the Registration Rights
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<PAGE> 125
Holders. The Company is generally obligated to bear the expenses, other than
underwriting discounts and sales commissions, of these registrations.
WARRANTS
The Company has Bridge Note Warrants outstanding exercisable for an
aggregate of 800,000 shares of Common Stock at an exercise price of $1.55 per
share. Such warrants expire on November 23, 2004. See "Certain
Transactions -- Bridge Financing."
TRANSFER AGENT
The Company acts as the transfer agent and registrar for its Common and
Preferred Stock.
INTER-SECURITYHOLDER AGREEMENT
In connection with the Series C Financing, the Company entered into an
Inter-Securityholder Agreement in August 1998 (the "Inter-Securityholder
Agreement") with the holders (such holders, the "Series C Holders") of the
Company's Series C Preferred Stock and the holders (such holders, the
"Subordinated Holders") of the Company's Convertible Subordinated Notes.
Pursuant to the Inter-Securityholder Agreement, the Subordinated Holders agreed,
for the benefit of the Series C Holders, to among other things, (a) subordinate
any obligations (the "Junior Obligations") arising from or relating to the
Convertible Subordinated Notes to any obligations arising from or relating to
the Series C Preferred Stock, and (b) refrain from exercising certain rights
pertaining to, or receiving any payments on, the Junior Obligations under
certain circumstances, without the consent of the holders of a majority of the
shares of Series C Preferred Stock then outstanding.
LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of the
New Notes offered hereby will be passed upon for the Company by Brobeck, Phleger
& Harrison LLP, Irvine, California. Richard A. Fink, a member of Brobeck,
Phleger & Harrison LLP, is Secretary of the Company and owns 40,000 shares of
Common Stock.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1996 and 1997 and for each of the three years in the period ended December 31,
1997 and the financial statements of Air Bearings, Incorporated for the year
ended December 31, 1995 included in this Prospectus and the related financial
statement schedule included elsewhere in the registration statement have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein and elsewhere in the registration statement, and are
included in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing.
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<PAGE> 126
GLOSSARY
Access Speed: The time it takes to locate data on a disk, measured in
milliseconds.
Actuator Mechanics: The mechanism within the disk drive that controls
movement of a head stack assembly.
Areal Density: A measure of recording density calculated by multiplying
bits per inch (bpi) by tracks per inch (tpi).
Asperity: A bump or protrusion on the surface of a disk.
Bit: The basic unit of storage of information in a computer system. Bits
are represented by the presence or absence of changes in orientation of the
magnetic domains along a track on the storage media.
Bits Per Inch (BPI): A measure of how densely information is packed on a
storage medium.
Burnish: To remove asperities or particles from the surface of a disk.
Byte: Eight bits. A megabyte (MB) equals one million bytes. A gigabyte (GB)
equals one billion bytes. One byte is sufficient to define all the
alphanumeric characters. Storage capacity of a disk drive is commonly
measured in megabytes which is the total number of storable bits, divided
by eight million.
Disk: A magnetically coated disk substrate which spins inside a disk drive
and is used as the storage medium for digital data.
Disk Drive: The primary data storage device used by computers. Disk drives
are used to record, store and retrieve digital information in a computer
system.
Flying Height: The distance between the read/write head and the disk
surface, created by the cushion of air that results from the velocity of
the disk rotation, which keeps the two objects from touching. Closer flying
heights permit denser data storage but require more precise mechanical
designs.
Gigabyte: Equal to one billion bytes or one thousand megabytes.
Glide Height: The minimum allowable distance between the read/write head
and the surface of a disk. Glide height is measured in millionths of an
inch (or microinches). Flying the read/write head closer to the surface of
the spinning disk enhances performance in a disk drive.
Head Disk Assembly (HDA): The combination of the HSA and disk(s) as part of
the final assembly of a hard disk drive.
Head Gimbal Assembly (HGA): A magnetic recording head attached to a
flexure, or suspension arm, and a wire/tubing assembly.
Head Stack Assembly (HSA): Multiple head gimbal assemblies (HGAs).
Read/Write Head: A small magnetic transducer that flies above the surface
of the disk and performs the functions of reading and writing data onto the
disk.
MR (magnetoresistive) Head: Recording head that uses an inductive thin-film
element to write data onto the media and a separate MR element to read the
data. The use of a separate but more sensitive read element permits data to
be recorded and, subsequently, read at much higher track densities than
inductive thin-film head technology. MR head technology is regarded by many
in the industry as a means to significantly increase areal densities.
Media Certification: The process of testing the magnetic qualities of a
disk's surface.
Megabyte: Equal to one million bytes.
Microinch: One millionth of an inch. There are approximately 3000
microinches in a human hair and 200 microinches in a fingerprint.
Quasi-Static Test: A static test (not involving a spinning disk) utilizing
comparably low frequencies.
A-1
<PAGE> 127
Server: A computer generally configured for the support of concurrent
multi-user applications. The server is generally a storage repository of
software and data.
Servowrite: To write magnetic servo tracks on a disk surface which provide
track location and positioning information.
Spindle: The drive's center shaft, on which the disks are mounted. A
synchronized spindle is a shaft that allows two disks to spin
simultaneously as a mirror image of each other, permitting redundant
storage of data.
Storage Capacity: The amount of information, expressed in bytes, that can
be stored on a hard drive.
Thin Films: For magnetic disks, films thickness measured in Angstroms (250
Angstroms = one microinch).
Throughput: The number of units (disk drives, disks or read/write heads)
processed through a given manufacturing step or on a given machine per
unit.
Track: One of the many concentric magnetic circle patterns written on a
disk surface as a guide for storing and reading data.
Tracks Per Inch (TPI): The number of tracks per inch of media.
Transfer Rate: The rate at which the disk sends and receives data from the
controller.
Yield: A measure of manufacturing efficiency; the percent of acceptable
product obtained from a specific manufacturing process(es).
A-2
<PAGE> 128
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PHASE METRICS, INC.:
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets as of December 31, 1996 and
1997 and June 30, 1998 (unaudited)..................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997 and the three and six
months ended June 30, 1997 and 1998 (unaudited)........ F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1995, 1996 and 1997
and the six months ended June 30, 1998 (unaudited)..... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996
and 1997 and the six months ended June 30, 1997 and
1998 (unaudited)....................................... F-6
Notes to Consolidated Financial Statements................ F-7
AIR BEARINGS, INCORPORATED:
Independent Auditors' Report.............................. F-32
Statement of Income and Retained Earnings for the year
ended December 31, 1995................................ F-33
Statement of Cash Flows for the year ended December 31,
1995................................................... F-34
Notes to Financial Statements............................. F-35
</TABLE>
F-1
<PAGE> 129
INDEPENDENT AUDITORS' REPORT
Phase Metrics, Inc.:
We have audited the accompanying consolidated balance sheets of Phase
Metrics, Inc. and its subsidiaries as of December 31, 1996 and 1997, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Phase Metrics, Inc. and its
subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
January 30, 1998
F-2
<PAGE> 130
PHASE METRICS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------- -----------
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 2,737 $ 2,977 $ 2,809
Accounts receivable -- net................................ 25,042 28,730 30,563
Inventories............................................... 51,795 55,585 38,456
Prepaid expenses and other................................ 5,734 1,975 2,081
Income taxes receivable................................... 5,000 5,156 7,274
Deferred tax assets....................................... 10,026 8,952 --
-------- -------- --------
Total current assets................................... 100,334 103,375 81,183
Property, plant and equipment, net.......................... 28,078 38,023 33,467
Intangible assets, net...................................... 19,477 4,966 1,685
Deferred tax assets......................................... 2,842 5,269 --
Other....................................................... 3,282 3,097 2,876
-------- -------- --------
Total assets................................................ $154,013 $154,730 $119,211
======== ======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 18,188 $ 10,419 $ 12,241
Accrued expenses and other liabilities.................... 21,117 16,058 26,565
Customer deposits......................................... 15,885 9,038 1,528
Current portion of debt................................... 2,463 1,785 9,423
-------- -------- --------
Total current liabilities.............................. 57,653 37,300 49,757
Long-term liabilities:
Long-term debt............................................ 85,557 111,272 107,555
Convertible subordinated notes............................ 8,000 8,000 8,000
Accrued expenses and interest............................. 5,520 6,794 8,969
Series B redeemable preferred stock, $.0001 par value,
3,857,280 shares authorized, issued and outstanding
(liquidation preference of $10,578 and $11,122 at December
31, 1997 and June 30, 1998, respectively)................. 6,314 9,237 10,355
Commitments and contingencies (Notes 6 and 9)
Stockholders' deficit:
Series A preferred stock, $.0001 par value 8,250,000
shares authorized, issued and outstanding (liquidation
preference of $9,000).................................. 3 3 3
Common stock, $.0001 par value, 70,000,000 shares
authorized; 5,632,500, 5,627,431 and 5,600,060 shares
issued and outstanding at December 31, 1996 and 1997
and June 30, 1998, respectively........................ 5,665 6,090 6,276
Retained deficit.......................................... (14,699) (23,166) (70,854)
Accumulated translation adjustments....................... -- (800) (850)
-------- -------- --------
Total stockholders' deficit............................ (9,031) (17,873) (65,425)
-------- -------- --------
Total liabilities, redeemable preferred stock and
stockholders' deficit..................................... $154,013 $154,730 $119,211
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 131
PHASE METRICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30, JUNE 30,
------------------------------ ------------------- -------------------
1995 1996 1997 1997 1998 1997 1998
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.................... $116,894 $190,773 $184,660 $ 52,633 $ 31,400 $104,236 $ 63,902
Cost of sales................ 64,766 103,861 101,294 27,464 32,855 55,378 52,472
-------- -------- -------- -------- -------- -------- --------
Gross profit (loss)........ 52,128 86,912 83,366 25,169 (1,455) 48,858 11,430
Operating expenses:
Research and development... 11,372 31,110 43,572 11,221 9,689 21,651 19,158
Selling, general and
administrative.......... 15,695 24,631 22,968 6,155 5,224 12,318 9,686
Amortization and
write-downs of
intangibles............. 13,094 28,656 14,591 5,363 1,642 8,726 3,280
Settlement charge.......... -- -- -- -- 5,872 -- 5,872
Restructuring charge....... -- -- -- -- 3,046 -- 3,046
Purchased in-process
research and
development............. -- 13,935 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total operating
expenses.............. 40,161 98,332 81,131 22,739 25,473 42,695 41,042
-------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations................. 11,967 (11,420) 2,235 2,430 (26,928) 6,163 (29,612)
Interest expense............. 5,625 8,448 11,573 2,827 3,770 5,393 7,201
Other (income)
expense -- net............. 149 (26) 474 400 25 476 120
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income
taxes and extraordinary
items...................... 6,193 (19,842) (9,812) (797) (30,723) 294 (36,933)
Income tax expense
(benefit).................. 1,524 (8,974) (4,268) (239) 11,434 88 8,701
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary items........ 4,669 (10,868) (5,544) (558) (42,157) 206 (45,634)
Extraordinary loss, net of
income taxes............... -- 1,122 -- -- -- -- 941
-------- -------- -------- -------- -------- -------- --------
Net income (loss)............ 4,669 (11,990) (5,544) (558) (42,157) 206 (46,575)
Accretion for redemption
value and dividends on
Series B redeemable
preferred stock............ (3,000) (3,000) (2,923) (750) (557) (1,500) (1,113)
-------- -------- -------- -------- -------- -------- --------
Net income (loss)
attributable to common
stockholders............... $ 1,669 $(14,990) $ (8,467) $ (1,308) $(42,714) $ (1,294) $(47,688)
======== ======== ======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 132
PHASE METRICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A
PREFERRED STOCK COMMON STOCK RETAINED ACCUMULATED
------------------ ------------------ EARNINGS TRANSLATION
SHARES AMOUNT SHARES AMOUNT (DEFICIT) ADJUSTMENTS TOTAL
--------- ------ --------- ------ --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995............. 8,250,000 $3 2,750,000 $1,065 $ (1,378) $ -- $ (310)
Issuance of common stock to effect
acquisitions....................... -- -- 1,150,000 1,150 -- -- 1,150
Exercise of options.................. -- -- 1,519,600 733 -- -- 733
Accrued dividends on Series B
redeemable preferred stock......... -- -- -- -- (1,500) -- (1,500)
Accretion for redemption value on
Series B redeemable preferred
stock.............................. -- -- -- -- (1,500) -- (1,500)
Compensation expense on option
grants............................. -- -- -- 350 -- -- 350
Net income........................... -- -- -- -- 4,669 -- 4,669
--------- -- --------- ------ -------- ----- --------
Balance, December 31, 1995........... 8,250,000 3 5,419,600 3,298 291 -- 3,592
Issuance of common stock to effect
acquisitions....................... -- -- 254,000 1,905 -- -- 1,905
Exercise of options, net of
repurchases........................ -- -- (41,100) 62 -- -- 62
Accrued dividends on Series B
redeemable preferred stock......... -- -- -- -- (1,500) -- (1,500)
Accretion for redemption value on
Series B redeemable preferred
stock.............................. -- -- -- -- (1,500) -- (1,500)
Compensation expense on option
grants............................. -- -- -- 400 -- -- 400
Net loss............................. -- -- -- -- (11,990) -- (11,990)
--------- -- --------- ------ -------- ----- --------
Balance, December 31, 1996........... 8,250,000 3 5,632,500 5,665 (14,699) -- (9,031)
Exercise of options, net of
repurchases........................ -- -- (5,069) 25 -- -- 25
Accrued dividends on Series B
redeemable preferred stock......... -- -- -- -- (1,423) -- (1,423)
Accretion for redemption value on
Series B redeemable preferred
stock.............................. -- -- -- -- (1,500) -- (1,500)
Compensation expense on option
grants............................. -- -- -- 400 -- -- 400
Net loss............................. -- -- -- -- (5,544) -- (5,544)
Accumulated translation
adjustments........................ -- -- -- -- -- (800) (800)
--------- -- --------- ------ -------- ----- --------
Balance, December 31, 1997........... 8,250,000 3 5,627,431 6,090 (23,166) (800) (17,873)
Exercise of options, net of
repurchases(1)..................... -- -- (27,371) (14) -- -- (14)
Accrued dividends on Series B
redeemable preferred stock(1)...... -- -- -- -- (363) -- (363)
Accretion for redemption value on
Series B redeemable preferred
stock(1)........................... -- -- -- -- (750) -- (750)
Compensation expense on option
grants(1).......................... -- -- -- 200 -- -- 200
Net loss(1).......................... -- -- -- -- (46,575) -- (46,575)
Accumulated translation
adjustments(1)..................... -- -- -- -- -- (50) (50)
--------- -- --------- ------ -------- ----- --------
Balance, June 30, 1998(1)............ 8,250,000 $3 5,600,060 $6,276 $(70,854) $(850) $(65,425)
========= == ========= ====== ======== ===== ========
</TABLE>
- ---------------
(1) Unaudited.
See notes to consolidated financial statements.
F-5
<PAGE> 133
PHASE METRICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ ----------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss).............................. $ 4,669 $(11,990) $ (5,544) $ 206 $(46,575)
Adjustments to reconcile net income (loss) to
net cash provided by (used for) operating
activities:
Depreciation, amortization and write-downs of
intangible assets.......................... 15,897 32,953 21,872 12,056 7,630
Amortization of deferred financing costs..... 1,395 644 540 254 342
Loss on disposal of property, plant and
equipment.................................. -- -- 714 526 199
Compensation expense on option grants........ 350 400 400 200 200
Deferred income taxes........................ (10,196) (16,333) (1,353) (2,089) 14,221
Interest on convertible subordinated notes... 2,000 2,000 1,894 1,000 500
Restructuring charge -- fixed asset
impairment................................. -- -- -- -- 1,380
Purchased in-process research and
development................................ -- 13,935 -- -- --
Extraordinary loss net of income taxes....... -- 1,122 -- -- 941
Changes in assets and liabilities:
Accounts receivable........................ (11,339) 2,442 (3,688) (9,756) (1,833)
Inventories................................ (20,107) (20,019) (4,508) (4,995) 17,129
Prepaid expenses and other assets.......... (1,415) (5,796) 3,732 1,969 (1,282)
Income taxes receivable.................... -- (5,000) (156) 5,000 (1,379)
Accounts payable........................... 19,535 (5,189) (7,769) 2,377 1,822
Customer deposits, accrued expenses and
other liabilities....................... 17,511 (10,571) (12,526) (8,886) 4,685
-------- -------- -------- -------- --------
Net cash provided by (used for)
operating activities.................. 18,300 (21,402) (6,392) (2,138) (2,020)
-------- -------- -------- -------- --------
Investing activities:
Acquisition of property, plant and equipment... (9,135) (24,564) (17,091) (11,348) (1,294)
Acquisitions, net of cash acquired of $6,755
and $1,595, respectively..................... (1,967) (20,752) -- -- --
Increase in patent costs....................... -- -- (78) -- --
-------- -------- -------- -------- --------
Net cash used for investing
activities............................ (11,102) (45,316) (17,169) (11,348) (1,294)
-------- -------- -------- -------- --------
Financing activities:
Proceeds from term notes....................... 18,000 145,000 -- -- --
Proceeds from senior notes..................... -- -- -- -- 110,000
Repayment of term and subordinated notes....... (4,850) (80,446) (1,800) (1,200) (79,200)
Revolving loans -- net......................... 4,100 (300) 26,900 14,700 (22,300)
Repayment of bridge notes...................... (20,000) -- -- -- --
Payment of debt issuance costs................. (765) (3,872) (330) (30) (4,839)
Proceeds from sale/leaseback of equipment...... -- 4,431 -- -- --
Payments on capital lease obligations.......... (317) (436) (912) (393) (488)
Net proceeds from issuance (repurchase) of
common stock................................. 733 62 25 32 (14)
-------- -------- -------- -------- --------
Net cash provided by (used for)
financing activities.................. (3,099) 64,439 23,883 13,109 3,159
-------- -------- -------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents.................................... -- -- (82) (3) (13)
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................... 4,099 (2,279) 240 (380) (168)
Cash and cash equivalents, beginning of period... 917 5,016 2,737 2,737 2,977
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period......... $ 5,016 $ 2,737 $ 2,977 $ 2,357 $ 2,809
======== ======== ======== ======== ========
Supplemental disclosure of cash flow information:
Interest paid.................................. $ 2,789 $ 5,277 $ 9,393 $ 4,142 $ 1,584
======== ======== ======== ======== ========
Income taxes paid, (net refunds)............... $ 5,055 $ 21,857 $ (5,357) $ 1,945 $ 3,957
======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 134
PHASE METRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations -- Phase Metrics, Inc. and its wholly-owned
subsidiaries (the "Company") design, manufacture and sell process and production
test equipment for the data storage industry. The consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
Unaudited Interim Financial Information -- The unaudited interim
consolidated financial information as of June 30, 1998 and for the three and six
months ended June 30, 1997 and 1998 has been prepared on the same basis as the
audited consolidated financial statements. In the opinion of management, such
unaudited information includes all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of financial position, results of
operations and cash flows for the interim periods presented. Results of these
interim periods are not necessarily indicative of the results to be expected for
the full year.
The Company's first, second and third fiscal quarters end on the Sunday
closest to March 31, June 30 and September 30, respectively. For ease of
reference, such quarter end date is used herein.
Use of Estimates in the Preparation of the Consolidated Financial
Statements -- The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions. Assets, liabilities, revenues and expenses and
disclosures of contingent assets and liabilities are affected by such estimates
and assumptions. Actual results could differ from those estimates.
Risks and Uncertainties -- The Company is subject to certain risks and
uncertainties and believes that changes in any of the following areas could have
a material effect on the Company's future financial position or results of
operations: size and timing of orders from, and shipments to, major customers;
the timing of introductions of new products and product enhancements by the
Company or its competitors; the Company's ability to develop, introduce and
market new, technologically advanced products; the cyclicality of the data
storage industry; the rescheduling of capital expenditures by the Company's
customers; variations in the Company's customer base and product mix; the
availability and cost of key production materials and components; the Company's
ability to effectively manage its inventory and to control costs; the financial
stability of major customers; the Company's success in expanding its operations
overseas; personnel changes; expenses associated with acquisitions; fluctuations
in amortization and write-downs of intangible assets; foreign currency exchange
rate fluctuations and general economic factors.
Cash and Cash Equivalents -- The Company invests its excess cash in money
market accounts and highly liquid government securities. The Company considers
all highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents.
Inventories -- Inventories are stated at the lower of cost (first-in,
first-out) or market.
Property, Plant and Equipment -- Property, plant and equipment are recorded
at cost. Depreciation and amortization are provided using the straight-line
method over the estimated useful lives of the assets. Buildings and improvements
are depreciated over 39 years and equipment and furniture are generally
depreciated over three to five years. Amortization of leasehold improvements is
provided using the straight-line method over the lesser of the remaining lease
term or the life of the assets. Depreciation and amortization expense related to
property, plant and equipment totaled $2.8 million, $4.3 million, and $7.3
million for the years ended December 31, 1995, 1996 and 1997, respectively.
Intangible Assets -- Intangible assets consist primarily of purchased
technology, goodwill and covenants not to compete recorded in connection with
the Company's acquisitions (see Note 3). Purchased technology and goodwill are
amortized using the straight-line method over their expected useful lives,
generally three years. Covenants not to compete are amortized using the
straight-line method over the terms of the agreements of five to seven years.
F-7
<PAGE> 135
PHASE METRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
Impairment of Long-Lived Assets -- The recoverability of long-lived assets
is evaluated by an analysis of operating results and consideration of other
significant events or changes in the underlying assets and business environment.
If the Company identifies events or circumstances which indicate that an
impairment might exist, the Company determines whether the sum of the estimated
undiscounted future cash flows attributable to the assets in question is less
than their carrying amounts. If impairment exists, the Company recognizes an
impairment loss based on the excess of the carrying amount of the assets over
their fair values determined by the estimated discounted future cash flows. In
1996, the Company recorded write-downs totaling $11.9 million related to
impairment losses primarily for Cambrian Systems, Inc. ("Cambrian") and Applied
Robotic Technologies, Inc. ("ART") purchased technology. In 1997, the Company
recorded a write-down of $2.0 million related to an impairment loss for Air
Bearings, Inc. ("ABI") purchased technology (See Note 3).
Notes Payable -- Interest accrues on the $110 million principal amount
Senior Notes at 10 3/4% per annum. The Company is increasing the carrying value
of the senior notes payable to their ultimate redemption value.
Stock-Based Compensation -- The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related Interpretations in accounting for its stock-based awards to employees.
Revenue Recognition -- Sales are generally recognized upon shipment. A
provision for estimated warranty and installation costs is recorded upon product
shipment.
Research and Development -- Research and development costs are expensed as
incurred. The Company's products include certain software applications that are
integral to the operation of the product. The costs to develop such software
have not been capitalized as the Company believes its current software
development process is essentially completed concurrent with the establishment
of technological feasibility of the software.
Concentrations of Credit Risk -- Financial instruments that potentially
subject the Company to concentrations of credit risk consist of cash equivalents
and accounts receivable. The Company invests its excess cash in money market
accounts and highly liquid government securities.
The Company sells its products without collateral primarily to companies located
throughout the United States and Asia. Historically, a significant portion of
the Company's sales in any particular period have been attributable to sales to
a limited number of customers. Credit is extended based on an evaluation of the
customer's financial condition. The Company estimates its potential losses on
trade receivables on an ongoing basis and provides for anticipated losses in the
period in which the sales are recognized.
Sales to customers outside the United States (primarily Asia) totaled 23%, 57%,
and 49% of net sales for the years ended December 31, 1995, 1996 and 1997,
respectively. As of December 31, 1996 and 1997, balances due from foreign
customers (primarily located in Asia) were $10.2 million and $12.0 million,
respectively.
The Company had sales to individual customers in excess of 10% of net
sales, as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Customer:
A............................................. 25% 19% 18%
B............................................. -- -- 17%
C............................................. 11% 15% 16%
D............................................. -- 12% --
E............................................. 17% -- --
</TABLE>
F-8
<PAGE> 136
PHASE METRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
As of December 31, 1996 and 1997, accounts receivable from individual
customers with balances due in excess of 10% of total accounts receivable
totaled $16.9 million and $17.6 million, respectively.
Reclassifications -- Certain prior year amounts have been reclassified to
conform with the current year presentation.
Fair Value of Financial Instruments -- As of December 31, 1996 and 1997,
the carrying amounts of cash and cash equivalents and borrowings outstanding
under the Company's credit agreements approximate their respective fair values.
Estimation of the fair value of the convertible subordinated notes (see Note 4)
is not deemed practicable due to the fact that there is no market for this debt
and the related party relationship. The related party is a significant
stockholder of the Company.
Foreign Currency Translation -- The financial statements of the Company's
subsidiaries outside the United States are measured using the local currency as
the functional currency. Assets and liabilities of these subsidiaries are
translated at the rates of exchange at the balance sheet date. The resultant
translation adjustments are presented as a separate component of stockholders'
deficit.
Comprehensive Income -- As of January 1, 1998, the Company adopted SFAS No.
130, "Reporting Comprehensive Income," which requires an enterprise to report,
by major components and as a single total, the change in net assets during the
period from non-owner sources. For the years ended December 31, 1995, 1996 and
1997, the three months ended June 30, 1997 and 1998, and the six months ended
June 30, 1997 and 1998, comprehensive net income (loss) was $4.7 million,
$(12.0) million, $(6.3) million, $(0.6) million, $(42.2) million, $0.2 million
and $(46.6) million, respectively.
Recent Accounting Pronouncements -- In June 1997, SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," was
issued. SFAS No. 131 establishes annual and interim reporting standards for an
enterprise's business segments and related disclosures about its products,
services, geographic areas and major customers. Adoption of this statement will
not impact the Company's consolidated financial position, results of operations
or cash flows. The statement is effective for fiscal years beginning after
December 15, 1997, with earlier application permitted.
2. BALANCE SHEET DETAILS
Accounts Receivable
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Trade receivables........................................ $25,788 $30,393
Allowance for doubtful accounts.......................... (746) (1,663)
------- -------
$25,042 $28,730
======= =======
</TABLE>
F-9
<PAGE> 137
PHASE METRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Raw materials and components.................. $32,012 $30,915 $11,885
Work-in-process............................... 11,466 9,796 8,405
Finished goods................................ 8,317 14,874 18,166
------- ------- -------
$51,795 $55,585 $38,456
======= ======= =======
</TABLE>
Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
------- --------
<S> <C> <C>
Land.................................................... $ 2,400 $ 2,400
Buildings and improvements.............................. 4,118 9,147
Equipment and furniture................................. 22,000 30,944
Leasehold improvements.................................. 3,900 5,514
Construction in progress................................ 661 1,098
------- --------
33,079 49,103
Accumulated depreciation and amortization............... (5,001) (11,080)
------- --------
$28,078 $ 38,023
======= ========
</TABLE>
Intangible Assets
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
-------- --------
<S> <C> <C>
Purchased technology................................... $ 44,822 $ 17,598
Goodwill............................................... 4,410 --
Covenants not to compete............................... 2,175 2,175
Patents................................................ 53 131
-------- --------
51,460 19,904
Accumulated amortization and write-downs............... (31,983) (14,938)
-------- --------
$ 19,477 $ 4,966
======== ========
</TABLE>
F-10
<PAGE> 138
PHASE METRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Accrued warranty......................................... $ 7,727 $ 5,461
Accrued compensation..................................... 6,992 6,271
Other.................................................... 6,398 4,326
------- -------
$21,117 $16,058
======= =======
</TABLE>
Accrued Expenses and Interest
Accrued expenses and interest consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------ ------
<S> <C> <C>
Accrued interest on convertible subordinated notes......... $4,208 $6,102
Other accrued expenses..................................... 1,312 692
------ ------
$5,520 $6,794
====== ======
</TABLE>
3. ACQUISITIONS
In November 1994, the Company acquired all of the outstanding common stock
of ProQuip, Inc. ("ProQuip") and certain net assets of Cambrian. Concurrent with
such acquisitions, the Company restructured its combined operations.
In June 1995, the Company acquired all of the outstanding stock of Helios,
Incorporated ("Helios") and in July 1995, the Company acquired all of the
outstanding stock of ART and acquired certain net assets of Tahoe Instruments,
Inc. ("Tahoe").
In January 1996, the Company acquired all of the outstanding stock of ABI
and in December 1996, the Company acquired all of the outstanding stock of Santa
Barbara Metric ("SBM") and a portion of the business of Kirell Development, Inc.
("KDI").
The acquired companies discussed above design, manufacture and sell process
and production test equipment for the data storage industry. The acquisitions
have been accounted for in accordance with the purchase method of accounting and
the accompanying consolidated financial statements reflect the purchase price
allocated to assets acquired and liabilities assumed based upon their fair
values as of the acquisition date. The Company's results of operations include
those of the acquired companies from their respective dates of acquisition.
F-11
<PAGE> 139
PHASE METRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
The fair value of significant assets acquired, liabilities assumed and
purchased in-process research and development is summarized as follows (in
millions):
<TABLE>
<CAPTION>
1994 1995 1996
------------------ --------------- --------------------
PROQUIP CAMBRIAN HELIOS ART ABI KDI & SBM
------- -------- ------ ----- ----- -----------
<S> <C> <C> <C> <C> <C> <C>
Current assets..................... $ 10.3 $ 3.5 $ 9.1 $ 5.6 $ 4.5 $ 0.5
Property and other assets.......... 1.2 0.5 -- 0.1 0.7 --
Covenant not to compete............ 1.5 0.2 -- -- -- 1.8
Purchased technology and
goodwill......................... 10.8 14.7 11.6 7.5 4.9 --
Liabilities........................ (10.2) (7.7) (13.6) (7.8) (0.1) (1.4)
Purchased in-process research and
development...................... -- -- -- -- 11.0 2.4
------ ----- ------ ----- ----- -----
Total purchase price............... $ 13.6 $11.2 $ 7.1 $ 5.4 $21.0 $ 3.3
====== ===== ====== ===== ===== =====
</TABLE>
In connection with the Company's acquisitions of ABI, SBM and a portion of
the business of KDI in 1996, the Company acquired certain research and
development projects that had not reached technological feasibility and had no
alternative future uses. Accordingly, $13.4 million of purchased in-process
research and development was expensed in 1996.
The following summarizes the cash and noncash components of the Company's
acquisitions (in millions):
<TABLE>
<CAPTION>
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Total purchase price........................................ $24.8 $13.0 $24.3
Common stock issued......................................... -- (1.1) (1.9)
Notes payable issued........................................ -- (3.1) --
Cash acquired............................................... (2.8) (6.8) (1.6)
----- ----- -----
Cash used for acquisitions.................................. $22.0 $ 2.0 $20.8
===== ===== =====
</TABLE>
The following unaudited information presents the pro forma results of
operations of the Company, after giving effect to certain adjustments including
amortization of intangible assets acquired, as if each acquisition had taken
place on January 1 of the year preceding its acquisition, with the exception of
Tahoe, KDI and SBM for which the operations were deemed immaterial. These pro
forma results have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had the acquisitions been
made on such date, nor are they necessarily indicative of future results to be
expected (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1995 1996
-------- --------
<S> <C> <C>
Net sales................................................... $130,044 $190,773
======== ========
Income (loss) before extraordinary item..................... $ (2,005) $ 1,320
======== ========
Net income (loss)........................................... $ (2,005) $ 198
======== ========
</TABLE>
F-12
<PAGE> 140
PHASE METRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
4. DEBT
Debt Summary -- Debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
------- --------
<S> <C> <C>
Credit agreements........................................... $83,800 $109,900
Convertible subordinated notes.............................. 8,000 8,000
Subordinated notes, interest at 6%, paid in 1997............ 1,000 --
Capital lease obligations with weighted average annual
interest rates
of 9%..................................................... 3,220 3,157
------- --------
Total....................................................... 96,020 121,057
Less current portion........................................ (2,463) (1,785)
------- --------
Long-term debt.............................................. $93,557 $119,272
======= ========
</TABLE>
Credit Agreements -- At December 31, 1997, the Company had a $120.0 million
credit agreement, amended in September of 1997, (the "Credit Agreement") with a
group of financial institutions (the "Lenders") which provides for (i) five-year
term loans (the "Term Loans") in the principal amount of $80.0 million, and (ii)
a three-year revolving credit facility (the "Revolver") up to $40.0 million. The
Credit Agreement was terminated and repaid in full subsequent to December 31,
1997 (See Note 11).
The Term Loans bear interest at the Company's option of (i) prime plus 2.0%
to 2.5% or (ii) LIBOR plus 3.0% to 3.5%. The Revolver bears interest at the
Company's option of (i) prime plus 0.5% to 2.0%, or (ii) LIBOR plus 1.5% to
3.0%. The spreads depend on the Company's consolidated leverage ratio as defined
in the Credit Agreement. As of December 31, 1997, the Term Loans bore interest
at prime (8.5%) plus 2.5% and outstanding borrowings under the Revolver totaling
$3.2 million. Substantially all assets of the Company are pledged as collateral
for the Credit Agreement.
The Company pays a commitment fee on the unused portion of its Revolver.
The Credit Agreement contains certain affirmative and negative covenants
customary for this type of agreement. The Credit Agreement is guaranteed by all
of the Company's domestic subsidiaries and all such guarantees are
collateralized by first priority pledges of all outstanding capital stock of
each guarantor.
In connection with the refinancing of certain credit agreements in January
and December 1996, the related unamortized debt issuance costs were written off.
These write-offs, net of related tax benefit of $0.7 million, have been reported
as extraordinary items in the accompanying consolidated statements of
operations. In connection with the Credit Agreement, the Company paid fees of
$1.2 million, for debt issuance costs to the syndication agent, a stockholder of
the Company.
Through a foreign subsidiary, the Company has entered into an accounts
receivable based credit agreement. The agreement has no fixed expiration, does
not contain any covenant compliance requirements, and the interest rate is
negotiated on a customer by customer basis. The borrowings outstanding at
December 31, 1996 totaled $0.2 million and bore interest at 1.2%. There were no
borrowings outstanding as of December 31, 1997.
Convertible Subordinated Notes -- In November 1994, the Company issued and
sold $8.0 million principal amount of its convertible subordinated notes (the
"Convertible Subordinated Notes") to certain stockholders.
The Convertible Subordinated Notes currently will mature in December 2001.
Interest accrued at an annual rate of 25.0% from the date of issuance through
November 23, 1997, and thereafter accrues at an annual rate equal to the greater
of 12.5% or prime (8.5% as of December 31, 1997) plus 2.0%. The
F-13
<PAGE> 141
PHASE METRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
Convertible Subordinated Notes bore interest at 12.5% as of December 31, 1997.
Interest is payable at maturity. The Company and the holders of the Convertible
Subordinated Notes agreed, effective upon the issuance of the Notes (See Note
11), to amend the Convertible Subordinated Notes to extend the maturity date to
July 15, 2005 and to eliminate all rights of redemption formerly provided for.
The convertible subordinated notes, including accrued interest: (i) are
convertible into 5,142,720 shares of common stock at any time at the option of
the holder, (ii) will automatically be converted into common stock upon
effectiveness of a registration statement under the Securities Act of 1933 for
the sale of common stock with a minimum per share price of $4.665 (as adjusted
to take into account any subsequent subdivisions, combinations or
reclassifications) and net proceeds to the Company of not less than $15.0
million, and (iii) are subject to certain anti-dilution provisions.
Long-term debt repayments (excluding capital leases) as of December 31,
1997 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- --------------------------------------------------------
<S> <C>
1998.................................................. $ 800
1999.................................................. 55,767
2000.................................................. 26,667
2001.................................................. 34,666
2002.................................................. --
--------
Total......................................... $117,900
========
</TABLE>
5. INCOME TAXES
The components of income tax expense (benefit) are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
-------- -------- -------
<S> <C> <C> <C>
Current income taxes:
Federal........................................... $ 9,513 $ 6,330 $(2,915)
State............................................. 2,025 590 --
-------- -------- -------
Total..................................... 11,538 6,920 (2,915)
Deferred income taxes:
Federal........................................... (7,889) (13,610) 386
State............................................. (2,125) (3,211) (1,739)
-------- -------- -------
Total..................................... (10,014) (16,821) (1,353)
Income tax (benefit) expense before extraordinary
items............................................. 1,524 (9,901) (4,268)
Extraordinary items................................. -- 927 --
-------- -------- -------
Income tax expense (benefit)........................ $ 1,524 $ (8,974) $(4,268)
======== ======== =======
</TABLE>
F-14
<PAGE> 142
PHASE METRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
The reconciliations between the statutory federal income tax rate and the
effective income tax rate for the years ended December 31, 1995, 1996 and 1997
are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1995 1996 1997
----- ------ ------
<S> <C> <C> <C>
Statutory tax rate -- expense (benefit)..................... 35.0% (35.0)% (34.0)%
Federal research and development credits.................... (4.9) (4.0) (8.2)
State income taxes, net of federal benefit.................. (1.0) (6.6) (4.2)
Foreign sales corporation, net of tax....................... (6.2) (2.4) --
Purchased in-process research and development............... -- 1.8 --
Compensation expense on option grants....................... -- 0.6 1.4
Other....................................................... 1.7 0.4 1.5
---- ----- -----
Effective tax rate -- expense (benefit)..................... 24.6% (45.2)% (43.5)%
==== ===== =====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities used for financial
reporting and the amounts used for income tax purposes. The items comprising the
Company's deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Reserves not currently deductible........................... $ 6,023 $ 5,492
Customer deposits........................................... 1,873 1,469
Uniform capitalization adjustment........................... 1,423 707
State taxes................................................. (919) (1,345)
Purchased technology........................................ 4,972 6,540
Tax credit carryforwards (expiring through 2002)............ -- 803
Other....................................................... (504) 555
------- -------
Total............................................. $12,868 $14,221
======= =======
</TABLE>
The Company believes that future taxable income will be sufficient to
utilize deferred tax assets recorded at December 31, 1997. Realization of the
Company's deferred tax assets is dependent upon the Company generating future
taxable income against which its credit carryforwards and reversing temporary
differences can be offset. (See Note 12 -- Subsequent Events (unaudited) for a
discussion of subsequent valuation allowance recorded against deferred tax
assets).
6. LEASES
Capital Leases -- The Company incurred capital lease obligations of $1.9
million, $1.8 million, and $0.8 million in connection with lease agreements for
equipment and furniture during the years ended December 31, 1995, 1996 and 1997,
respectively. At December 31, 1996 and 1997, assets under capital leases
included in property, plant and equipment totaled $3.8 million and $4.4 million
with accumulated amortization of $0.6 million and $1.3 million, respectively.
Operating Leases -- The Company leases certain of its facilities and
certain equipment under operating leases that expire at various dates through
2003. Certain facility leases include provisions for inflation escalation
adjustments, as well as one to five year renewal options. Rent expense under
operating leases totaled $0.5 million, $3.4 million and $5.1 million for the
years ended December 31, 1995, 1996 and 1997, respectively. In June 1996, the
Company sold and leased back certain equipment under an operating lease for net
proceeds of $4.4 million. No gain or loss was recognized in connection with this
transaction.
F-15
<PAGE> 143
PHASE METRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
Future minimum lease payments under capital and operating leases as of
December 31, 1997 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31: LEASES LEASES
------------------------ ------- ---------
<S> <C> <C>
1998................................................ $1,207 $ 4,804
1999................................................ 1,082 2,500
2000................................................ 985 2,196
2001................................................ 343 928
2002................................................ 73 847
Thereafter.......................................... -- 465
------ -------
Total.......................................... 3,690 $11,740
=======
Amount representing interest............................. (533)
------
Present value of minimum lease payments.................. 3,157
Current portion.......................................... (985)
------
Long-term portion........................................ $2,172
======
</TABLE>
7. SERIES B REDEEMABLE PREFERRED STOCK
Each share of Series B redeemable preferred stock ("Series B preferred
stock"): (i) is voting, (ii) is convertible at the option of the holder into
common stock on a one-for-one basis, (iii) is entitled to preference in
liquidation equal to $1.56 per share plus all cumulative and unpaid dividends,
(iv) has antidilution rights, (v) has approval rights on new issuances of
preferred stock, (vi) will automatically be converted into common stock upon the
effectiveness of a registration statement under the Securities Act of 1933 for
the sale of common stock with a minimum per share price of $6.00 (as adjusted to
take into account any subsequent subdivisions, combinations or
reclassifications) and net proceeds to the Company of not less than $15.0
million, (vii) is redeemable by the Company at $1.56 per share after the payment
of cumulative and unpaid dividends, and (viii) is entitled to receive cumulative
minimum dividends at the rate of 25% of $1.5555 per year on the $6.0 million
redemption value. This rate was reduced to the greater of 12.5% or $1.5555
multiplied by the prime (8.5% as of December 31, 1997) plus 2.0% after November
22, 1997. The dividends are cumulative at $1.5 million per year through November
1997 and thereafter at minimum rates of $0.8 million per year. At any time after
November 23, 1998, a majority of the stockholders can request the Company to
redeem all outstanding shares at the redemption price of $1.56 per share plus
all unpaid dividends. On November 23, 2000 the Company must redeem all
outstanding shares. All redemptions are subject to funds legally available. The
$6.0 million redemption value is being accreted to retained earnings over the
redemption period ending November 23, 1998.
8. STOCKHOLDERS' EQUITY (DEFICIT)
Series A Preferred Stock -- The Series A preferred stock ranks junior to
the Series B and C preferred stock with respect to dividend and liquidation
rights, including liquidation rights in connection with any merger, dissolution
or winding up of operations. Each share of Series A preferred stock: (i) is
voting, (ii) is entitled to receive dividends at the same rate and time as
common stockholders when declared by the board of directors, (iii) is
convertible at the option of the holders into common stock on a one-for-one
basis, (iv) is entitled to receive $1.09 per share upon liquidation after
payment in full to Series B and C preferred stockholders, (v) will automatically
be converted into common stock upon the effectiveness of a registration
statement under the Securities Act of 1933 for the sale of common stock with a
minimum per share price of
F-16
<PAGE> 144
PHASE METRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
$6.00 (as adjusted to take into account any subsequent subdivisions,
combinations or reclassifications) and net proceeds to the Company of not less
than $15.0 million, and (vi) is subject to certain anti-dilution provisions.
Common Shares Reserved -- As of December 31, 1997, the Company has reserved
the following number of shares of common stock for future issuance:
<TABLE>
<S> <C>
Conversion of Series A and B preferred stock................ 12,107,280
Conversion of subordinated notes............................ 5,142,720
Exercise and issuance of stock options...................... 4,926,570
Exercise of warrants........................................ 800,000
----------
Total............................................. 22,976,570
==========
</TABLE>
Registration Rights -- Series A and B preferred stockholders, convertible
subordinated debtholders and the holders of the common stock warrants
(collectively "securityholders") have been granted certain registration rights.
Such rights may be invoked by request of the holders of at least 25% of such
securities then outstanding or to be issued upon conversion of the Series A or
Series B preferred stock. The securityholders have been granted a right of first
refusal to purchase any outstanding capital stock offered for sale, as defined.
Warrants -- In connection with the issuance and repayment of certain debt,
the Company has outstanding warrants to acquire 800,000 shares of common stock
at $1.55 per share, subject to adjustment. The warrants expire on November 23,
2004.
Stock Option Plan -- Under the 1995 Stock Option Plan (the "Plan"), 6.3
million shares of common stock are reserved for issuance upon exercise of
options granted by the Company. Under the Plan, incentive and non-qualified
stock options may be granted to employees, officers, directors and consultants
to purchase shares of the Company's common stock. The exercise price for an
incentive stock option and a nonqualified stock option cannot be less than 100%
and 85%, respectively, of the fair market value of the Company's common stock on
the grant date as determined by the board of directors. Options vest at a rate
of 20% on the first anniversary of the vesting commencement date determined by
the Board of Directors and then ratably over the following 48 months. Options
are immediately exercisable and underlying shares are subject to the Company's
repurchase rights, which lapse over a five-year period. Options expire as
determined by the Board of Directors, but not more than 10 years after the grant
date. In addition, the Company has outstanding options to purchase an additional
100,000 shares of common stock granted outside of the Plan.
At December 31, 1997, 2,638,386 shares were available for future option
grants. The total number of shares authorized, as well as shares subject to
outstanding options, will be appropriately adjusted in the event of certain
changes to the Company's capital structure, such as stock dividends, stock
splits or other recapitalizations.
F-17
<PAGE> 145
PHASE METRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
A summary of stock option transactions is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
NUMBER OF PRICE PER
SHARES SHARE
---------- ----------
<S> <C> <C>
Balance at January 1, 1995
Granted............................................. 2,400,000 $0.89
Exercised........................................... (1,519,600) $0.49
Canceled............................................ (56,400) $0.55
----------
Balance at December 31, 1995.......................... 824,000 $1.66
Granted............................................. 1,108,000 $7.50
Exercised........................................... (35,216) $2.88
Canceled............................................ (179,983) $3.35
----------
Balance at December 31, 1996.......................... 1,716,801 $5.22
Granted............................................. 1,093,500 $8.36
Exercised........................................... (52,498) $1.69
Canceled............................................ (469,619) $6.72
----------
Balance at December 31, 1997.......................... 2,288,184 $6.49
==========
Vested at December 31, 1995........................... 21,108 $0.85
==========
Vested at December 31, 1996........................... 202,600 $1.58
==========
Vested at December 31, 1997........................... 495,833 $4.32
==========
Subject to repurchase at December 31, 1995............ 1,221,117 $0.50
==========
Subject to repurchase at December 31, 1996............ 817,679 $0.58
==========
Subject to repurchase at December 31, 1997............ 493,063 $0.55
==========
</TABLE>
The Company recognized compensation expense of $0.4 million during each of
the years ended December 31, 1995, 1996 and 1997 for the amortization of the
excess of the fair market value of the Company's common stock on the grant date
over the exercise price of stock options granted in 1995. The remaining
unamortized compensation expense related to such options is $1.1 million at
December 31, 1997, which will be recognized ratably over the remaining vesting
period.
The pro forma information required by SFAS 123 and presented below has been
determined as if the Company had accounted for its employee stock awards under
the Plan using the fair value method of that statement. The fair value for these
awards was estimated at the date of grant using the minimum value pricing model
with the following weighted-average assumptions for December 31, 1995, 1996 and
1997, respectively: weighted average risk-free interest rates of 6.29%, 5.84%
and 6.04%; no dividend yield; and a weighted average expected life of 3.3, 3.5
and 3.5 years.
In management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock awards.
F-18
<PAGE> 146
PHASE METRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
For purposes of pro forma disclosures, the estimated fair value of the
awards is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------------
1995 1996 1997
------ -------- -------
<S> <C> <C> <C>
Pro forma net income (loss)................... $4,383 $(12,487) $(5,976)
====== ======== =======
</TABLE>
The following table summarizes information as of December 31, 1997
concerning options outstanding:
<TABLE>
<CAPTION>
SHARES
WEIGHTED AVERAGE SUBJECT
EXERCISE OPTIONS REMAINING TO
PRICES OUTSTANDING CONTRACTUAL LIFE VESTED REPURCHASE
-------- ----------- ---------------- ------- ----------
(YEARS)
<S> <C> <C> <C> <C>
$0.37 129,400 7.33 71,198 416,685
$1.00 293,367 7.58 142,595 70,111
$5.00 130,567 7.86 56,760 --
$7.50 1,055,700 8.72 224,630 5,917
$8.75 679,150 9.50 650 350
--------- ------- -------
2,288,184 495,833 493,063
========= ======= =======
</TABLE>
The weighted average fair value of options granted during the years ended
December 31, 1995, 1996 and 1997 was $1.01, $1.33 and $1.53, respectively.
9. COMMITMENTS
Related Party Transaction -- In November 1994, the Company executed a
consulting services agreement with certain of its stockholders which provides
for the payment of $0.2 million in November of each year through 1998. As of
December 31, 1997 the present value and accrued interest related to obligations
under the agreement was $0.4 million.
Acquisition-Related Agreements -- Concurrent with the Company's
acquisitions of Helios, ART, ABI, SBM, Tahoe and KDI, the Company entered into,
among other things, (i) employment or consulting agreements with the former
principals of each respective entity for minimum terms of three years each, (ii)
non-compete agreements for periods of five to seven years, and (iii) earn-out
agreements based on units produced or sold with stated combined maximum earn-out
payments for the material arrangements totaling $14.1 million, of which $3.3
million was considered certain and, accordingly, allocated to the original
purchase price, and the remainder of which is being charged to compensation
expense as incurred. During the years ended December 31, 1995, 1996 and 1997,
$1.4 million, $3.8 million and $2.0 million, respectively, of earn-outs have
been charged to compensation expense.
10. EMPLOYEE SAVINGS PLAN
Under the Company's 401(k) plan (the "Plan"), eligible employees may defer
up to 15% of their pre tax earnings, subject to the Internal Revenue Service
annual contribution limit. Company matching contributions to the Plan totaled
$0.4 million and $0.6 million for the years ended December 31, 1996 and 1997,
respectively.
F-19
<PAGE> 147
PHASE METRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
11. SUBSEQUENT FINANCING
On January 30, 1998, the Company sold $110.0 million of its 10.75% Senior
Notes due 2005 (the "Notes"), in a private offering. The Notes bear interest at
10.75% per annum, payable semiannually in arrears on February 1 and August 1 of
each year, commencing August 1, 1998. The Notes are senior unsecured obligations
of the Company, and are redeemable at the option of the Company, in whole or in
part, at any time on or after January 15, 2002, in cash at redemption prices as
defined. In addition, at any time prior to January 15, 2001, the Company may
redeem up to 33% of the Notes at a redemption price as defined, with the net
proceeds of a public equity offering, as defined. The Company used the net
proceeds of the Notes of $105.9 million, together with existing cash and an
initial draw of $1.6 million under the New Credit Facility to repay in full its
existing term loans and revolving credit facility and all accrued interest
thereon, as well as to pay fees of $0.3 million for the New Credit Facility.
Concurrently with closing the sale of the Notes, the Company entered into a
$25 million revolving credit facility with a group of banks (the "New Credit
Facility"). The New Credit Facility is secured by substantially all of the
Company's assets.
The Notes and the New Credit Facility contain customary affirmative and
negative covenants, including limitations on other indebtedness, liens,
investments and guarantees, restricted payments, mergers and acquisitions, sales
of assets, capital expenditures, leases and affiliate transactions. The New
Credit facility also contains financial covenants relating to minimum interest
coverage, minimum net worth, minimum cash flow and maximum leverage.
In connection with the January 30, 1998 repayment of its then existing term
loans and revolving credit facility and all accrued interest thereon, the
related unamortized debt issuance costs were written off. This write-off, net of
related tax benefit of $0.7 million, has been reported as an extraordinary loss
in the accompanying condensed consolidated statements of operations. The Company
is increasing the carrying value of the Notes to their ultimate redemption
value.
12. SUBSEQUENT EVENTS (UNAUDITED)
The data storage industry in general, including many of the Company's
customers, has been experiencing significant weakness in demand for data storage
products, intense competition, pricing erosion and overcapacity in manufacturing
operations. Such adverse market conditions have resulted in the postponement,
rescheduling or cancellation of orders by several of the Company's major
customers and has had a material adverse effect on the Company's business,
results of operations and financial condition. In light of these circumstances,
and the Company's expectation that the data storage industry's adverse market
conditions will extend into 1999, in June, 1998, the Company announced and
implemented a Restructuring Plan (the "Restructuring"). The Restructuring
includes a workforce reduction of approximately 115 employees (16%), relocation
and consolidation of much of its Concord, California operation to the Company's
Fremont, California facility, and the sale of its San Diego, California
facility, which has been listed with a national real estate broker. The property
is listed in excess of its book value. Upon completion of such sale, the Company
intends to secure a smaller leased facility in San Diego in which to conduct its
operations.
In the second quarter of 1998, the Company recorded a charge of $3.0
million related to the Restructuring. The significant components of the
restructuring charge are $0.9 million for employee severance costs, $0.7 million
for contractual lease buyouts and $1.4 million in asset impairment related to
assets obsoleted due to restructuring activities. As of June 30, 1998,
approximately $0.4 million in termination benefits had been paid to affected
employees, and $2.6 million was recorded as an accrued liability related to the
Restructuring. Relocation of the Concord operation is expected to be completed
in the third quarter of 1998. Period costs to be incurred in connection with
these activities are not expected to be significant.
F-20
<PAGE> 148
PHASE METRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
In connection with the impact on the Company's operations of the industry
downturn, in the second quarter of 1998, the Company recorded a $13.5 million
charge to cost of sales to write-down excess and obsolete inventory. Also in the
second quarter of 1998, the Company recorded a $22.7 million charge to income
tax expense for a valuation allowance against its entire net deferred tax asset
balance. Such charge was taken due to factors which give rise to uncertainty as
to whether the net deferred tax asset is realizable, including the lack of
history of consistent earnings and the significant loss in the second quarter of
1998.
In August, 1998, the Company sold its Series C Convertible Redeemable
Preferred Stock (the "Series C Preferred") as follows: (i) 3,750,000 shares to a
new shareholder, (ii) 2,500,000 shares to current shareholders and (iii) a total
of 110,000 shares to members of its Board of Directors. The sales price for all
Series C Preferred was $4 per share. The proceeds of approximately $25.4 million
have been used to repay in full the Company's New Credit Facility and accrued
interest totaling $7.1 million, with the remainder to be used for general
operating purposes. Contingent upon certain regulatory approvals, the new
shareholder will purchase an additional $5.0 million of the Series C Preferred
representing 1,250,000 shares at a purchase price of $4 per share.
The Series C Preferred is (i) voting, (ii) convertible at the option of the
holder into one share of voting Common Stock of the Company, (iii) entitled to
receive a preference to the holders of Common Stock, Series A Preferred Stock,
Series B Redeemable Preferred Stock and the Convertible Subordinated Notes in
the event of liquidation, as defined, and depending upon the timing and nature
of such liquidation, (iv) entitled to antidilution rights, (v) automatically
converted into one share of Common Stock upon the effectiveness of a
registration statement under the Securities Act of 1933 of Common Stock with a
minimum purchase price of $6 per share and net proceeds to the Company of
$15,000,000, (vi) to have approval rights on new issuances of Preferred Stock,
(vii) mandatorily redeemable by the Company on or after July 15, 2005 at a
redemption price of $5 per share, plus accrued and unpaid dividends, without
interest, and (viii) entitled to cumulative dividends beginning August, 2000, at
a rate equal to the greater of 12.5% of the stated value per share of $4 and the
stated value per share multiplied by the sum of the prime rate plus 2%.
Concurrent with the sale of the Series C Preferred, the Company implemented
a twenty-for-one stock split with respect to the Series A and Series B Preferred
Stock, with corresponding adjustments to related common stock conversion factors
and per share liquidation preferences, redemption prices and dividend rates.
Related share information has been restated accordingly herein.
The Company's second quarter operating results have resulted in a technical
default under certain financial covenants contained in the New Credit Facility.
The Company was not in payment default under this New Credit Facility. As a
result of the technical default, the $8.4 million outstanding under the
Company's New Credit Facility as of June 30, 1998 has been reclassified to
current liabilities on the accompanying consolidated balance sheet.
In August, 1998, the Company repaid in full the New Credit Facility and
accrued interest totaling $7.1 million and terminated the New Credit Facility.
In connection with this repayment, in the third quarter of 1998 the Company will
record a $0.4 million write-off of the related unamortized debt issuance costs
as an extraordinary loss in the consolidated financial statements.
F-21
<PAGE> 149
PHASE METRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
The Company has, to date, not registered the Notes with the Securities and
Exchange Commission ("SEC"). The indenture covering the Notes requires
liquidated damages to be paid to the note holders totaling approximately $5,500
per week beginning May 31, 1998 if the Notes are not registered with the SEC
before that date, or upon other registration defaults. The liquidated damages
increase by $5,500 per week beginning each subsequent 90 day period until
registration defaults have been cured, up to a maximum of $27,500 per week.
In April 1998, the Company entered into an agreement (the "Settlement
Agreement") to reimburse a major customer for costs incurred in connection with
the customer's cancellation of a contract with a third party to purchase
upgrades to certain production test equipment originally purchased from the
Company. The Company took this action to protect its intellectual property and
preserve a valued customer relationship. The Company recorded a $5.9 million
charge to earnings in the second quarter of 1998 in connection with the
Settlement Agreement. The Company will make the reimbursement provided for under
the Settlement Agreement by providing a credit to the customer for products to
be purchased by the customer during 1998. Products to be purchased under the
Settlement Agreement are at favorable pricing which will negatively impact the
Company's gross profit margin during the second half of 1998. In connection with
the Settlement Agreement, the Company secured a $3.7 million standby letter of
credit from a bank in favor of the customer. The standby letter of credit
balance will be reduced ratably as products are completed and become available
for shipment to the customer. The outstanding standby letter of credit balance
is approximately $2.2 million as of June 30, 1998.
13. FINANCIAL INFORMATION FOR GUARANTOR SUBSIDIARIES AND NON-GUARANTOR
SUBSIDIARIES.
The Company conducts substantially all of its business through the parent
company and its domestic and foreign subsidiaries. In January 1998, the Company
issued the Notes (see Note 11). The Notes are fully and unconditionally
guaranteed, on a joint and several basis, by all of the Company's wholly-owned
domestic subsidiaries (the "Guarantor Subsidiaries").
Presented below is condensed consolidating financial information for Phase
Metrics, Inc. (the "Parent Company"), the Guarantor Subsidiaries and the
wholly-owned foreign subsidiaries (the "Non-Guarantor Subsidiaries") for the
years ended December 31, 1995, 1996 and 1997, the three months and the six
months ended June 30, 1997 and 1998. The condensed consolidating financial
information has been presented to show the nature of assets held, results of
operations and cash flows of the Parent Company, Guarantor Subsidiaries and
Non-Guarantor Subsidiaries assuming the expected guarantee structure of the
Senior Notes was in effect at the beginning of the periods presented. Separate
financial statements for the Guarantor Subsidiaries are not presented based on
management's determination that they would not provide additional information
that is material to investors.
The supplemental condensed consolidating financial information reflects the
investments of the Parent Company in the Guarantor and Non-Guarantor
Subsidiaries using the equity method of accounting.
F-22
<PAGE> 150
PHASE METRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
FOREIGN
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales.................................. $107,921 $8,973 $-- $ -- $116,894
Cost of sales.............................. 59,706 5,060 -- -- 64,766
-------- ------ --- ------- --------
Gross profit............................. 48,215 3,913 -- -- 52,128
Research and development expense........... 10,867 505 -- -- 11,372
Selling, general and administrative
expense.................................. 13,935 1,760 -- -- 15,695
Amortization and write-downs of intangible
assets................................... 13,094 -- -- -- 13,094
-------- ------ --- ------- --------
Income from operations................... 10,319 1,648 -- -- 11,967
Interest expense........................... 5,624 1 -- -- 5,625
Other (income) expense -- net.............. 175 (26) -- -- 149
-------- ------ --- ------- --------
Income before equity in subsidiaries and
taxes................................. 4,520 1,673 -- -- 6,193
Equity in net income of subsidiaries....... 1,261 -- -- (1,261) --
Income tax expense......................... 1,112 412 -- -- 1,524
-------- ------ --- ------- --------
Net income................................. $ 4,669 $1,261 $-- $(1,261) $ 4,669
======== ====== === ======= ========
</TABLE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
FOREIGN
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net income................................. $ 4,669 $ 1,261 $ -- $(1,261) $ 4,669
Depreciation, amortization and
write-downs of intangible assets...... 15,877 20 -- -- 15,897
Equity in net income of subsidiaries..... (1,261) -- -- 1,261 --
Other non-cash adjustments............... 3,745 -- -- -- 3,745
Changes in working capital............... (5,038) (973) -- -- (6,011)
-------- ------- ------ ------- --------
Net cash provided by operating
activities....................... 17,992 308 -- -- 18,300
-------- ------- ------ ------- --------
Investing activities:
Acquisition of property, plant and
equipment............................. (8,902) (233) -- -- (9,135)
Acquisitions, net of cash acquired of
$6,755................................ (1,967) -- -- -- (1,967)
-------- ------- ------ ------- --------
Net cash used for investing
activities....................... (10,869) (233) -- -- (11,102)
-------- ------- ------ ------- --------
Financing activities:
Revolving loans -- net................... 4,100 -- -- -- 4,100
Proceeds from term notes................. 18,000 -- -- -- 18,000
Repayment of debt........................ (4,850) -- -- -- (4,850)
Repayment of bridge notes................ (20,000) -- -- -- (20,000)
Intercompany balances and other.......... (274) (75) -- -- (349)
-------- ------- ------ ------- --------
Net cash used for financing
activities....................... (3,024) (75) -- -- (3,099)
-------- ------- ------ ------- --------
Net increase in cash and cash
equivalents.............................. 4,099 -- -- -- 4,099
Cash and cash equivalents, beginning of
period................................... 917 -- -- -- 917
-------- ------- ------ ------- --------
Cash and cash equivalents, end of period... $ 5,016 $ -- $ -- $ -- $ 5,016
======== ======= ====== ======= ========
</TABLE>
F-23
<PAGE> 151
PHASE METRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1996
ASSETS
<TABLE>
<CAPTION>
FOREIGN
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Accounts receivable -- net................. $ 24,224 $ 629 $ 189 $ -- $ 25,042
Inventories................................ 48,946 2,150 1,768 (1,069) 51,795
Other current assets....................... 21,620 1,164 713 -- 23,497
Property, plant and equipment, net......... 26,532 1,223 323 -- 28,078
Intercompany balances...................... (4,455) 7,058 (2,603) -- --
Investment in subsidiaries................. 7,616 -- -- (7,616) --
Other...................................... 25,097 21 483 -- 25,601
-------- ------- ------- -------- --------
Total assets.......................... $149,580 $12,245 $ 873 $ (8,685) $154,013
======== ======= ======= ======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Other current liabilities.................. $ 50,781 $ 3,873 $ 536 $ -- $ 55,190
Current portion of debt.................... 2,463 -- -- -- 2,463
Long-term debt............................. 93,557 -- -- -- 93,557
Other...................................... 5,496 -- 24 -- 5,520
Redeemable preferred stock................. 6,314 -- -- -- 6,314
Stockholders' equity (deficit)............. (9,031) 8,372 313 (8,685) (9,031)
-------- ------- ------- -------- --------
Total liabilities, redeemable
preferred stock and stockholders'
equity (deficit).................... $149,580 $12,245 $ 873 $ (8,685) $154,013
======== ======= ======= ======== ========
</TABLE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
FOREIGN
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales.................................. $162,442 $37,654 $ 4,384 $(13,707) $190,773
Cost of sales.............................. 95,285 18,217 2,521 (12,162) 103,861
-------- ------- ------- -------- --------
Gross profit............................. 67,157 19,437 1,863 (1,545) 86,912
Research and development expense........... 29,397 1,539 174 -- 31,110
Selling, general and administrative
expense.................................. 19,267 4,449 1,391 (476) 24,631
Amortization and write-downs of intangible
assets................................... 28,656 -- -- -- 28,656
Purchased in-process research and
development expense...................... 13,935 -- -- -- 13,935
-------- ------- ------- -------- --------
Income (loss) from operations............ (24,098) 13,449 298 (1,069) (11,420)
Interest expense........................... 8,408 38 2 -- 8,448
Other (income) expense -- net.............. (22) (5) 1 -- (26)
-------- ------- ------- -------- --------
Income (loss) before equity in
subsidiaries, taxes and extraordinary
items................................. (32,484) 13,416 295 (1,069) (19,842)
Equity in net income of subsidiaries....... 6,219 -- -- (6,219) --
Income tax expense (benefit)............... (15,397) 6,305 118 -- (8,974)
-------- ------- ------- -------- --------
Net income (loss) before extraordinary
items................................. (10,868) 7,111 177 (7,288) (10,868)
Extraordinary loss, net of income taxes.... 1,122 -- -- -- 1,122
-------- ------- ------- -------- --------
Net income (loss).......................... $(11,990) $ 7,111 $ 177 $ (7,288) $(11,990)
======== ======= ======= ======== ========
</TABLE>
F-24
<PAGE> 152
PHASE METRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
FOREIGN
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net income (loss).......................... $(11,990) $ 7,111 $ 177 $(7,288) $(11,990)
Depreciation, amortization and
write-downs of intangible assets...... 32,511 347 95 -- 32,953
Equity in net income of subsidiaries..... (6,219) -- -- 6,219 --
Other non-cash adjustments............... 3,044 -- -- -- 3,044
Purchased in-process research and
development........................... 13,935 -- -- -- 13,935
Extraordinary items...................... 1,122 -- -- -- 1,122
Changes in working capital............... (60,782) 1,521 (2,274) 1,069 (60,466)
-------- ------- ------- ------- --------
Net cash provided by (used for)
operating activities............. (28,379) 8,979 (2,002) -- (21,402)
-------- ------- ------- ------- --------
Investing activities:
Acquisition of property, plant and
equipment............................. (23,519) (627) (418) -- (24,564)
Acquisitions, net of cash acquired of
$1,597................................ (20,752) -- -- -- (20,752)
-------- ------- ------- ------- --------
Net cash used for investing
activities....................... (44,271) (627) (418) -- (45,316)
-------- ------- ------- ------- --------
Financing activities:
Revolving loans -- net................... (300) (300)
Proceeds from term notes................. 145,000 -- -- -- 145,000
Repayment of debt........................ (80,429) (17) -- -- (80,446)
Intercompany balances and other.......... 4,478 (7,213) 2,920 -- 185
-------- ------- ------- ------- --------
Net cash provided by (used for)
financing activities............. 68,749 (7,230) 2,920 -- 64,439
-------- ------- ------- ------- --------
Net increase (decrease) in cash and cash
equivalents.............................. (3,901) 1,122 500 -- (2,279)
Cash and cash equivalents, beginning of
period................................... 5,016 -- -- -- 5,016
-------- ------- ------- ------- --------
Cash and cash equivalents, end of period... $ 1,115 $ 1,122 $ 500 $ -- $ 2,737
======== ======= ======= ======= ========
</TABLE>
F-25
<PAGE> 153
PHASE METRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1997
ASSETS
<TABLE>
<CAPTION>
FOREIGN
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Accounts receivable -- net................. $ 27,693 $ 470 $ 567 $ -- $ 28,730
Inventories................................ 48,255 5,624 5,844 (4,138) 55,585
Other current assets....................... 17,672 786 602 -- 19,060
Property, plant and equipment, net......... 35,510 2,194 319 -- 38,023
Intercompany balances...................... (4,308) 11,589 (7,281) -- --
Investment in subsidiaries................. 13,247 -- -- (13,247) --
Other...................................... 12,800 48 484 -- 13,332
-------- ------- ------- -------- --------
Total assets.......................... $150,869 $20,711 $ 535 $(17,385) $154,730
======== ======= ======= ======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Other current liabilities.................. $ 32,241 $ 3,079 $ 195 $ -- $ 35,515
Current portion of debt.................... 1,785 -- -- -- 1,785
Long-term debt............................. 119,272 -- -- -- 119,272
Redeemable preferred stock................. 9,237 -- -- -- 9,237
Other...................................... 6,207 -- 587 -- 6,794
Stockholders' equity (deficit)............. (17,873) 17,632 (247) (17,385) (17,873)
-------- ------- ------- -------- --------
Total liabilities, redeemable
preferred stock and stockholders'
equity (deficit).................... $150,869 $20,711 $ 535 $(17,385) $154,730
======== ======= ======= ======== ========
</TABLE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
FOREIGN
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales.................................. $165,724 $38,995 $12,631 $(32,690) $184,660
Cost of sales.............................. 102,461 16,098 11,069 (28,334) 101,294
-------- ------- ------- -------- --------
Gross profit............................. 63,263 22,897 1,562 (4,356) 83,366
Research and development expense........... 40,412 3,004 156 -- 43,572
Selling, general and administrative
expense.................................. 18,559 3,556 2,140 (1,287) 22,968
Amortization and write-downs of intangible
assets................................... 14,591 -- -- -- 14,591
-------- ------- ------- -------- --------
Income (loss) from operations............ (10,299) 16,337 (734) (3,069) 2,235
Interest expense........................... 11,566 -- 7 -- 11,573
Other (income) expense -- net.............. 278 (53) 249 -- 474
-------- ------- ------- -------- --------
Income (loss) before equity in
subsidiaries and taxes................ (22,143) 16,390 (990) (3,069) (9,812)
Equity in net income of subsidiaries....... 5,631 -- -- (5,631) --
Income tax expense (benefit)............... (10,968) 7,130 (430) -- (4,268)
-------- ------- ------- -------- --------
Net income (loss).......................... $ (5,544) $ 9,260 $ (560) $ (8,700) $ (5,544)
======== ======= ======= ======== ========
</TABLE>
F-26
<PAGE> 154
PHASE METRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
FOREIGN
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net income (loss).......................... $(5,544) $ 9,260 $ (560) $(8,700) $ (5,544)
Depreciation, amortization and
write-downs of intangible assets...... 21,119 487 266 -- 21,872
Equity in net income of subsidiaries..... (5,631) -- -- 5,631 --
Other non-cash adjustments............... 3,548 -- -- -- 3,548
Changes in working capital............... (21,090) (4,154) (4,093) 3,069 (26,268)
-------- ------- ------- ------- --------
Net cash provided by (used for)
operating activities................ (7,598) 5,593 (4,387) -- (6,392)
-------- ------- ------- ------- --------
Investing activities:
Acquisition of property, plant and
equipment............................. (15,442) (1,404) (245) -- (17,091)
Increase in patent costs................. (78) -- -- -- (78)
-------- ------- ------- ------- --------
Net cash used for investing
activities.......................... (15,520) (1,404) (245) -- (17,169)
-------- ------- ------- ------- --------
Financing activities:
Revolving loans -- net................... 26,900 -- -- -- 26,900
Repayment of debt........................ (1,776) -- (24) -- (1,800)
Other.................................... (1,364) (4,531) 4,678 -- (1,217)
-------- ------- ------- ------- --------
Net cash provided by (used for)
financing activities................ 23,760 (4,531) 4,654 -- 23,883
-------- ------- ------- ------- --------
Effect of exchange rate changes on cash and
cash equivalents......................... -- -- (82) -- (82)
Net increase (decrease) in cash and cash
equivalents.............................. 642 (342) (60) -- 240
Cash and cash equivalents, beginning of
period................................... 1,115 1,122 500 -- 2,737
-------- ------- ------- ------- --------
Cash and cash equivalents, end of period... $ 1,757 $ 780 $ 440 $ -- $ 2,977
======== ======= ======= ======= ========
</TABLE>
F-27
<PAGE> 155
PHASE METRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FOREIGN
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
------- ------------ ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales................................... $45,994 $14,051 $3,114 $(10,526) $52,633
Cost of sales............................... 28,698 5,266 2,790 (9,290) 27,464
------- ------- ------ -------- -------
Gross profit.............................. 17,296 8,785 324 (1,236) 25,169
Research and development expense............ 10,390 725 106 -- 11,221
Selling, general and administrative
expense................................... 4,938 1,086 446 (315) 6,155
Amortization and write-downs of intangible
assets.................................... 5,363 -- -- -- 5,363
------- ------- ------ -------- -------
Income (loss) from operations............. (3,395) 6,974 (228) (921) 2,430
Interest expense............................ 2,826 -- 1 -- 2,827
Other (income) expense -- net............... 410 (8) (2) -- 400
------- ------- ------ -------- -------
Income (loss) before equity in
subsidiaries and taxes................. (6,631) 6,982 (227) (921) (797)
Equity in net income of subsidiaries........ 3,807 (3,807) --
Income tax expense (benefit)................ (2,266) 2,095 (68) -- (239)
------- ------- ------ -------- -------
Net income (loss)........................... $ (558) $ 4,887 $ (159) $ (4,728) $ (558)
======= ======= ====== ======== =======
</TABLE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FOREIGN
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
------- ------------ ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales................................... $94,437 $23,611 $7,810 $(21,622) $104,236
Cost of sales............................... 57,570 9,624 6,621 (18,437) 55,378
------- ------- ------ -------- --------
Gross profit.............................. 36,867 13,987 1,189 (3,185) 48,858
Research and development expense............ 20,157 1,333 161 -- 21,651
Selling, general and administrative
expense................................... 9,997 2,052 854 (585) 12,318
Amortization and write-downs of intangible
assets.................................... 8,726 -- -- -- 8,726
------- ------- ------ -------- --------
Income (loss) from operations............. (2,013) 10,602 174 (2,600) 6,163
Interest expense............................ 5,391 -- 2 -- 5,393
Other (income) expense -- net............... 491 (13) (2) -- 476
------- ------- ------ -------- --------
Income (loss) before equity in
subsidiaries and taxes................. (7,895) 10,615 174 (2,600) 294
Equity in net income of subsidiaries........ 4,952 (4,952) --
Income tax expense (benefit)................ (3,149) 3,185 52 -- 88
------- ------- ------ -------- --------
Net income.................................. $ 206 $ 7,430 $ 122 $ (7,552) $ 206
======= ======= ====== ======== ========
</TABLE>
F-28
<PAGE> 156
PHASE METRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FOREIGN
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net income................................. $ 206 $ 7,430 $ 122 $(7,552) $ 206
Depreciation, amortization and
write-downs of intangible assets...... 11,948 285 77 -- 12,310
Equity in net income of subsidiaries..... (4,952) -- -- 4,952 --
Other non-cash adjustments............... 1,726 -- -- -- 1,726
Changes in working capital............... (15,884) (481) (2,615) 2,600 (16,380)
-------- ------- ------- ------- --------
Net cash provided by (used for)
operating activities................ (6,956) 7,234 (2,416) -- (2,138)
-------- ------- ------- ------- --------
Investing activities:
Acquisition of property, plant and
equipment............................. (10,408) (722) (218) -- (11,348)
-------- ------- ------- ------- --------
Financing activities:
Repayment of term and subordinated
notes................................. (1,200) -- (1,200)
Revolving loans -- net................... 14,700 -- -- -- 14,700
Payment of debt issuance costs........... (30) (30)
Other.................................... 4,289 (7,435) 2,785 -- (361)
-------- ------- ------- ------- --------
Net cash provided by (used for)
financing activities................ 17,759 (7,435) 2,785 -- 13,109
-------- ------- ------- ------- --------
Effect of exchange rate changes on cash and
cash equivalents......................... -- -- (3) -- (3)
Net increase (decrease) in cash and cash
equivalents.............................. 395 (923) 148 -- (380)
Cash and cash equivalents, beginning of
period................................... 1,115 1,122 500 -- 2,737
-------- ------- ------- ------- --------
Cash and cash equivalents, end of period... $ 1,510 $ 199 $ 648 $ -- $ 2,357
======== ======= ======= ======= ========
</TABLE>
F-29
<PAGE> 157
PHASE METRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 1998
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
FOREIGN
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Accounts receivable -- net................. $ 28,336 $ 381 $ 1,846 $ -- $ 30,563
Inventories................................ 33,241 3,942 6,029 (4,756) 38,456
Other current assets....................... 10,920 514 730 -- 12,164
Property, plant and equipment, net......... 31,520 1,656 291 -- 33,467
Intercompany balances...................... (6,687) 14,795 (8,108) -- --
Investment in subsidiaries................. 13,643 -- -- (13,643) --
Other...................................... 3,599 494 468 -- 4,561
-------- ------- ------- -------- --------
Total assets.......................... $114,572 $21,782 $ 1,256 $(18,399) $119,211
======== ======= ======= ======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Other current liabilities.................. $ 36,854 $ 2,631 $ 849 $ -- $ 40,334
Current portion of debt.................... 9,423 -- -- -- 9,423
Long-term debt............................. 115,555 -- -- -- 115,555
Redeemable preferred stock................. 10,355 -- -- -- 10,355
Other...................................... 7,810 612 547 -- 8,969
Stockholders' equity (deficit)............. (65,425) 18,539 (140) (18,399) (65,425)
-------- ------- ------- -------- --------
Total liabilities, redeemable
preferred stock and stockholders'
equity (deficit).................... $114,572 $21,782 $ 1,256 $(18,399) $119,211
======== ======= ======= ======== ========
</TABLE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
FOREIGN
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales.................................. $ 27,326 $5,821 $2,847 $(4,594) $ 31,400
Cost of sales.............................. 31,550 2,862 2,192 (3,749) 32,855
-------- ------ ------ ------- --------
Gross profit (loss)...................... (4,224) 2,959 655 (845) (1,455)
Research and development expense........... 8,771 981 -- (63) 9,689
Selling, general and administrative
expense.................................. 3,982 836 435 (29) 5,224
Amortization and write-downs of intangible
assets................................... 1,642 -- -- -- 1,642
Settlement charge.......................... 5,872 -- -- -- 5,872
Restructuring charge....................... 2,439 607 -- -- 3,046
-------- ------ ------ ------- --------
Income (loss) from operations............ (26,930) 535 220 (753) (26,928)
Interest expense........................... 3,769 -- 1 -- 3,770
Other (income) expense -- net.............. 32 -- (7) -- 25
-------- ------ ------ ------- --------
Income (loss) before equity in
subsidiaries and taxes................ (30,731) 535 226 (753) (30,723)
Equity in net income of subsidiaries....... (59) 59 --
Income tax expense (benefit)............... 11,367 (4) 71 -- 11,434
-------- ------ ------ ------- --------
Net income (loss).......................... $(42,157) $ 539 $ 155 $ (694) $(42,157)
======== ====== ====== ======= ========
</TABLE>
F-30
<PAGE> 158
PHASE METRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
FOREIGN
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales....................................... $ 56,736 $10,316 $5,755 $(8,905) $ 63,902
Cost of sales................................... 50,553 5,263 4,842 (8,186) 52,472
-------- ------- ------ ------- --------
Gross profit.................................. 6,183 5,053 913 (719) 11,430
Research and development expense................ 17,421 1,800 -- (63) 19,158
Selling, general and administrative expense..... 7,484 1,443 797 (38) 9,686
Amortization and write-downs of intangible
assets........................................ 3,280 -- -- -- 3,280
Settlement charge............................... 5,872 -- -- -- 5,872
Restructuring charge............................ 2,439 607 -- -- 3,046
-------- ------- ------ ------- --------
Income (loss) from operations................... (30,313) 1,203 116 (618) (29,612)
Interest expense................................ 7,201 (4) 4 -- 7,201
Other (income) expense -- net................... 135 14 (29) -- 120
-------- ------- ------ ------- --------
Income (loss) before equity in subsidiaries,
taxes and extraordinary items.............. (37,649) 1,193 141 (618) (36,933)
Equity in net income of subsidiaries............ 396 (396) --
Income tax expense (benefit).................... 8,381 286 34 -- 8,701
-------- ------- ------ ------- --------
Net income (loss) before extraordinary items.... (45,634) 907 107 (1,014) (45,634)
Extraordinary items, net of income taxes........ 941 -- -- -- 941
-------- ------- ------ ------- --------
Net income (loss)............................... $(46,575) $ 907 $ 107 $(1,014) $(46,575)
======== ======= ====== ======= ========
</TABLE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
FOREIGN
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net income (loss)............................... $(46,575) $ 907 $ 107 $(1,014) $(46,575)
Depreciation, amortization and write-downs of
intangible assets.......................... 7,533 394 45 -- 7,972
Equity in net income of subsidiaries.......... (396) -- -- 396 --
Other non-cash adjustments.................... 2,279 -- -- -- 2,279
Extraordinary items........................... 941 -- -- -- 941
Changes in working capital.................... 31,236 7,025 (5,516) 618 33,363
-------- ------- ------- ------- --------
Net cash provided by (used for) operating
activities............................... (4,982) 8,326 (5,364) -- (2,020)
Investing activities:
Acquisition of property, plant and
equipment.................................. (237) (998) (59) -- (1,294)
-------- ------- ------- ------- --------
Net cash used for investing activities..... (237) (998) (59) -- (1,294)
-------- ------- ------- ------- --------
Financing activities:
Proceeds from senior notes.................... 110,000 -- -- -- 110,000
Repayment of term and subordinated notes...... (79,200) -- -- -- (79,200)
Revolving loans -- net........................ (22,300) -- -- -- (22,300)
Payment of debt issuance costs................ (4,839) -- (4,839)
Other......................................... 1,730 (7,737) 5,505 -- (502)
-------- ------- ------- ------- --------
Net cash provided by (used for) financing
activities............................... 5,391 (7,737) 5,505 -- 3,159
-------- ------- ------- ------- --------
Effect of exchange rate changes on cash and cash
equivalents................................... -- -- (13) -- (13)
Net increase (decrease) in cash and cash
equivalents................................... 172 (409) 69 -- (168)
Cash and cash equivalents, beginning of year.... 1,757 780 440 -- 2,977
-------- ------- ------- ------- --------
Cash and cash equivalents, end of year.......... $ 1,929 $ 371 $ 509 $ -- $ 2,809
======== ======= ======= ======= ========
</TABLE>
F-31
<PAGE> 159
INDEPENDENT AUDITORS' REPORT
Air Bearings, Incorporated:
We have audited the accompanying statements of income and retained earnings
and of cash flows of Air Bearings, Incorporated for the year ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects the results of operations and cash flows of Air Bearings, Incorporated
for the year ended December 31, 1995 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
September 6, 1996
F-32
<PAGE> 160
AIR BEARINGS, INCORPORATED
STATEMENT OF INCOME AND RETAINED EARNINGS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
<S> <C>
Sales....................................................... $7,924
Cost of sales............................................... 1,621
------
Gross profit.............................................. 6,303
------
Operating expenses:
Selling, general and administrative....................... 372
Research and development.................................. 92
------
Total operating expenses.......................... 464
------
Income from operations...................................... 5,839
Other income -- net......................................... (9)
------
Income before income taxes.................................. 5,848
Income tax expense.......................................... 88
------
Net income.................................................. 5,760
Distributions to stockholders............................... (1,818)
Retained earnings, beginning of year........................ 718
------
Retained earnings, end of year.............................. $4,660
======
</TABLE>
See notes to financial statements.
F-33
<PAGE> 161
AIR BEARINGS, INCORPORATED
STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
<S> <C>
Operating activities:
Net income................................................ $5,760
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 72
Changes in assets and liabilities:
Accounts receivable.................................. (1,743)
Inventory............................................ (494)
Prepaid expenses and other........................... (2)
Accounts payable..................................... 35
Accrued expenses and other liabilities............... 129
------
Net cash provided by operating activities......... 3,757
------
Investing activities -- Acquisition of property............. (536)
------
Financing activities:
Distributions to stockholders............................. (1,818)
Repayments of notes payable............................... --
------
Net cash used for financing activities............ (1,818)
------
Net increase in cash and cash equivalents................... 1,403
Cash and cash equivalents, beginning of year................ --
------
Cash and cash equivalents, end of year...................... $1,403
======
</TABLE>
See notes to financial statements.
F-34
<PAGE> 162
AIR BEARINGS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General -- The Company develops and manufactures air bearing spindles and
other components used in production test equipment for the data storage
industry.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions. Assets, liabilities, revenues and expenses, and
disclosure of contingent assets and liabilities are affected by such estimates
and assumptions. Actual results could differ from those estimates.
Cash and Cash Equivalents -- Cash equivalents consist of money market
accounts. The Company has not experienced any losses on its cash accounts.
Inventory -- Inventory is stated at the lower of cost (first-in, first-out)
or market.
Property -- Property is stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the property (generally
5 years).
Revenue -- Revenue from product sales is recognized upon shipment.
Concentrations of Credit Risk -- The Company markets and sells its products
domestically and internationally without collateral. Export sales, primarily to
companies in Asia, accounted for 17% of 1995 sales. Three customers individually
accounted for 43%, 22% and 17% of 1995 sales and the related accounts receivable
from these customers aggregated approximately $1.5 million at December 31, 1995.
2. LEASE COMMITMENTS
The Company has month-to-month operating leases for its facilities. Rental
expense under these leases was $34,000 for the year ended December 31, 1995.
3. INCOME TAXES
The Company is an S Corporation for federal tax and California franchise
tax reporting purposes. S Corporation status requires the pass-through of income
and losses to the shareholders of the Company. The tax payable and related
provision by the Company consists of a 1 1/2% statutory California franchise
tax. Distributions of earnings are made periodically during the year to the
stockholders in an amount estimated to cover the tax on the earnings of the S
Corporation.
4. EMPLOYEE BENEFIT PLAN
The Company maintains a Simplified Employee Pension Plan ("SEP IRA Plan")
for the benefit of all qualifying employees. The SEP IRA Plan provides for
employer contributions up to 15% of each participant's compensation (as defined)
with an individual yearly maximum employer contribution (as defined).
Contributions of $66,000 were declared by the Company's Board of Directors in
1995.
5. SUBSEQUENT EVENT
On January 18, 1996, all of the Company's outstanding stock was acquired by
Phase Metrics, Inc. for total consideration of approximately $21 million.
* * * * * *
F-35
<PAGE> 163
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR DLJ. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE
UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Available Information................. v
Summary............................... 1
Risk Factors.......................... 12
The Exchange Offer.................... 25
Use of Proceeds....................... 32
Capitalization........................ 33
Selected Consolidated Financial
Data................................ 34
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 36
Business.............................. 48
Management............................ 65
Certain Transactions.................. 73
Principal Stockholders................ 75
Description of Indebtedness........... 77
Description of New Notes.............. 78
Certain United States Federal Tax
Considerations...................... 108
Notice to Investors................... 111
Plan of Distribution.................. 112
Description of Capital Stock.......... 114
Legal Matters......................... 117
Experts............................... 117
Glossary.............................. A-1
Index to Financial Statements......... F-1
</TABLE>
================================================================================
================================================================================
$110,000,000
[PHASE METRICS LOGO]
NEW 10 3/4% SENIOR NOTES
DUE 2005
--------------------
PROSPECTUS
--------------------
, 1998
================================================================================
<PAGE> 164
ALTERNATE PAGES TO BE USED IN MARKET-MAKING
PROSPECTUS FOLLOW
<PAGE> 165
PROSPECTUS [ALTERNATIVE COVER PAGE FOR MARKET-MAKING PROSPECTUS]
NEW 10 3/4% SENIOR NOTES DUE 2005
($110,000,000 PRINCIPAL AMOUNT)
OF
[LOGO OF PHASE METRICS]
------------------------
Phase Metrics, Inc., a Delaware corporation (the "Company"), exchanged (the
"Exchange Offer"), upon the terms and subject to the conditions set forth in a
prospectus related thereto, up to an aggregate principal amount of $110,000,000
of its new 10 3/4% Senior Notes due 2005 (the "New Notes") and the guarantees
related thereto for an equal principal amount of its outstanding 10 3/4% Senior
Notes due 2005 (the "Notes") and the guarantees related thereto. The New Notes
are senior unsecured obligations of the Company and are substantially identical
(including principal amount, interest rate, maturity and redemption rights) to
the Notes for which they were exchanged pursuant to the Exchange Offer, except
that (i) the offering and sale of the New Notes was registered under the
Securities Act of 1933, as amended (the "Securities Act") and (ii) holders of
New Notes are not entitled to certain rights under the Registration Rights
Agreement of the Company and Applied Robotic Technologies, Inc., Helios,
Incorporated, Air Bearings, Incorporated and Santa Barbara Metric, Inc., all of
which are California corporations and wholly-owned subsidiaries of the Company
(together with any future other subsidiary of the Company that executes a New
Note Guarantee, the "Subsidiary Guarantors") dated as of January 30, 1998 (the
"Registration Rights Agreement"). The New Notes are fully and unconditionally
guaranteed on a senior unsecured basis (the "New Note Guarantees") by, and are
joint and several obligations of the Subsidiary Guarantors. The New Notes are
issued under an Indenture dated as of January 30, 1998 (the "Indenture"), among
the Company, the Subsidiary Guarantors and State Street Bank and Trust Company,
as trustee (the "Trustee"). See "Description of New Notes."
The New Notes will bear interest from January 30, 1998, the date of
issuance of the Notes, at a rate equal to 10 3/4% per annum. Interest on the New
Notes will be payable semiannually on February 1 and August 1 of each year,
commencing August 1, 1998. The New Notes are redeemable at the option of the
Company, in whole or in part, at any time on or after February 1, 2002, at the
redemption prices set forth herein, plus accrued and unpaid interest and
Liquidated Damages (as defined herein), if any, thereon to the date of
redemption.
Prior to February 1, 2001, up to 33% of the initially outstanding aggregate
principal amount of New Notes (and any Notes which remain outstanding after the
Exchange Offer) will be redeemable at the option of the Company from the net
proceeds of a public sale of the Company's Common Stock ("Common Stock") at a
price of 110.75% of the principal amount of the New Notes (and any Notes which
remain outstanding after the Exchange Offer), together with accrued and unpaid
interest and Liquidated Damages, if any, to the date of redemption; provided,
that at least 67% of the initially outstanding aggregate principal amount of New
Notes (and any Notes which remain outstanding after the Exchange Offer) remains
outstanding immediately after such redemption. Upon the occurrence of a Change
of Control (as defined herein), each Holder (as defined herein) of New Notes may
require the Company to repurchase all or a portion of such Holder's New Notes at
101% of the aggregate principal amount of the New Notes, together with accrued
and unpaid interest and Liquidated Damages, if any, to the date of repurchase.
There can be no assurance that sufficient funds will be available at the time of
any Change of Control to make any required repurchase of New Notes. See "Risk
Factors -- Payment Upon a Change of Control" and "Description of New
Notes -- Repurchase at the Option of Holders -- Change of Control."
------------------------
SEE "RISK FACTORS" COMMENCING ON PAGE 12 FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS WHO TENDER NOTES
IN THE EXCHANGE OFFER.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is , 1998.
B-1
<PAGE> 166
The New Notes are senior unsecured obligations of the Company and rank pari
passu in right of payment to all existing and future senior indebtedness of the
Company and senior in right of payment to all existing and future subordinated
indebtedness of the Company. The New Notes are effectively subordinated,
however, to all secured obligations of the Company, to the extent of the assets
securing such obligations. The New Notes are fully and unconditionally
guaranteed under the New Note Guarantees on a joint and several basis by the
Subsidiary Guarantors. The New Note Guarantees are senior unsecured obligations
of the Subsidiary Guarantors and rank pari passu in right of payment to all
existing and future senior indebtedness of the Subsidiary Guarantors. The New
Note Guarantees are effectively subordinated, however, to all secured
obligations of the Subsidiary Guarantors, including the guarantees of the
Subsidiary Guarantors in favor of the lenders under the New Credit Facility, to
the extent of the assets securing such obligations. As of June 30, 1998, the New
Notes and the New Note Guarantees would have been effectively subordinated to
approximately $2.8 million of secured indebtedness under the Company's capital
lease obligations which amount does not include any amounts outstanding under
the New Credit Facility which was terminated in August 1998. In addition, the
Notes are and the New Notes will be structurally subordinated to all
indebtedness and other obligations of the Non-Guarantor Subsidiaries, including
all accounts payable, and debt for borrowed money. As of June 30, 1998, the
Non-Guarantor Subsidiaries had an aggregate of $0.9 million of such indebtedness
and other obligations outstanding, all of which ranked or will rank effectively
senior to the Notes and New Notes in right of payment. The Subsidiary Guarantors
did not, as of June 30, 1998, have any material amount of indebtedness
outstanding.
This Prospectus is to be used by Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ"), a significant stockholder of the Company, in connection
with its offers and sales of the New Notes (and related guarantees) from
time-to-time in market-making transactions at negotiated prices related to
prevailing market prices at the time of sale. DLJ may act as principal or agent
in such transactions. The Company does not intend to list the New Notes on any
securities exchange or to seek admission thereof to trading in the National
Association of Securities Dealers Automated Quotation System. DLJ has advised
the Company that it intends to make a market in the New Notes; however, DLJ is
not obligated to do so and any market-making may be discontinued at any time.
DLJ may be required to discontinue its market-making activities when this
Prospectus must be updated for any reason. The Company will receive no portion
of the proceeds of the sale of any New Notes by DLJ and will bear expenses
incident to the registration thereof. See "Plan of Distribution."
The Company's Japanese, Korean and Singapore subsidiaries, Phase Metrics
Japan Co. Ltd., Phase Metrics Korea Co. Ltd. and Phase Metrics Pacific PTE,
Ltd., respectively, and Phase Metrics International Incorporated, the Company's
foreign sales corporation based in Barbados (collectively, the "Non-Guarantor
Subsidiaries") have not guaranteed the Company's obligations under the Notes and
will not guarantee the Company's obligations under the New Notes. As of and for
the year ended December 31, 1997, and the six months ended June 30, 1998, the
operating results and assets of the Non-Guarantor Subsidiaries, individually and
in the aggregate, were not material to the results of operations and assets of
the Company on a consolidated basis, net of intercompany eliminations. See Note
13 of Notes to Consolidated Financial Statements. The total assets, total
liabilities, net sales and net income (loss) of the Non-Guarantor Subsidiaries
as a percentage of the Company's consolidated total assets, total liabilities,
net sales and net income (loss) as of and for the year ended December 31, 1997
were 3.1%, 0.4%, 1.6% and 10.1%, respectively, and as of and for the six months
ended June 30, 1998, were 5.2, 0.7%, 6.1% and (0.2)%, respectively.
The Notes were initially sold by the Company on January 30, 1998 (the "Note
Closing") in transactions not registered under the Securities Act of 1933, as
amended (the "Securities Act") in reliance upon the exemption provided in
Section 4(2) thereof (the "Note Offering").
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PRO-
[Alternative Cover Continued]
B-2
<PAGE> 167
SPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE NEW NOTES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY OF THE NEW NOTES TO ANY PERSON IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO
SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
[End of Alternative Cover]
B-3
<PAGE> 168
ABSENCE OF ACTIVE TRADING MARKET
The New Notes constitute a new issue of securities with no established
trading market. Although the New Notes will generally be permitted to be resold
or otherwise transferred by holders who are not affiliates of the Company
without compliance with the registration requirements under the Securities Act,
the Company does not intend to list the New Notes on any securities exchange or
to seek admission thereof to trading in the National Association of Securities
Dealers Automated Quotation System. Although DLJ has advised the Company that it
currently intends to make a market in the New Notes, DLJ is not obligated to do
so and may discontinue such market making at any time without notice. In
addition, such market making activity will be subject to the limits imposed by
law. If a trading market does not develop or is not maintained, holders of the
New Notes may experience difficulty in reselling the New Notes or may be unable
to sell them at all. If a market for the New Notes develops, any such market may
be discontinued at any time. Accordingly, there can be no assurance as to the
development or liquidity of any market for the New Notes.
DLJ may be deemed to be an "affiliate" of the Company and, as such, may be
required to deliver a prospectus in connection with its market-making activities
in the New Notes.
B-4
<PAGE> 169
USE OF PROCEEDS
There will be no proceeds to the Company from the Exchange Offer. The net
proceeds to the Company from the sale of the Notes were approximately $105.9
million (after deducting discounts and commissions and Note Offering expenses
payable by the Company). The Note Offering was part of a refinancing plan of the
Company's then existing term loan and revolving credit indebtedness under its
Former Credit Facility to, among other things, (i) extend the maturity of those
borrowings, (ii) fix the interest rate of those borrowings at a rate believed by
the Company to be attractive for long-term fixed rate financing, (iii) provide
the Company with additional cash for working capital and certain capital
expenditures and to fund possible future acquisitions, and (iv) increase its
operating and financial flexibility. The Company used all of the net proceeds
from the Note Offering, together with the Initial Draw of approximately $1.6
million under the New Credit Facility, to repay in full its then-existing term
loan and revolving credit indebtedness under the Former Credit Facility,
including all accrued interest thereunder to the date of repayment, and all
expenses related to the Refinancing. The term loan portion of the Former Credit
Facility bore interest at the Company's option of prime plus 2% to 2.5% or LIBOR
plus 3% to 3.5% and the revolver portion of the Former Credit Facility bore
interest at the Company's option of prime plus 0.5% to 2% or LIBOR plus 1.5% to
3%, based on the Company's consolidated leverage ratio as defined in the Former
Credit Agreement. The term loans and revolver mature in December 2002 and
December 1999, respectively. The Company used proceeds from the term loans and
revolver to refinance its then existing credit facility, fund capital
expenditures, working capital and certain acquisitions.
This Prospectus is delivered in connection with the sale of the New Notes
(and the related guarantees) by DLJ in market-making transactions. The Company
will not receive any of the proceeds from such transactions.
B-5
<PAGE> 170
PLAN OF DISTRIBUTION
This Prospectus has been prepared for use by DLJ in connection with offers
and sales from time-to-time of the New Notes (and related guarantees) in
market-making transactions at negotiated prices relating to prevailing market
prices at the time of sale. DLJ may act as principal or agent in such
transactions. DLJ has advised the Company that it currently intends to make a
market in the New Notes, but it is not obligated to do so and may discontinue or
suspend any such market-making activities at any time without notice.
There is no existing market for the New Notes and there can be no assurance
as to the liquidity of any market that may develop for the New Notes, the
ability of Holders of the New Notes to sell their New Notes or the price at
which Holders would be able to sell their New Notes. Future trading prices of
the New Notes will depend on many factors, including, among other things,
prevailing interest rates, the Company's operating results, the market for
similar securities and general economic conditions. The Company does not
currently intend to list the New Notes on any securities exchange or the
National Association of Securities Dealers Automated Quotation System.
Therefore, no assurance can be given as to the liquidity of any trading market
for the New Notes. See "Risk Factors -- Absence of Active Trading Market."
DLJ served as the initial purchaser in the Note Offering and received total
underwriting discounts and commissions of $3.575 million in connection
therewith.
DLJ and the Company entered into the Registration Rights Agreement with
respect to the use by DLJ of this Prospectus. Pursuant to the Registration
Rights Agreement, the Company agreed to bear all registration expenses incurred
under such agreement, and the Company agreed to indemnify DLJ against certain
liabilities, including liabilities under the Securities Act.
Entities affiliated with DLJ (i) hold 14,300,000 shares of Common Stock of
the Company, including shares of the Company's Series A Preferred Stock, Series
B Preferred Stock and Series C Preferred Stock which are convertible into an
aggregate of 2,000,000 shares, 3,857,280 shares and 2,500,000 shares of the
Company's Common Stock, respectively, Convertible Subordinated Notes which are
convertible into an aggregate of 5,142,720 shares of the Company's Common Stock,
and Bridge Financing Warrants which are exercisable for an aggregate of 800,000
shares of the Company's Common Stock and (ii) pursuant to the Securityholders
Agreement, are entitled to elect two members to the Company's Board of
Directors.
In consideration for DLJ's services, the Company paid to DLJ, in each of
1996 and 1997, $200,000 in fees for financial advisory and certain investment
banking services provided to the Company.
In connection with the refinancing of its then-outstanding indebtedness in
December of 1996, the Company paid fees of $1.2 million in the aggregate for
debt issuance costs to DLJCF. DLJCF is an affiliate of DLJ.
B-6
<PAGE> 171
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware General Corporation Law the Company has
broad powers to indemnify its directors and officers against liabilities they
may incur in such capacities, including liabilities under the Securities Act of
1933, as amended (the "Securities Act"). The Company's Bylaws (the "Bylaws")
(Exhibit 3.2 hereto) provide that the Company shall indemnify its directors and
officers to the fullest extent permitted by Delaware law. The Bylaws authorize
the Company, to the fullest extent permitted by law, to advance litigation
expenses to its directors and officers in defending any proceeding.
In addition, the Company's Certificate of Incorporation (the "Certificate")
(Exhibit 3.1 hereto) provides that, pursuant to Delaware law, its directors
shall not be liable for monetary damages for breach of the directors' fiduciary
duty of care to the Company and its stockholders. This provision in the
Certificate does not eliminate the duty of care, and in appropriate
circumstances equitable remedies such as injunctive or other forms of
non-monetary relief will remain available under Delaware law. In addition, each
director will continue to be subject to liability for breach of the director's
duty of loyalty to the Company, for acts or omissions not in good faith or
involving intentional misconduct, for knowing violations of law, for actions
leading to improper personal benefit to the director and for payment of
dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws. The Certificate further provides that the
Company shall indemnify (and advance expenses to) its directors and also is
authorized to indemnify its officers (and any other person to which Delaware law
permits) to the fullest extent permitted by law.
The Company has entered into agreements to indemnify its directors and
certain of its officers and employees in addition to the indemnification
provided for in the Bylaws and under Delaware law. These agreements will, among
other things, indemnify the Company's directors and certain of its officers and
employees for certain expenses (including attorneys fees), judgments, fines and
settlement amounts incurred by such person in any action or proceeding,
including any action by or in the right of the Company, on account of services
by that person as a director or officer of the Company or as a director or
officer of any subsidiary of the Company, or as a director or officer of any
other company or enterprise that the person provides services to at the request
of the Company. The agreements also require the Company to advance all
reasonable expenses incurred by or on behalf of the indemnified director or
officer in connection with any proceeding by reason of the director or officer's
corporate status subject to an undertaking by the indemnified director or
officer to repay any expenses advanced that have been ultimately determined not
to be indemnifiable. These indemnification agreements further provide that the
conferred indemnification rights and remedies are to be nonexclusive of any
other rights and remedies granted under law, the Certificate, any other
agreement, or otherwise and that no change to these agreements shall limit or
restrict any right under these agreements with respect to any action taken or
omitted by such director or officer in his corporate status prior to such change
and to the extent any such change in the law permits greater indemnification
than would be currently provided under the Certificate and these agreements, the
parties' intent is that these agreements provide the greater benefits so
afforded by such change. The Company has also obtained directors' and officers'
liability insurance.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
The following Exhibits are attached hereto and incorporated herein by
reference.
<TABLE>
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of the
Company.
3.2** Bylaws of the Company.
4.1** Purchase Agreement dated as of January 23, 1998 by and among
the Company, Helios, Incorporated, Applied Robotic
Technologies, Inc., Air Bearings, Incorporated, Santa
Barbara Metric, Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation.
</TABLE>
II-1
<PAGE> 172
<TABLE>
<C> <S>
4.2** Indenture dated as of January 30, 1998 by and among the Company, the Subsidiary Guarantors and
State Street Bank and Trust Company of California, N.A. as Trustee.
4.3** Form of 10 3/4% Senior Notes Due 2005 dated as of January 30, 1998 (incorporated by reference to
Exhibit 4.2).
4.4** Registration Rights Agreement dated as of January 30, 1998 by and among the Company, Helios,
Incorporated, Applied Robotics Technologies, Inc., Air Bearings, Incorporated, Santa Barbara
Metric, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation.
5.1** Opinion of Brobeck, Phleger & Harrison LLP.
10.1** Lease Agreement dated June 5, 1995 by and between the Company and Security Capital Industrial
Trust.
10.2** Sublease Agreement dated April 1, 1997 by and between the Company and Hitachi America Ltd.
10.3** Master Security Agreement dated as of May 5, 1995 between the Company and Komag Incorporated, a
Delaware corporation.
10.4** Employment Agreement dated November 23, 1994 by and between the Company and John F. Schaefer.
10.5** Komag Intercreditor Agreement dated May 5, 1995.
10.6** Form of Indemnification Agreement.
10.7** 1995 Stock Option/Stock Issuance Plan.
10.8** Form of Notice of Grant of Stock Option with respect to holders of stock options granted under the
1995 Stock Option/Stock Issuance Plan.
10.9** Form of Stock Option Agreement and Addendum generally used in connection with the 1995 Stock
Option/Stock Issuance Plan.
10.10** Form of Stock Purchase Agreement and Addendum generally used in connection with the 1995 Stock
Option/ Stock Issuance Plan.
10.11 Amended and Restated Securityholders Agreement dated as of August 3, 1998, among DLJ Merchant
Banking Partners, L.P., DLJ International Partners, C.V., DLJ Offshore Partners, C.V., DLJ Merchant
Banking Funding, Inc., DLJ First ESC, L.P., DLJ Capital Corporation, Sprout Growth II, L.P., Sprout
Capital VI, L.P., PM Funding, Inc., Donaldson, Lufkin & Jenrette Securities Corporation, ABS
Capital Partners II, L.P., Arthur J. Cormier, John F. Schaefer, The Freedland 1994 Unitrust, The
Moraru 1994 Unitrust, The Le 1994 Unitrust, The Najjor Unitrust, Neil H. Brumberger, Hart H.
Brumberger, Roger D. Peters and Mary Anne Christine Peters Living Trust, Jeffrey K. Rhoton and
Yvonne H. Rhoton Living Trust, Raymond M. Karam, Randall E. Bye, Pedro A. Aylwin, Dr. Gilbert E.
Amelio and the Company.
10.12** Master Capital Lease Agreement dated as of January 13, 1996 by and between the Company and NTFC
Capital Corporation.
10.13** Form of Convertible Subordinated Note Due 2005 dated as of November 23, 1994 including all
amendments thereto.
10.14 Inter-Securityholder Agreement dated as of August 3, 1998 among DLJ Merchant Banking Partners,
L.P., DLJ International Partners, C.V., DLJ Offshore Partners, C.V., DLJ Merchant Banking Funding,
Inc., DLJ Capital Corporation, DLJ First ESC, L.P., Sprout Growth II, L.P., Sprout Capital VI,
L.P., ABS Capital Partners II, L.P., Donaldson, Lufkin & Jenrette Securities Corporation, William
E. Terry, Dr. Gilbert F. Amelio and the Company.
</TABLE>
II-2
<PAGE> 173
<TABLE>
<C> <S>
10.15 Securities Purchase Agreement, dated as of August 3, 1998 among ABS Capital Partners II, L.P., DLJ
Merchant Banking Partners, L.P., DLJ International Partners, C.V., DLJ Offshore Partners, C.V., DLJ
Merchant Banking Funding, Inc., DLJ Capital Corporation, Donaldson, Lufkin & Jenrette Securities
Corporation, DLJ First ESC, L.P., Sprout Growth II, L.P., Sprout Capital VI, L.P., Dr. Gilbert F.
Amelio, William E. Terry and the Company.
12.1 Statement Regarding Computation of Ratios.
21.1** List of Subsidiaries.
23.1 Independent Auditors' Consent and Report on Schedule.
23.2** Consent of Brobeck, Phleger & Harrison LLP (contained in Exhibit 5.1).
24.1** Powers of Attorney (contained on signature page on page II-4, II-5, II-6, II-7 and II-8).
25.1** Form T-1 Statement of Eligibility and Qualification of State Street Bank and Trust Company of
California, N.A. as Trustee.
27.1** Financial Data Schedule.
99.1** Form of Letter of Transmittal for the 10 3/4% Senior Notes due 2005.
99.2** Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9.
99.3** Form of Notice of Guaranteed Delivery.
</TABLE>
- ---------------
** Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts -- Phase Metrics, Inc.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(a)(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to tis Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
II-3
<PAGE> 174
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of the counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) To respond to requests for information that is incorporated by
reference into the Prospectus that is a part of this Registration Statement
pursuant to Item 4, 10(b), 11, or 13 of this Form, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of this Registration Statement
through the date of responding to the request.
II-4
<PAGE> 175
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Diego,
State of California, on the 31st day of August, 1998.
PHASE METRICS, INC.
By: /s/ JOHN F. SCHAEFER
------------------------------------
John F. Schaefer
Chairman and Chief Executive Officer
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ JOHN F. SCHAEFER Chairman of the Board, Chief August 31, 1998
- ----------------------------------------------------- Executive Officer and President
John F. Schaefer (Principal Executive Officer)
/s/ BRAD LALUZERNE Vice President, Chief Financial August 31, 1998
- ----------------------------------------------------- Officer and Assistant Secretary
Brad LaLuzerne (Principal Accounting and
Financial Officer)
* Director August 31, 1998
- -----------------------------------------------------
Arthur J. Cormier
* Director August 31, 1998
- -----------------------------------------------------
Thompson Dean
* Director August 31, 1998
- -----------------------------------------------------
Robert Finzi
* Director August 31, 1998
- -----------------------------------------------------
Dr. Gilbert F. Amelio
* Director August 31, 1998
- -----------------------------------------------------
William E. Terry
/s/ ANDREW T. SHEEHAN Director August 31, 1998
- -----------------------------------------------------
Andrew T. Sheehan
</TABLE>
*By: /s/ JOHN F. SCHAEFER
-------------------------------
John F. Schaefer
(Attorney-in-fact)
II-5
<PAGE> 176
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Diego,
State of California, on the 31st day of August, 1998.
AIR BEARINGS, INCORPORATED
By: /s/ JOHN F. SCHAEFER
------------------------------------
John F. Schaefer
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ JOHN F. SCHAEFER Chairman of the Board and Chief August 31, 1998
- ----------------------------------------------------- Executive Officer (Principal
John F. Schaefer Executive Officer)
/s/ BRAD LALUZERNE Chief Financial Officer, August 31, 1998
- ----------------------------------------------------- Assistant Secretary and
Brad LaLuzerne Director (Principal Accounting
and Financial Officer)
</TABLE>
II-6
<PAGE> 177
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Diego,
State of California, on the 31st day of August, 1998.
APPLIED ROBOTIC TECHNOLOGIES, INC.
By: /s/ JOHN F. SCHAEFER
------------------------------------
John F. Schaefer
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ JOHN F. SCHAEFER Chairman of the Board and Chief August 31, 1998
- ----------------------------------------------------- Executive Officer (Principal
John F. Schaefer Executive Officer)
/s/ BRAD LALUZERNE Vice President, Assistant August 31, 1998
- ----------------------------------------------------- Secretary and Director
Brad LaLuzerne (Principal Accounting and
Financial Officer)
</TABLE>
II-7
<PAGE> 178
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Diego,
State of California, on the 31st day of August, 1998.
HELIOS, INCORPORATED
By: /s/ JOHN F. SCHAEFER
------------------------------------
John F. Schaefer
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ JOHN F. SCHAEFER Chairman of the Board and Chief August 31, 1998
- ----------------------------------------------------- Executive Officer (Principal
John F. Schaefer Executive Officer)
/s/ BRAD LALUZERNE Vice President, Assistant August 31, 1998
- ----------------------------------------------------- Secretary and Director
Brad LaLuzerne (Principal Accounting and
Financial Officer)
</TABLE>
II-8
<PAGE> 179
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Diego,
State of California, on the 31st day of August, 1998.
SANTA BARBARA METRIC, INC.
By: /s/ JOHN F. SCHAEFER
------------------------------------
John F. Schaefer
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ JOHN F. SCHAEFER Chairman of the Board and Chief August 31, 1998
- ----------------------------------------------------- Executive Officer (Principal
John F. Schaefer Executive Officer)
/s/ BRAD LALUZERNE Chief Financial Officer, August 31, 1998
- ----------------------------------------------------- Assistant Secretary and
Brad LaLuzerne Director (Principal Accounting
and Financial Officer)
/s/ W. DEWEY HOCKEMEYER Director August 31, 1998
- -----------------------------------------------------
W. Dewey Hockemeyer
</TABLE>
II-9
<PAGE> 180
SCHEDULE II
PHASE METRICS, INC.
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
---------------------------
BALANCE AT CHARGES TO BALANCE AT
BEGINNING COSTS AND CHARGES TO END OF
DESCRIPTION OF PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS OF PERIOD
----------- ---------- ---------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995
Allowance for doubtful accounts......... $154 $ 463 $-- $ 27 $ 590
Year ended December 31, 1996
Allowance for doubtful accounts......... 590 247 -- 91 746
Year ended December 31, 1997
Allowance for doubtful accounts......... 746 1,405 -- 488 1,663
</TABLE>
<PAGE> 181
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTIONS
------- ------------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of the
Company.
3.2** Bylaws of the Company.
4.1** Purchase Agreement dated as of January 23, 1998 by and among
the Company, Helios, Incorporated, Applied Robotic
Technologies, Inc., Air Bearings, Incorporated, Santa
Barbara Metric, Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation.
4.2** Indenture dated as of January 30, 1998 by and among the
Company, the Subsidiary Guarantors and State Street Bank and
Trust Company of California, N.A. as Trustee.
4.3** Form of 10 3/4% Senior Notes Due 2005 dated as of January
30, 1998 (incorporated by reference to Exhibit 4.2).
4.4** Registration Rights Agreement dated as of January 30, 1998
by and among the Company, Helios, Incorporated, Applied
Robotics Technologies, Inc., Air Bearings, Incorporated,
Santa Barbara Metric, Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation.
5.1** Opinion of Brobeck, Phleger & Harrison LLP.
10.1** Lease Agreement dated June 5, 1995 by and between the
Company and Security Capital Industrial Trust.
10.2** Sublease Agreement dated April 1, 1997 by and between the
Company and Hitachi America Ltd.
10.3** Master Security Agreement dated as of May 5, 1995 between
the Company and Komag Incorporated, a Delaware corporation.
10.4** Employment Agreement dated November 23, 1994 by and between
the Company and John F. Schaefer.
10.5** Komag Intercreditor Agreement dated May 5, 1995.
10.6** Form of Indemnification Agreement.
10.7** 1995 Stock Option/Stock Issuance Plan.
10.8** Form of Notice of Grant of Stock Option with respect to
holders of stock options granted under the 1995 Stock
Option/Stock Issuance Plan.
10.9** Form of Stock Option Agreement and Addendum generally used
in connection with the 1995 Stock Option/Stock Issuance
Plan.
10.10** Form of Stock Purchase Agreement and Addendum generally used
in connection with the 1995 Stock Option/ Stock Issuance
Plan.
10.11 Amended and Restated Securityholders Agreement dated as of
August 3, 1998, among DLJ Merchant Banking Partners, L.P.,
DLJ International Partners, C.V., DLJ Offshore Partners,
C.V., DLJ Merchant Banking Funding, Inc., DLJ First ESC,
L.P., DLJ Capital Corporation, Sprout Growth II, L.P.,
Sprout Capital VI, L.P., PM Funding, Inc., Donaldson, Lufkin
& Jenrette Securities Corporation, ABS Capital Partners II,
L.P., Arthur J. Cormier, John F. Schaefer, The Freedland
1994 Unitrust, The Moraru 1994 Unitrust, The Le 1994
Unitrust, The Najjor Unitrust, Neil H. Brumberger, Hart H.
Brumberger, Roger D. Peters and Mary Anne Christine Peters
Living Trust, Jeffrey K. Rhoton and Yvonne H. Rhoton Living
Trust, Raymond M. Karam, Randall E. Bye, Pedro A. Aylwin,
Dr. Gilbert E. Amelio and the Company.
10.12** Master Capital Lease Agreement dated as of January 13, 1996
by and between the Company and NTFC Capital Corporation.
10.13** Form of Convertible Subordinated Note Due 2005 dated as of
November 23, 1994 including all amendments thereto.
</TABLE>
<PAGE> 182
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTIONS
------- ------------
<C> <S>
10.14 Inter-Securityholder Agreement dated as of August 3, 1998
among DLJ Merchant Banking Partners, L.P., DLJ International
Partners, C.V., DLJ Offshore Partners, C.V., DLJ Merchant
Banking Funding, Inc., DLJ Capital Corporation, DLJ First
ESC, L.P., Sprout Growth II, L.P., Sprout Capital VI, L.P.,
ABS Capital Partners II, L.P., Donaldson, Lufkin & Jenrette
Securities Corporation, William E. Terry, Dr. Gilbert F.
Amelio and the Company.
10.15 Securities Purchase Agreement, dated as of August 3, 1998
among ABS Capital Partners II, L.P., DLJ Merchant Banking
Partners, L.P., DLJ International Partners, C.V., DLJ
Offshore Partners, C.V., DLJ Merchant Banking Funding, Inc.,
DLJ Capital Corporation, Donaldson, Lufkin & Jenrette
Securities Corporation, DLJ First ESC, L.P., Sprout Growth
II, L.P., Sprout Capital VI, L.P., Dr. Gilbert F. Amelio,
William E. Terry and the Company.
12.1 Statement Regarding Computation of Ratios.
21.1** List of Subsidiaries.
23.1 Independent Auditors' Consent and Report on Schedule.
23.2** Consent of Brobeck, Phleger & Harrison LLP (contained in
Exhibit 5.1).
24.1** Powers of Attorney (contained on signature page on page
II-4, II-5, II-6, II-7 and II-8).
25.1** Form T-1 Statement of Eligibility and Qualification of State
Street Bank and Trust Company of California, N.A. as
Trustee.
27.1** Financial Data Schedule.
99.1** Form of Letter of Transmittal for the 10 3/4% Senior Notes
due 2005.
99.2** Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9.
99.3** Form of Notice of Guaranteed Delivery.
</TABLE>
- ---------------
** Previously filed.
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
PHASE METRICS, INC.
(a Delaware corporation)
The undersigned, John F. Schaefer and Richard A. Fink, hereby certify
that:
ONE: They are the duly elected and acting President and Secretary,
respectively, of said Corporation.
TWO: The Certificate of Incorporation of said Corporation shall be
amended and restated to read in full as follows:
ARTICLE I
The name of this Corporation is Phase Metrics, Inc.
ARTICLE II
The address of the registered office of the Corporation in the State of
Delaware is 9 East Loockerman Street, Dover, 19901. The name of the
Corporation's registered agent at such address is National Registered Agents,
Inc.
ARTICLE III
The purpose of this Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of Delaware.
ARTICLE IV
The Corporation is authorized to issue two classes of stock designated
respectively "Common Stock" and "Preferred Stock." The total number of shares of
Common Stock this Corporation is authorized to issue is 70,000,000, par value
$.0001 per share, and the total number of shares of Preferred Stock this
Corporation is authorized to issue is 19,717,280, par value $.0001 per share.
The Preferred Stock shall be issued in series. The first three such series shall
be designated "Series A Convertible Preferred Stock," "Series B Convertible
Participating Preferred Stock," and "Series C Convertible Redeemable Preferred
Stock." The total number of shares of Series A Convertible Preferred Stock this
Corporation is authorized to issue is 8,250,000. The total number of shares of
Series B Convertible Participating Preferred Stock this Corporation is
authorized to issue is 3,857,280. The total number of shares of Series C
Convertible Redeemable Preferred Stock this Corporation is authorized to issue
is 7,610,000. Each share of Series A Convertible Preferred Stock issued and
outstanding on the date hereof is hereby split and divided into 20 shares of
Series A Convertible Preferred Stock. Each share of Series B Convertible
Participating Preferred Stock issued and outstanding on the date hereof is
hereby split and divided into 20 shares of Series B Convertible Participating
Preferred Stock. All references to numbers of shares in this Amended and
Restated Certificate reflect the stock splits referred to above.
1
<PAGE> 2
(A) Series A Convertible Preferred Stock
The following is a statement of the designations, powers,
privileges, preferences and relative, participating, optional or other special
rights, and the qualifications, limitations or restrictions relating to the
Series A Convertible Preferred Stock:
(1) Number and Designation. 8,250,000 shares of the Preferred
Stock of the Corporation shall be designated as Series A Convertible Preferred
Stock (the "SERIES A PREFERRED STOCK"). Each share of Series A Preferred Stock
shall rank equally in all respects and shall be subject to the following
provisions.
(2) Rank. The Series A Preferred Stock shall rank junior to the
Series B Convertible Participating Preferred Stock ("Series B Preferred Stock")
and the Series C Convertible Redeemable Preferred Stock (the "Series C Preferred
Stock") with respect to dividend rights and rights on liquidation, dissolution
or winding up as set forth in Article IV(A), paragraph (3) and Article IV(A),
paragraph (4), and prior to all classes of Common Stock with respect to rights
on liquidation, dissolution or winding up. All equity securities of the
Corporation to which the Series A Preferred Stock ranks prior (whether with
respect to dividends or upon liquidation, dissolution, winding up or otherwise),
including the Common Stock, are collectively referred to in this Article IV(A)
as the "JUNIOR SECURITIES." All equity securities of the Corporation with which
the Series A Preferred Stock ranks on a parity (whether with respect to
dividends or upon liquidation, dissolution or winding up) are collectively
referred to in this Article IV(A) as the "PARITY SECURITIES." The respective
definitions of Junior Securities and Parity Securities shall also include any
rights or options exercisable for or convertible into any of the Junior
Securities and Parity Securities, as the case may be.
(3) Dividends. Shares of Series A Preferred Stock shall rank
junior as to dividend rights to shares of Series B Preferred Stock and Series C
Preferred Stock. Each share of Series A Preferred Stock shall be entitled to
receive, when, as and if declared by the Board of Directors, out of funds
legally available for the payment of dividends, dividends to the same extent as,
on the same basis as, at the same rate as, and contemporaneously with, dividends
when, as and if declared by the Board of Directors with respect to shares of
Common Stock or Parity Securities. Such dividends shall be payable on the dates
specified by the Board of Directors as the dates for payment of dividends in
respect of shares of Common Stock or Parity Securities (each of such dates being
a "DIVIDEND PAYMENT DATE") (unless such day is not a business day, in which
event on the next succeeding business day), in preference to dividends on the
Junior Securities. Such dividends shall be paid to the holders of record at the
close of business on the date specified by the Board of Directors of the
Corporation at the time such dividend is declared, provided that such date shall
not be more than 60 days nor less than 10 days prior to the respective dividend
payment date. If the Corporation shall at any time after the date of issuance of
the Series A Preferred Stock pay any dividend on Common Stock payable in shares
of Common Stock or effect a subdivision or combination of the outstanding shares
of Common Stock (by reclassification or otherwise) into a greater or lesser
number of shares of Common Stock, then in each such case the dividend amount to
which holders of shares of Series A Preferred Stock were entitled immediately
prior to such event under the preceding sentence shall be adjusted by
multiplying such amount by a fraction of which the numerator is the number of
shares of Common Stock outstanding immediately after such event and of which the
2
<PAGE> 3
denominator is the number of shares of Common Stock that were outstanding
immediately prior to such event.
(4) Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, before any payment or
distribution of the assets of the Corporation (whether capital or surplus) shall
be made to or set apart for the holders of Junior Securities, but after payment
in full to holders of Series B Preferred Stock and Series C Preferred Stock of
all amounts due thereunder, the holders of the shares of Series A Preferred
Stock shall be entitled to receive an amount in cash equal to $1.091 per share
of Series A Preferred Stock, plus an amount equal to all dividends declared and
unpaid thereon to the date of final distribution to such holders. If, upon any
liquidation, dissolution or winding up of the Corporation, the assets of the
Corporation, or proceeds thereof, distributable among the holders of the shares
of Series A Preferred Stock, after payment in full to holders of Series B
Preferred Stock and Series C Preferred Stock of all amounts due thereunder,
shall be insufficient to pay in full the preferential amount aforesaid and
liquidating payments on any Parity Securities, then such assets, or the proceeds
thereof, shall be distributed among the holders of shares of Series A Preferred
Stock and any such other Parity Securities ratably in accordance with the
respective amounts that would be payable on such shares of Series A Preferred
Stock and any such other Parity Securities if all amounts payable thereon were
paid in full. Subject to the rights of the holders of any Parity Securities,
after payment shall have been made in full to the holders of the Series A
Preferred Stock, as provided in this Article IV(A), paragraph (4), any other
series or class or classes of Junior Securities shall, subject to the respective
terms and provisions (if any) applying thereto, be entitled to receive any and
all assets remaining to be paid or distributed, and the holders of the Series A
Preferred Stock shall not be entitled to share therein.
(b) For the purposes of this Article IV(A), paragraph (4), (i) a
consolidation or merger of the Corporation with one or more corporations, or
(ii) a sale or transfer of all or substantially all of the Corporation's assets,
shall be deemed to be a liquidation, dissolution or winding up, voluntary or
involuntary, of the Corporation.
(5) Conversion.
(a) Subject to the provisions of this Article IV(A), paragraph (5),
each holder of the shares of Series A Preferred Stock shall have the right, at
any time and from time to time, at such holder's option, to convert any or all
outstanding shares (and fractional shares) of Series A Preferred Stock, in whole
or in part, into fully paid and non-assessable shares of Common Stock.
(b) Subject to the provisions of this Article IV(A), paragraph (5),
all of the outstanding shares (and fractional shares) of Series A Preferred
Stock shall be converted automatically into fully paid and non-assessable shares
of Common Stock upon the occurrence of a Series A Trigger Event. Any conversion
pursuant to this Article IV(A), paragraph 5(b) shall occur automatically,
without further action on the part of the holders or the Corporation.
(c) The number of shares of Common Stock deliverable upon conversion of
a share of Series A Preferred Stock, adjusted as hereinafter provided, is
referred to in this Article
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IV(A) as the "SERIES A CONVERSION RATIO." The Series A Conversion Ratio as of
August 3, 1998 is one, subject to adjustment from time to time pursuant to
Article IV(A), paragraph (5)(g) hereof.
(d)(i) In order to exercise the conversion privilege and upon the
occurrence of a Series A Trigger Event, the holder of the shares of Series A
Preferred Stock to be converted shall surrender the certificate representing
such shares at the office of the Corporation, with, in the case of any
conversion pursuant to Article IV(A), paragraph 5(a), a written notice of
election to convert completed and signed, specifying the number of shares to be
converted. Unless the shares issuable on conversion are to be issued in the same
name as the name in which such shares of Series A Preferred Stock are
registered, each share surrendered for conversion shall, subject to the
provisions of the Securityholders Agreement, be accompanied by instruments of
transfer, in form satisfactory to the Corporation, duly executed by the holder
or the holder's duly authorized attorney and an amount sufficient to pay any
transfer or similar tax.
(ii) As promptly as practicable after the surrender by the holder of
the certificates for shares of Series A Preferred Stock as aforesaid, the
Corporation shall issue and shall deliver to such holder, or on the holder's
written order to the holder's transferee, a certificate or certificates for the
whole number of shares of Common Stock issuable upon the conversion of such
shares in accordance with the provisions of this Article IV(A), paragraph (5).
(iii) Each conversion shall be deemed to have been effected (x) in the
case of any conversion pursuant to Article IV(A), paragraph 5(a), immediately
prior to the close of business on the date on which the certificates for shares
of Series A Preferred Stock shall have been surrendered and such notice received
by the Corporation as aforesaid or (y) in the case of any conversion pursuant to
Article IV(A), paragraph 5(b), on the date of the Series A Trigger Event, and
the person in whose name or names any certificate or certificates for shares of
Common Stock shall be issuable upon such conversion shall be deemed to have
become the holder of record of the shares of Common Stock represented thereby at
such time on such date and such conversion shall be into a number of shares of
Common Stock equal to the product of the number of shares of Series A Preferred
Stock surrendered times the Series A Conversion Ratio in effect at such time on
such date. All shares of Common Stock delivered upon conversion of the Series A
Preferred Stock will upon delivery be duly and validly issued and fully paid and
non-assessable, free of all liens and charges and not subject to any preemptive
rights. Upon the surrender of certificates representing shares of Series A
Preferred Stock, such shares shall no longer be deemed to be outstanding and all
rights of a holder with respect to such shares surrendered for conversion shall
immediately terminate except the right to receive the Common Stock and any other
amounts payable pursuant to this Article IV(A), paragraph (5).
(e)(i) From the date of delivery by a holder of shares of Series A
Preferred Stock of such holder's shares of Series A Preferred Stock (and, in the
case of any conversion pursuant to Article IV(A), paragraph 5(b), upon the
occurrence of a Series A Trigger Event), such Series A Preferred Stock shall
continue to participate equally and ratably with the holders of shares of Common
Stock in all dividends paid on the Common Stock as if such shares of Series A
Preferred Stock had been converted to shares of Common Stock at the time of such
delivery or Series A Trigger Event.
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(ii) Except to the extent provided above in Article IV(A), paragraph
(5)(e)(i) and in Article IV(A), paragraph (5)(g), the Corporation shall make no
payment or adjustment for accrued and unpaid dividends on the shares of Series A
Preferred Stock, whether or not in arrears, on conversion of such shares or for
dividends in cash on the shares of Common Stock issued upon such conversion.
(f)(i) The Corporation covenants that it will at all times reserve and
keep available, free from preemptive rights, such number of its authorized but
unissued shares of Common Stock as shall be required for the purpose of
effecting conversions of the Series A Preferred Stock.
(ii) Prior to the delivery of any securities which the Corporation
shall be obligated to deliver upon conversion of the Series A Preferred Stock,
the Corporation shall comply with respect to the issuance of such securities
with all applicable federal and state laws and regulations which require action
to be taken by the Corporation.
(iii) The Corporation will pay any and all documentary stamp or similar
issue or transfer taxes payable in respect of the issue or delivery of shares of
Common Stock on conversion of the Series A Preferred Stock pursuant hereto;
provided that the Corporation shall not be required to pay any tax which may be
payable in respect of any transfer involving the issue or delivery of shares of
Common Stock in a name other than that of the holder of the Series A Preferred
Stock to be converted and no such issue or delivery shall be made unless and
until the person requesting such issue or delivery has paid to the Corporation
the amount of any such tax or has established, to the satisfaction of the
Corporation, that such tax has been paid.
(iv) In connection with the conversion of any shares of Series A
Preferred Stock, no fractions of shares of Common Stock shall be issued, but in
lieu thereof the Corporation shall pay a cash adjustment in respect of such
fractional interest in an amount equal to such fractional interest multiplied by
the Daily Price per share of Common Stock on the business day on which such
shares of Series A Preferred Stock are deemed to have been converted.
(g)(i) In case the Corporation shall at any time after August 3, 1998
(I) declare a dividend or make a distribution on Common Stock payable in Common
Stock (other than a dividend in which shares of Series A Preferred Stock
participate as provided in Article IV(A), paragraph (3)), (II) subdivide or
split the outstanding Common Stock, (III) combine or reclassify the outstanding
Common Stock into a smaller number of shares, (IV) issue any shares of its
capital stock in a reclassification of Common Stock (including any such
reclassification in connection with a consolidation or merger in which the
Corporation is the continuing Corporation, other than any such consolidation or
merger which results in the payment to the holders of Series A Preferred Stock
of the liquidation preference as provided in Article IV(A), paragraph (4)), or
(V) consolidate with, or merge with or into, any other Person (other than any
such consolidation or merger which results in the payment to the holders of
Series A Preferred Stock of the liquidation preference as provided in Article
IV(A), paragraph (4)), the Series A Conversion Ratio in effect at the time of
the record date for such dividend or distribution or of the effective date of
such subdivision, split, combination, consolidation, merger or reclassification
shall be proportionately adjusted so that the conversion of the Series A
Preferred Stock after such time shall entitle the holder to receive the
aggregate number of shares of
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<PAGE> 6
Common Stock or other securities of the Corporation (or shares of any security
into which such shares of Common Stock have been combined, consolidated, merged
or reclassified pursuant to clause (III), (IV) or (V) above) which, if this
Series A Preferred Stock had been converted immediately prior to such time, such
holder would have owned upon such conversion and been entitled to receive by
virtue of such dividend, distribution, subdivision, split, combination,
consolidation, merger or reclassification, assuming such holder of Common Stock
of the Corporation (x) is not a Person with which the Corporation consolidated
or into which the Corporation merged or which merged into the Corporation or to
which such recapitalization, sale or transfer was made, as the case may be
("CONSTITUENT PERSON"), or an affiliate of a constituent person and (y) failed
to exercise any rights of election as to the kind or amount of securities, cash
and other property receivable upon such reclassification, change, consolidation,
merger, recapitalization, sale or transfer (provided, that if the kind or amount
of securities, cash and other property receivable upon such reclassification,
change, consolidation, merger, recapitalization, sale or transfer is not the
same for each share of Common Stock of the Corporation held immediately prior to
such reclassification, change, consolidation, merger, recapitalization, sale or
transfer by other than a constituent person or an affiliate thereof and in
respect of which such rights of election shall not have been exercised
("NON-ELECTING SHARE"), then for the purpose of this Article IV(A), paragraph
(5)(g) the kind and amount of securities, cash and other property receivable
upon such reclassification, change, consolidation, merger, recapitalization,
sale or transfer by each non-electing share shall be deemed to be the kind and
amount so receivable per share by a plurality of the non-electing shares). Such
adjustments shall be made successively whenever any event listed above shall
occur.
(ii) In case the Corporation shall at any time after August 3, 1998
issue or sell any Common Stock (other than Common Stock issued (I) upon
conversion of the Series A Preferred Stock, the Series B Preferred Stock, the
Series C Preferred Stock or the Notes, (II) pursuant to the Corporation's stock
option plans or pursuant to any other Common Stock related employee compensation
plan of the Corporation approved by the Corporation's Board of Directors, (III)
upon exercise or conversion of any security the setting of a record date for
which or issuance of which caused an adjustment under Article IV(A), paragraphs
(5)(g)(iii) or (g)(iv) hereof, (IV) upon exercise of warrants issued to lenders
of the Corporation including, without limitation, pursuant to the Bridge
Securities Purchase Agreement, (V) in connection with any bona fide, arms-length
direct or indirect merger, acquisition or similar transaction) without
consideration or for a consideration per share less than the then Conversion
Price Per Common Share, the Series A Conversion Ratio to be in effect after such
issuance or sale shall be determined by multiplying the Series A Conversion
Ratio in effect immediately prior to such issuance or sale by a fraction, (A)
the numerator of which shall be the sum of (x) the product of the aggregate
number of shares of Common Stock outstanding immediately after such issuance or
sale and the Current Valuation Per Common Share immediately prior to such
issuance or sale plus (y) the aggregate of the product of each share of Fully
Diluted Common Stock (other than shares of Common Stock included in (A)(x) or
employee stock options) outstanding immediately prior to such issuance or sale
and the Exercise Price applicable to such share of Fully Diluted Common Stock
and (B) the denominator of which shall be the sum of (x) the number of shares of
Common Stock outstanding immediately prior to the time of such issuance or sale
multiplied by the Current Valuation Per Common Share immediately prior to such
issuance or sale, plus (y) the aggregate of the product of each share of Fully
Diluted Common Stock (other than shares of Common Stock included in (B)(x) or
employee stock options) outstanding immediately prior to such issuance or sale
and the Exercise Price applicable to such share of Fully Diluted Common
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Stock, plus (z) the aggregate consideration, if any, to be received by the
Corporation upon such issuance or sale. In case any portion of the consideration
to be received by the Corporation shall be in a form other than cash, the fair
market value of such noncash consideration shall be utilized in the foregoing
computation. Such fair market value shall be determined by the Board of
Directors of the Corporation; provided that if the holders of 25% of the Series
A Preferred Stock shall object to any such determination, the Board of Directors
shall retain an independent appraiser reasonably satisfactory to such holders to
determine such fair market value. The holders shall be notified promptly of any
consideration other than cash to be received by the Corporation and furnished
with a description of the consideration and the fair market value thereof, as
determined by the Board of Directors.
(iii) In case the Corporation shall at any time after August 3, 1998
fix a record date for the issuance of rights, options or warrants to the holders
of its Common Stock or other securities of the Corporation entitling such
holders to subscribe for or purchase shares of Common Stock (or securities
convertible into shares of Common Stock), with respect to which the holders of
Series A Preferred Stock do not participate pursuant to Article IV(A), paragraph
(3), at a price per share of Common Stock (or having a conversion price per
share of Common Stock, if a security convertible into shares of Common Stock)
less than the then Conversion Price Per Common Share on such record date, the
maximum number of shares of Common Stock issuable upon exercise of such rights,
options or warrants (or conversion of such convertible securities) shall be
deemed to have been issued and outstanding as of such record date and the Series
A Conversion Ratio shall be adjusted pursuant to Article IV(A), paragraph
(5)(g)(ii) hereof, as though such maximum number of shares of Common Stock had
been so issued for the aggregate consideration payable by the holders of such
rights, options, warrants or convertible securities prior to their receipt of
such shares of Common Stock. In case any portion of such consideration shall be
in a form other than cash, the fair market value of such noncash consideration
shall be determined as set forth in Article IV(A), paragraph (5)(g)(ii) hereof.
Such adjustment shall be made successively whenever such record date is fixed;
and in the event that such rights, options or warrants are not so issued or
expire unexercised, or in the event of a change in the number of shares of
Common Stock to which the holders of such rights, options or warrants are
entitled (other than pursuant to adjustment provisions therein comparable to
those contained in this Article IV(A), paragraph (5)(g)), the Series A
Conversion Ratio shall again be adjusted to be the Series A Conversion Ratio
which would then be in effect if such record date had not been fixed, in the
former event, or the Series A Conversion Ratio which would then be in effect if
such holder had initially been entitled to such changed number of shares of
Common Stock, in the latter event.
(iv) In case the Corporation shall at any time after August 3, 1998
issue rights, options (other than options issued pursuant to a plan described in
clause II of Article IV(A), paragraph (5)(g)(ii)) or warrants (other than
warrants described in clause IV of Article IV(A), paragraph (5)(g)(ii))
entitling the holders thereof to subscribe for or purchase Common Stock (or
securities convertible into shares of Common Stock) or shall issue convertible
securities, and the price per share of Common Stock of such rights, options,
warrants or convertible securities (including, in the case of rights, options or
warrants, the price at which they may be exercised) is less than the then
Conversion Price Per Common Share, the maximum number of shares of Common Stock
issuable upon exercise of such rights, options or warrants or upon conversion of
such convertible securities shall be deemed to have been issued and outstanding
as of the date of such sale or issuance, and the Series A Conversion Ratio shall
be adjusted pursuant to Article
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IV(A), paragraph (5)(g)(ii) hereof as though such maximum number of shares of
Common Stock had been so issued for an aggregate consideration equal to the
aggregate consideration paid for such rights, options, warrants or convertible
securities and the aggregate consideration payable by the holders of such
rights, options, warrants or convertible securities prior to their receipt of
such shares of Common Stock. In case any portion of such consideration shall be
in a form other than cash, the fair market value of such noncash consideration
shall be determined as set forth in Article IV(A), paragraph (5)(g)(ii) hereof.
Such adjustment shall be made successively whenever such rights, options,
warrants or convertible securities are issued; and in the event that such
rights, options or warrants expire unexercised, or in the event of a change in
the number of shares of Common Stock to which the holders of such rights,
options, warrants or convertible securities are entitled (other than pursuant to
adjustment provisions therein comparable to those contained in this Article
IV(A), paragraph (5)(g)), the Series A Conversion Ratio shall again be adjusted
to be the Series A Conversion Ratio which would then be in effect if such
rights, options, warrants or convertible securities had not been issued, in the
former event, or the Series A Conversion Ratio which would then be in effect if
such holders had initially been entitled to such changed number of shares of
Common Stock, in the latter event. No adjustment of the Series A Conversion
Ratio shall be made pursuant to this Article IV(A), paragraph (5)(g)(iv) to the
extent that the Series A Conversion Ratio shall have been adjusted pursuant to
Article IV(A), paragraph (5)(g)(iii) (or is not required to be adjusted pursuant
to Article IV(A), paragraph (5)(g)(iii) because holders of the Series A
Preferred Stock have participated pursuant to Article IV(A), paragraph (3)) upon
the setting of any record date relating to such rights, options, warrants or
convertible securities and such adjustment fully reflects the number of shares
of Common Stock to which the holders of such rights, options, warrants or
convertible securities are entitled and the price payable therefor.
(v) In case the Corporation shall at any time after August 3, 1998
fix a record date for the making of a distribution to holders of Common Stock
(including any such distribution made in connection with a consolidation or
merger in which the Corporation is the continuing corporation, other than any
such consolidation or merger which results in the payment to holders of Series A
Preferred Stock of the liquidation preference as provided in Article IV(A),
paragraph (4)) of evidences of indebtedness, assets or other property (other
than dividends payable in Common Stock or rights, options or warrants referred
to in, and for which an adjustment is made pursuant to Article IV(A), paragraph
(5)(g)(iii) hereof) with respect to which the holders of the Series A Preferred
Stock do not participate pursuant to Article IV(A), paragraph (3), the Series A
Conversion Ratio to be in effect after such record date shall be determined by
multiplying the Series A Conversion Ratio in effect immediately prior to such
record date by a fraction, (A) the numerator of which shall be the Current
Valuation Per Common Share on such record date, and (B) the denominator of which
shall be the Current Valuation Per Common Share on such record date, less the
fair market value (determined as set forth in Article IV(A), paragraph
(5)(g)(ii) hereof) of the portion of the assets, other property or evidence of
indebtedness so to be distributed which is applicable to one share of Common
stock. Such adjustments shall be made successively whenever such a record date
is fixed; and in the event that such distribution is not so made, the Series A
Conversion Ratio shall again be adjusted to be the Series A Conversion Ratio
which would then be in effect if such record date had not been fixed.
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(vi) For purposes of any computation under this Article IV(A),
paragraph (5)(f)(iv) or paragraph (5)(g), the number of shares of Common Stock
outstanding at any given time shall not include shares owned or held by or for
the account of the Corporation.
(vii) No adjustment to the Series A Conversion Ratio pursuant to
Article IV(A), paragraphs (5)(g)(ii), (iii), (iv) and (v) above shall be
required unless such adjustment would require an increase or decrease of at
least 1% in the Series A Conversion Ratio; provided however, that any
adjustments which by reason of this Article IV(A), paragraph (5)(g)(vii) are not
required to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations under this Article IV(A), paragraph
(5)(g) shall be made to the nearest four decimal points.
(viii) In the event that, at any time as a result of the provisions of
this Article IV(A), paragraph (5)(g), the holders of the Series A Preferred
Stock upon subsequent conversion shall become entitled to receive any shares of
capital stock of the Corporation other than Common Stock, the number of such
other shares so receivable upon conversion of the Series A Preferred Stock shall
thereafter be subject to adjustment from time to time in a manner and on terms
as nearly equivalent as practicable to the provisions contained herein.
(ix) In the event:
(A) of any capital reorganization or reclassification of the Common
Stock (other than a subdivision or combination of the outstanding Common
Stock and other than a change in par value of the Common Stock) or of
any consolidation or merger to which the Corporation is a party and for
which approval of any stockholders of the Corporation is required (other
than a consolidation or merger in which the Corporation is the
continuing corporation and that does not result in any reclassification
or change of the Common Stock outstanding), or of the conveyance or
transfer of the properties and assets of the Corporation substantially
as an entirety; or
(B) of the voluntary or involuntary dissolution, liquidation or
winding-up of the Corporation; or
(C) the Corporation proposes to take any action (other than actions of
the character described in Article IV(A), paragraph (5)(g)(i)(I) or
(II)) that would require an adjustment pursuant to this Article IV(A),
paragraph (5)(g) to the number of shares purchasable upon conversion;
then the Corporation shall cause to be mailed by first-class mail to the holders
of Series A Preferred Stock, at least five days prior to the applicable record
or effective date hereinafter specified (10 days in the case of the events
referred to in clauses (A) and (B) above), a notice stating (x) the date as of
which the holders of Common Stock of record to be entitled to receive any such
rights, warrants or distributions are to be determined, or (y) the date on which
any such consolidation, merger, conveyance, transfer, dissolution, liquidation
or winding-up is expected to become effective, and the date as of which it is
expected that holders of Common Stock of record shall be entitled to exchange
their shares of Common Stock for securities or other property, if
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any, deliverable upon such reorganization, reclassification, consolidation,
merger, conveyance, transfer, dissolution, liquidation or winding-up.
(h) All adjustments pursuant to this Article IV(A), paragraph (5)
shall be notified to the holders of this Series A Preferred Stock and such
notice shall be accompanied by a schedule of computation of the adjustments.
(6) Voting Rights.
(a) Except as otherwise provided by applicable law, the holders of
the shares of Series A Preferred Stock (i) shall be entitled to vote with the
holders of the Common Stock on all matters submitted for a vote of holders of
Common Stock, (ii) shall be entitled to a number of votes equal to the number of
votes to which shares of Common Stock issuable upon conversion of such shares of
Series A Preferred Stock would have been entitled if such shares of Common Stock
had been outstanding at the time of the applicable vote and related record date
and (iii) shall be entitled to notice of any stockholders' meeting in accordance
with the Amended and Restated Certificate of Incorporation and Bylaws of the
Corporation. Except as otherwise provided by applicable law and as set forth in
Article IV(A), paragraph (6)(b) below, the shares of Series A Preferred Stock
shall vote together with the shares of Common Stock as a single class.
(b) Without the written consent or affirmative vote at a meeting
called for that purpose of the holders of a majority of the shares of Series A
Preferred Stock then outstanding, the Corporation shall not take any of the
following actions:
(i) create, authorize, or issue any class or series of stock other
than the Series B Preferred Stock ranking prior to the Series A
Preferred Stock (whether with respect to dividends or upon liquidation,
dissolution or winding up) or any Parity Securities, or increase the
authorized number of shares of any such class or series, or reclassify
any authorized stock of the Corporation into any such prior shares or
Parity Securities, or create, authorize or issue any obligation or
security convertible into or evidencing the right to purchase any such
prior shares or Parity Securities;
(ii) issue more shares of the Series A Preferred Stock;
(iii) voluntarily liquidate, dissolve, or wind up the Corporation un
less provision for the payment of the liquidation preference is made in
accordance with Article IV(A), paragraph (4) or
(iv) amend, alter, or repeal, whether by merger, consolidation or
otherwise, any of the provisions of the Amended and Restated Certificate
of Incorporation or Bylaws of the Corporation in a manner adverse to the
preferences, privileges, voting rights or powers of the Series A
Preferred Stock.
(c) Except as otherwise required by applicable law or as set forth
herein, the shares of Series A Preferred Stock shall not have any relative,
participating, optional or other special voting rights and powers and the
consent of the holders thereof shall not be required for the taking of any
corporate action.
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(7) General Provision. Shares of Series A Preferred Stock which have
been issued and reacquired in any manner, including shares purchased or
redeemed, shall (upon compliance with any applicable state laws) have the status
of authorized and unissued shares of the class of Preferred Stock undesignated
as to series and may be redesignated and reissued as part of any series of the
Preferred Stock; provided that no such issued and reacquired shares of Series A
Preferred Stock shall be reissued or sold as Series A Preferred Stock.
(8) Prohibition of Payments Pending Redemption of the Series C
Preferred Stock. Notwithstanding anything to the contrary contained in this
Article IV(A), no payments of any kind (including but not limited to any
dividend payments) payable on the Series A Preferred Stock shall be made unless
and until at least 95% of the shares of Series C Preferred Stock issued pursuant
to the Series C Preferred Stock Securities Purchase Agreement entered into by
the Corporation on or about August 3, 1998 (the "Series C Purchase Agreement")
shall have first been redeemed in accordance with Article IV(C), paragraph (5)
or converted, except that after August 3, 2000, the Corporation shall be
permitted to pay dividends on the Series A Preferred Stock, when and if declared
by the Board of Directors, for any dividend period after that date, but only to
the extent that (i) the payments relate to the current Dividend Period and
provide no payments for dividends accruing prior to the dividend payment date
and (ii) full cumulative dividends on all outstanding shares of Series C
Preferred Stock shall have first been paid for the current and all dividend
periods prior to such payment. The limitation on payments set forth in this
Article IV(A), paragraph (8) shall terminate upon (a) a consolidation or merger
of the Corporation with one or more corporations, or (b) a sale or transfer of
all or substantially all of the Corporation's stock or assets; provided that, in
the event of (a) or (b), the Series C Preferred Stock has received its full
liquidation preference in accordance with Article IV(C), paragraph (4).
(B) Series B Preferred Stock
The following is a statement of the designations, powers, privileges,
preferences and relative, participating, optional or other special rights, and
the qualifications, limitations or restrictions relating to the Series B
Preferred Stock:
(1) Number and Designation. 3,857,280 shares of the Preferred Stock
of the Corporation shall be designated as Series B Convertible Participating
Preferred Stock. Each share of Series B Preferred Stock shall rank equally in
all respects and shall be subject to the following provisions.
(2) Rank. The Series B Preferred Stock shall rank junior to the
Series C Preferred Stock with respect to dividend rights, redemption rights and
rights on liquidation, dissolution or winding up as set forth in Article IV(B)
paragraph (3) and Article IV(B), paragraph (4). The Series B Preferred Stock
shall, with respect to dividend rights and rights on liquidation, dissolution or
winding up, rank prior to the Corporation's Series A Preferred Stock and all
classes of the Corporation's Common Stock, in each case, as set forth in Article
IV(B), paragraph (3) and Article IV(B), paragraph (4). All equity securities of
the Corporation to which the Series B Preferred Stock ranks prior (whether with
respect to dividends or upon liquidation, dissolution, winding up or otherwise),
including the Common Stock, are collectively referred to in this Article IV(B)
as the "JUNIOR SECURITIES." All equity securities of the Corporation with which
the Series B Preferred Stock ranks on a parity (whether with respect to
dividends or upon
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liquidation, dissolution or winding up) are collectively referred to in this
Article IV(B) as the "PARITY SECURITIES." The respective definitions of Junior
Securities and Parity Securities in this Article IV(B) shall also include any
rights or options exercisable for or convertible into any of the Junior
Securities and Parity Securities, as the case may be. The Series B Preferred
Stock shall be subject to the creation of Junior Securities and Parity
Securities.
(3) Dividends.
(a) Subject to the rights of the holders of shares of Series C
Preferred Stock, the holders of shares of Series B Preferred Stock shall be
entitled to receive, when, as and if declared by the Board of Directors, out of
funds legally available for the payment of dividends, cash dividends at (i) a
rate of 25% per annum of the Original Liquidation Amount (as defined below) per
share for the period from the date of issuance of such shares until November 23,
1997 (the "Decrease Date"), and (ii) the Applicable Rate (as defined below) in
effect in respect of each Dividend Period (as defined below) thereafter.
Notwithstanding the foregoing, if for any Dividend Period the holder of such
amount of Common Stock as a holder of Series B Preferred Stock would be entitled
to receive upon conversion would be entitled to receive any dividend and such
dividend would, but for the provisions of this Article IV(B) paragraph (3),
exceed the dividend payable on one share of Series B Preferred Stock in respect
of such period, the dividend payable per share of Series B Preferred Stock in
respect of such period shall be increased so as to equal the dividend payable on
a share of Common Stock in respect of such period. Such dividends shall be
payable in arrears in equal amounts quarterly on March 31, June 30, Sept. 30 and
Dec. 31 of each year (unless such day is not a business day, in which event on
the next succeeding business day) (each of such dates being a "DIVIDEND PAYMENT
DATE" and each such quarterly period (or portion thereof) being a "DIVIDEND
PERIOD"). Such dividends shall be cumulative from the date of issue, whether or
not in any Dividend Period or Periods there shall be funds of the Corporation
legally available for the payment of such dividends. Such dividends shall be
paid to the holders of record at the close of business on the date specified by
the Board of Directors of the Corporation at the time such dividend is declared,
provided that such date shall not be more than 60 days nor less than 10 days
prior to the respective Dividend payment Date. Accrued and unpaid dividends for
any past Dividend Periods may be declared and paid at any time, without
reference to any Dividend Payment Date, to holders of record on such date, not
more than 45 days preceding the payment date thereof, as may be fixed by the
Board of Directors. As used herein, (x) "Applicable Rate" in effect in respect
of any Dividend Period after the Decrease Date shall mean the rate per annum
equal to the greater of (A) 12.5% of the Original Liquidation Amount per share
and (B) the Original Liquidation Amount per share multiplied by the sum of the
Prime Rate in effect on the first business day of such Dividend Period plus 2%,
and (y) "Prime Rate" means the rate of interest publicly announced by Citibank,
N.A. in The City of New York from time to time as its prime rate.
(b) Except in the case where the amount of dividends payable is
determined pursuant to the second sentence of Article IV(B), paragraph 3(a), the
amount of dividends payable for each full Dividend Period for the Series B
Preferred Stock shall be computed by dividing the annual dividend rate by four,
and the amount of dividends payable for the initial Dividend Period, or any
other period shorter or longer than a full Dividend Period, on the Series B
Preferred Stock shall be computed on the basis of twelve 30-day months and a
360-day year. Holders of shares of Series B Preferred Stock shall not be
entitled to any dividends, whether payable in cash, property or stock, in excess
of cumulative dividends, as herein provided, on the
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Series B Preferred Stock. No interest, or sum of money in lieu of interest,
shall be payable in respect of any dividend payment or payments on the Series B
Preferred Stock that may be in arrears.
(c) So long as any shares of the Series B Preferred Stock are
outstanding, no dividends, except as described in the next succeeding sentence,
shall be declared or paid or set apart for payment on Parity Securities, for any
period unless full cumulative dividends have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof set
apart for such payment on the Series B Preferred Stock for all Dividend Periods
terminating on or prior to the date of payment of the dividend on such class or
series of Parity Securities. When dividends are not paid in full or a sum
sufficient for such payment is not set apart, as aforesaid, all dividends
declared upon shares of the Series B Preferred Stock and all dividends declared
upon any other class or series of Parity Securities shall be declared ratably in
proportion to the respective amounts of dividends accumulated and unpaid on the
Series B Preferred Stock and accumulated and unpaid on such Parity Securities.
(d) So long as any shares of the Series B Preferred Stock are
outstanding, no dividends (other than dividends or distributions paid in shares
of, or options, warrants or rights to subscribe for or purchase shares of,
Junior Securities) shall be declared or paid or set apart for payment or other
distribution declared or made upon Junior Securities, nor shall any Junior
Securities be redeemed, purchased or otherwise acquired (other than a
redemption, purchase or other acquisition of shares of Common Stock made
pursuant to an employee incentive or benefit plan of the Corporation or any
subsidiary) (all such dividends, distributions, redemptions or purchases being
hereinafter referred to as a "JUNIOR SECURITIES DISTRIBUTION") for any
consideration (or any moneys be paid to or made available for a sinking fund for
the redemption of any shares of any such stock) by the Corporation, directly or
indirectly (except by conversion into or exchange for Junior Securities), unless
in each case (i) the full cumulative dividends on all outstanding shares of the
Series B Preferred Stock and any other Parity Securities shall have been paid or
set apart for payment for all past Dividend Periods with respect to the Series B
Preferred Stock and all past dividend periods with respect to such Parity
Securities and (ii) sufficient funds shall have been paid or set apart for the
payment of the dividend for the current Dividend Period with respect to the
Series B Preferred Stock and the current dividend period with respect to such
Parity Securities.
(4) Liquidation Preference.
(a) Subject to the rights of the holders of shares of Series C
Preferred Stock, in the event of any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, before any payment or
distribution of the assets of the Corporation (whether capital or surplus) shall
be made to or set apart for the holders of Junior Securities, the holders of the
shares of Series B Preferred Stock shall be entitled to receive the greater of
(x) $1.5555 per share of Series B Preferred Stock (the "Original Liquidation
Amount") plus an amount equal to all dividends (whether or not earned or
declared) accrued and unpaid thereon to the date of final distribution to such
holders and (y) the amount that would have been received by a holder of one
share of Series B Preferred Stock had it converted such share as provided in
Article IV(B), paragraph (7) immediately prior to such liquidation, dissolution
or winding-up (and assuming similar conversion by all holders of Series B
Preferred Stock). If, upon any liquidation, dissolution or winding up of the
Corporation, the assets of the Corporation, or proceeds thereof,
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<PAGE> 14
distributable among the holders of the shares of Series B Preferred Stock shall
be insufficient to pay in full the preferential amount aforesaid and liquidating
payments on any Parity Securities, then such assets, or the proceeds thereof,
shall be distributed among the holders of shares of Series B Preferred Stock and
any such other Parity Securities ratably in accordance with the respective
amounts that would be payable on such shares of Series B Preferred Stock and any
such other stock if all amounts payable thereon were paid in full. For the
purposes of this Article IV(B), paragraph (4), (i) a consolidation or merger of
the Corporation with one or more corporations, or (ii) a sale or transfer of all
or substantially all of the Corporation's assets, shall be deemed to be a
liquidation, dissolution or winding up, voluntary or involuntary, of the
Corporation.
(b) Subject to the rights of the holders of any Parity Securities,
after payment shall have been made in full to the holders of the Series B
Preferred Stock, as provided in this Article IV(B), paragraph (4), any other
series or class or classes of Junior Securities shall, subject to the respective
terms and provisions (if any) applying thereto, be entitled to receive any and
all assets remaining to be paid or distributed, and the holders of the Series B
Preferred Stock shall not be entitled to share therein.
(5) Redemption.
(a) Subject to the rights of the holders of Series C Preferred Stock,
to the extent the Corporation shall have funds legally available for such
payment, on July 15, 2005, if any shares of the Series B Preferred Stock shall
be outstanding, the Corporation shall redeem all then outstanding shares of the
Series B Preferred Stock, at a redemption price of $1.5555 per share in cash,
together with accrued and unpaid dividends thereon to such date, without
interest.
(b) Shares of Series B Preferred Stock which have been issued and
reacquired in any manner, including shares purchased or redeemed, shall (upon
compliance with any applicable provisions of applicable state laws) have the
status of authorized and unissued shares of the class of Preferred Stock
undesignated as to series and may be redesignated and reissued as part of any
series of the Preferred Stock; provided that no such issued and reacquired
shares of Series B Preferred Stock shall be reissued or sold as Series B
Preferred Stock.
(c) Subject to the rights of the holders of the Series C Preferred
Stock, if the Corporation is unable or shall fail to discharge its obligation to
redeem all outstanding shares of Series B Preferred Stock pursuant to Article
IV(B), paragraph (5)(a) (the "MANDATORY REDEMPTION OBLIGATION"), the Mandatory
Redemption Obligation shall be discharged as soon as the Corporation is able to
discharge such Mandatory Redemption Obligation. If and so long as any Mandatory
Redemption Obligation with respect to the Series B Preferred Stock shall not be
fully discharged, the Corporation shall not (i) directly or indirectly, redeem,
purchase, or otherwise acquire any Parity Security or discharge any mandatory or
optional redemption, sinking fund or other similar obligation in respect of any
Parity Securities (except in connection with a redemption, sinking fund or other
similar obligation to be satisfied pro rata with the Series B Preferred Stock)
or (ii) in accordance with Article IV(B), paragraph (3)(d), declare or make any
Junior Securities Distribution, or, directly or indirectly, discharge any
mandatory or optional redemption, sinking fund or other similar obligation in
respect of the Junior Securities.
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<PAGE> 15
(d) Notwithstanding the foregoing provisions of this Article IV(B),
paragraph (5), unless full cumulative cash dividends (whether or not declared)
on all outstanding shares of Series B Preferred Stock shall have been paid or
contemporaneously are declared and paid or set apart for payment for all
Dividend Periods terminating on or prior to the applicable redemption date, none
of the shares of Series B Preferred Stock shall be redeemed, and no sum shall be
set aside for such redemption, unless shares of Series B Preferred Stock are
redeemed (in accordance with the provisions of this Article IV(B), paragraph (5)
and for the redemption price plus accrued and unpaid dividends) pro rata among
the holders thereof.
(6) Procedure for Redemption.
(a) In the event that fewer than all the outstanding shares of Series
B Preferred Stock are to be redeemed, the number of shares to be redeemed shall
be determined by the Board of Directors and the shares to be redeemed shall be
selected by lot or pro rata (with any fractional shares being rounded to the
nearest whole share) as may be determined by the Board of Directors (subject to
Article IV(B), paragraph (5)(f)).
(b) In the event the Corporation shall redeem shares of Series B
Preferred Stock, notice of such redemption shall be given by first class mail,
postage prepaid, mailed not less than 30 days nor more than 60 days prior to the
redemption date, to each holder of record of the shares to be redeemed at such
holder's address as the same appears on the stock register of the Corporation;
provided that neither the failure to give such notice nor any defect therein
shall affect the validity of the giving of notice for the redemption of any
share of Series B Preferred Stock to be redeemed except as to the holder to whom
the Corporation has failed to give said notice or except as to the holder whose
notice was defective. Each such notice shall state: (i) the redemption date;
(ii) the number of shares of Series B Preferred Stock to be redeemed and, if
fewer than all the shares held by such holder are to be redeemed, the number of
shares to be redeemed from such holder; (iii) the redemption price; (iv) the
place or places where certificates for such shares are to be surrendered for
payment of the redemption price; and (v) that dividends on the shares to be
redeemed will cease to accrue on such redemption date.
(c) Notice having been mailed as aforesaid, from and after the
redemption date (unless default shall be made by the Corporation in providing
money for the payment of the redemption price of the shares called for
redemption), dividends on the shares of Series B Preferred Stock so called for
redemption shall cease to accrue, and all rights of the holders thereof as
stockholders of the Corporation (except the right to receive from the
Corporation the redemption price, together with accrued and unpaid dividends
thereon to the date fixed for redemption, without interest) shall cease. Upon
surrender in accordance with said notice of the certificates for any shares so
redeemed (properly endorsed or assigned for transfer, if the Board of Directors
of the Corporation shall so require and the notice shall so state), such share
shall be redeemed by the Corporation at the redemption price aforesaid. In case
fewer than all the shares represented by any such certificate are redeemed, a
new certificate shall be issued representing the unredeemed shares without cost
to the holder thereof.
(7) Conversion.
(a) Subject to the provisions of this Article IV(B), paragraph (7),
each holder of the shares of Series B Preferred Stock shall have the right, at
any time and from time to time,
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at such holder's option, to convert any or all outstanding shares (and
fractional shares) of Series B Preferred Stock, in whole or in part, into fully
paid and non-assessable shares of Common Stock.
(ii) Subject to the provisions of this Article IV(B), paragraph (7),
all of the outstanding shares (and fractional shares) of Series B Preferred
Stock shall be converted automatically into fully paid and non-assessable shares
of Common Stock upon the occurrence of a Series B Trigger Event. Any conversion
pursuant to this Article IV(B), paragraph 7(a)(ii) shall occur automatically,
without further action on the part of the holders or the Corporation.
(iii) The number of shares of Common Stock deliverable upon conversion
of a share of Series B Preferred Stock, adjusted as hereinafter provided, is
referred to in this Article IV(B) as the "SERIES B CONVERSION RATIO." The Series
B Conversion Ratio as of August 3, 1998 is one, subject to adjustment from time
to time pursuant to Article IV(B), paragraph (7)(h) hereof. Notwithstanding any
call for redemption pursuant to Article IV(B), paragraph (5), the right to
convert shares so called for redemption shall terminate at the close of business
on the date immediately preceding the date fixed for such redemption unless the
Corporation shall default in making payment of the amount payable upon such
redemption.
(b) [Purposely left blank].
(c)(i) In order to exercise the conversion privilege and upon the
occurrence of a Series B Trigger Event, the holder of the shares of Series B
Preferred Stock to be converted shall surrender the certificate representing
such shares at the office of the Corporation, with, in the case of any
conversion pursuant to Article IV(B), paragraph (7)(a)(i), a written notice of
election to convert completed and signed, specifying the number of shares to be
converted. Unless the shares issuable on conversion are to be issued in the same
name as the name in which such shares of Series B Preferred Stock are
registered, each share surrendered for conversion shall, subject to the
provisions of the Securityholders Agreement, be accompanied by instruments of
transfer, in form satisfactory to the Corporation, duly executed by the holder
or the holder's duly authorized attorney and an amount sufficient to pay any
transfer or similar tax.
(ii) As promptly as practicable after the surrender by the holder of
the certificates for shares of Series B Preferred Stock as aforesaid, the
Corporation shall issue and shall deliver to such holder, or on the holder's
written order to the holder's transferee, a certificate or certificates for the
whole number of shares of Common Stock issuable upon the conversion of such
shares in accordance with the provisions of this Article IV(B), paragraph (7).
(iii) Each conversion shall be deemed to have been effected (x) in the
case of any conversion pursuant to Article IV(B), paragraph 7(a)(i), immediately
prior to the close of business on the date on which the certificates for shares
of Series B Preferred Stock shall have been surrendered and such notice received
by the Corporation as aforesaid or (y) in the case of any conversion pursuant to
Article IV(B), paragraph 7(a)(ii), on the date of the Series B Trigger Event,
and the person in whose name or names any certificate or certificates for shares
of Common Stock shall be issuable upon such conversion shall be deemed to have
become the holder of record of the shares of Common Stock represented thereby at
such time on such date and such conversion shall be into a number of shares of
Common Stock equal to the product of the number of shares of Series B Preferred
Stock surrendered times the Series B Conversion
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<PAGE> 17
Ratio in effect at such time on such date. All shares of Common Stock delivered
upon conversion of the Series B Preferred Stock will upon delivery be duly and
validly issued and fully paid and non-assessable, free of all liens and charges
and not subject to any preemptive rights. Upon the surrender of certificates
representing shares of Series B Preferred Stock, such shares shall no longer be
deemed to be outstanding and all rights of a holder with respect to such shares
surrendered for conversion shall immediately terminate except the right to
receive the Common Stock and other amounts payable pursuant to this Article
IV(B), paragraph (7).
(d)(i) Upon delivery to the Corporation by a holder of shares of Series
B Preferred Stock of a notice of election to convert, the right of the
Corporation to redeem such shares of Series B Preferred Stock shall terminate,
regardless of whether a notice of redemption has been mailed as aforesaid.
(ii) From the date of delivery by a holder of shares of Series B
Preferred Stock of such holder's shares of Series B Preferred Stock (and in the
case of any conversion pursuant to Article IV(B), paragraph 7(a)(ii), upon the
occurrence of a Series B Trigger Event), in lieu of dividends on such Series B
Preferred Stock pursuant to Article IV(B), paragraph (3), such Series B
Preferred Stock shall participate equally and ratably with the holders of shares
of Common Stock in all dividends paid on the Common Stock as if such shares of
Series B Preferred Stock had been converted to shares of Common Stock at the
time of such delivery or Series B Trigger Event.
(iii) Except to the extent provided above in Article IV(B), paragraph
(7)(d)(ii) and in Article IV(B), paragraph (7)(h), the Corporation shall make no
payment or adjustment for accrued and unpaid dividends on the shares of Series B
Preferred Stock, whether or not in arrears, on conversion of such shares or for
dividends in cash on the shares of Common Stock issued upon such conversion.
(e)(i) The Corporation covenants that it will at all times reserve and
keep available, free from preemptive rights, such number of its authorized but
unissued shares of Common Stock as shall be required for the purpose of
effecting conversions of the Series B Preferred Stock.
(ii) Prior to the delivery of any securities which the Corporation
shall be obligated to deliver upon conversion of the Series B Preferred Stock,
the Corporation shall comply with respect to the issuance of such securities
with all applicable federal and state laws and regulations which require action
to be taken by the Corporation.
(f) The Corporation will pay any and all documentary stamp or similar
issue or transfer taxes payable in respect of the issue or delivery of shares of
Common Stock on conversion of the Series B Preferred Stock pursuant hereto;
provided that the Corporation shall not be required to pay any tax which may be
payable in respect of any transfer involving the issue or delivery of shares of
Common Stock in a name other than that of the holder of the Series B Preferred
Stock to be converted and no such issue or delivery shall be made unless and
until the person requesting such issue or delivery has paid to the Corporation
the amount of any such tax or has established, to the satisfaction of the
Corporation, that such tax has been paid.
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<PAGE> 18
(g) In connection with the conversion of any shares of Series B
Preferred Stock, no fractions of shares of Common Stock shall be issued, but in
lieu thereof the Corporation shall pay a cash adjustment in respect of such
fractional interest in an amount equal to such fractional interest multiplied by
the Daily Price per share of Common Stock on the business day on which such
shares of Series B Preferred Stock are deemed to have been converted.
(h)(i) In case the Corporation shall at any time after August 3, 1998
(I) declare a dividend or make a distribution on Common Stock payable in Common
Stock, (II) subdivide or split the outstanding Common Stock, (III) combine or
reclassify the outstanding Common Stock into a smaller number of shares, (IV)
issue any shares of its capital stock in a reclassification of Common Stock
(including any such reclassification in connection with a consolidation or
merger in which the Corporation is the continuing corporation, other than any
such consolidation or merger which results in the payment to the holders of
Series B Preferred Stock of the liquidation preference as provided in Article
IV(B), paragraph (4)), or (V) consolidate with, or merge with or into, any other
Person (other than any such consolidation or merger which results in the payment
to the holders of Series B Preferred Stock of the liquidation preference as
provided in Article IV(B), paragraph (4)), the Series B Conversion Ratio in
effect at the time of the record date for such dividend or distribution or of
the effective date of such subdivision, split, combination, consolidation,
merger or reclassification shall be proportionately adjusted so that the
conversion of the Series B Preferred Stock after such time shall entitle the
holder to receive the aggregate number of shares of Common Stock or other
securities of the Corporation (or shares of any security into which such shares
of Common Stock have been combined, consolidated, merged or reclassified
pursuant to clause (III), (IV) or (V) above) which, if this Series B Preferred
Stock had been converted immediately prior to such time, such holder would have
owned upon such conversion and been entitled to receive by virtue of such
dividend, distribution, subdivision, split, combination, consolidation, merger
or reclassification, assuming such holder of Common Stock of the Corporation (x)
is not a constituent person, or an affiliate of a constituent person and (y)
failed to exercise any rights of election as to the kind or amount of
securities, cash and other property receivable upon such reclassification,
change, consolidation, merger, recapitalization, sale or transfer (provided,
that if the kind or amount of securities, cash and other property receivable
upon such reclassification, change, consolidation, merger, recapitalization,
sale or transfer is not the same for each non-electing share of Common Stock of
the Corporation held immediately prior to such reclassification, change,
consolidation, merger, recapitalization, sale or transfer by other than a
constituent person or an affiliate thereof, then for the purpose of this Article
IV(B), subparagraph (h) the kind and amount of securities, cash and other
property receivable upon such reclassification, change, consolidation, merger,
recapitalization, sale or transfer by each non-electing share shall be deemed to
be the kind and amount so receivable per share by a plurality of the
non-electing shares). Such adjustment shall be made successively whenever any
event listed above shall occur.
(ii) In case the Corporation shall at any time after August 3, 1998
issue or sell any Common Stock (other than Common Stock issued (I) upon
conversion of the Series A Preferred Stock, the Series B Preferred Stock, the
Series C Preferred Stock or the Notes, (II) pursuant to the Corporation's stock
option plans or pursuant to any other Common Stock related employee compensation
plan of the Corporation approved by the Corporation's Board of Directors, (III)
upon exercise or conversion of any security the setting of a record date for
which or issuance of which caused an adjustment under Article IV(B), paragraphs
(7)(h)(iii) or (h)(iv)
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hereof, (IV) upon exercise of warrants issued to lenders of the Corporation
including, without limitation, pursuant to the Bridge Securities Purchase
Agreement or (V) in connection with any bona fide, arms-length direct or
indirect merger, acquisition or similar transaction) without consideration or
for a consideration per share less than the then Conversion Price Per Common
Share, the Series B Conversion Ratio to be in effect after such issuance or sale
shall be determined by multiplying the Series B Conversion Ratio in effect
immediately prior to such issuance or sale by a fraction, (A) the numerator of
which shall be the sum of (x) the product of the aggregate number of shares of
Common Stock outstanding immediately after such issuance or sale and the Current
Valuation Per Common Share immediately prior to such issuance or sale plus (y)
the aggregate of the product of each share of Fully Diluted Common Stock (other
than shares of Common Stock included in (A)(x) or employee stock options)
outstanding immediately prior to such issuance or sale and the Exercise Price
applicable to such share of Fully Diluted Common Stock and (B) the denominator
of which shall be the sum of (x) the number of shares of Common Stock
outstanding immediately prior to the time of such issuance or sale multiplied by
the Current Valuation Per Common Share immediately prior to such issuance or
sale, plus (y) the aggregate of the product of each share of Fully Diluted
Common Stock (other than shares of Common Stock included in (B)(x) or employee
stock options) outstanding immediately prior to such issuance or sale and the
Exercise Price applicable to such share of Fully Diluted Common Stock, plus (z)
the aggregate consideration, if any, to be received by the Corporation upon such
issuance or sale. In case any portion of the consideration to be received by the
Corporation shall be in a form other than cash, the fair market value of such
noncash consideration shall be utilized in the foregoing computation. Such fair
market value shall be determined by the Board of Directors of the Corporation;
provided that if the holders of 25% of the Series B Preferred Stock shall object
to any such determination, the Board of Directors shall retain an independent
appraiser reasonably satisfactory to such holders to determine such fair market
value. The holders shall be notified promptly of any consideration other than
cash to be received by the Corporation and furnished with a description of the
consideration and the fair market value thereof, as determined by the Board of
Directors.
(iii) In case the Corporation shall at any time after August 3, 1998 fix
a record date for the issuance of rights, options or warrants to the holders of
its Common Stock or other securities of the Corporation entitling such holders
to subscribe for or purchase shares of Common Stock (or securities convertible
into shares of Common Stock) at a price per share of Common Stock (or having a
conversion price per share of Common Stock, if a security convertible into
shares of Common Stock) less than the then Conversion Price Per Common Share on
such record date, the maximum number of shares of Common Stock issuable upon
exercise of such rights, options or warrants (or conversion of such convertible
securities) shall be deemed to have been issued and outstanding as of such
record date and the Series B Conversion Ratio shall be adjusted pursuant to
Article IV(B), paragraph (7)(h)(ii) hereof, as though such maximum number of
shares of Common Stock had been so issued for the aggregate consideration
payable by the holders of such rights, options, warrants or convertible
securities prior to their receipt of such shares of Common Stock. In case any
portion of such consideration shall be in a form other than cash, the fair
market value of such noncash consideration shall be determined as set forth in
Article IV(B), paragraph (7)(h)(ii) hereof. Such adjustment shall be made
successively whenever such record date is fixed; and in the event that such
rights, options or warrants are not so issued or expire unexercised, or in the
event of a change in the number of shares of Common Stock to which the holders
of such rights, options or warrants are entitled (other than pursuant to
adjustment provisions therein comparable to those contained in this
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Article IV(B), paragraph (7)(h)), the Series B Conversion Ratio shall again be
adjusted to be the Series B Conversion Ratio which would then be in effect if
such record date had not been fixed, in the former event, or the Series B
Conversion Ratio which would then be in effect if such holder had initially been
entitled to such changed number of shares of Common Stock, in the latter event.
(iv) In case the Corporation shall at any time after August 3, 1998
issue rights, options (other than options issued pursuant to a plan described in
clause II of Article IV(B), paragraph (h)(ii)) or warrants (other than warrants
described in clause IV of Article IV(B), paragraph (h) (ii)) entitling the
holders thereof to subscribe for or purchase Common Stock (or securities
convertible into shares of Common Stock) or shall issue convertible securities,
and the price per share of Common Stock of such rights, options, warrants or
convertible securities (including, in the case of rights, options or warrants,
the price at which they may be exercised) is less than the then Conversion Price
Per Common Share, the maximum number of shares of Common Stock issuable upon
exercise of such rights, options or warrants or upon conversion of such
convertible securities shall be deemed to have been issued and outstanding as of
the date of such sale or issuance, and the Series B Conversion Ratio shall be
adjusted pursuant to Article IV(B), paragraph (7)(h)(ii) hereof as though such
maximum number of shares of Common Stock had been so issued for an aggregate
consideration equal to the aggregate consideration paid for such rights,
options, warrants or convertible securities and the aggregate consideration
payable by the holders of such rights, options, warrants or convertible
securities prior to their receipt of such shares of Common Stock. In case any
portion of such consideration shall be in a form other than cash, the fair
market value of such noncash consideration shall be determined as set forth in
Article IV(B), paragraph (7)(h)(ii) hereof. Such adjustment shall be made
successively whenever such rights, options, warrants or convertible securities
are issued; and in the event that such rights, options or warrants expire
unexercised, or in the event of a change in the number of shares of Common Stock
to which the holders of such rights, options, warrants or convertible securities
are entitled (other than pursuant to adjustment provisions therein comparable to
those contained in this Article IV(B), paragraph (7)(h)), the Series B
Conversion Ratio shall again be adjusted to be the Series B Conversion Ratio
which would then be in effect if such rights, options, warrants or convertible
securities had not been issued, in the former event, or the Series B Conversion
Ratio which would then be in effect if such holders had initially been entitled
to such changed number of shares of Common Stock, in the latter event. No
adjustment of the Series B Conversion Ratio shall be made pursuant to this
Article IV(B), paragraph (7)(h)(iv) to the extent that the Series B Conversion
Ratio shall have been adjusted pursuant to Article IV(B), paragraph (7)(h)(iii)
upon the setting of any record date relating to such rights, options, warrants
or convertible securities and such adjustment fully reflects the number of
shares of Common Stock to which the holders of such rights, options, warrants or
convertible securities are entitled and the price payable therefor.
(v) In case the Corporation shall at any time after August 3, 1998
fix a record date for the making of a distribution to holders of Common Stock
(including any such distribution made in connection with a consolidation or
merger in which the Corporation is the continuing corporation, other than any
such consolidation or merger which results in the payment to holders of Series B
Preferred Stock of the liquidation preference as provided in Article IV(B),
paragraph (4)) of evidences of indebtedness, assets or other property (other
than dividends payable in Common Stock or rights, options or warrants referred
to in, and for which an adjustment is made pursuant to Article IV(B), paragraph
(7)(h)(iii) hereof), the Series B
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Conversion Ratio to be in effect after such record date shall be determined by
multiplying the Series B Conversion Ratio in effect immediately prior to such
record date by a fraction, (A) the numerator of which shall be the Current
Valuation Per Common Share on such record date, and (B) the denominator of which
shall be the Current Valuation Per Common Share on such record date, less the
fair market value (determined as set forth in Article IV(B), paragraph
(7)(h)(ii) hereof) of the portion of the assets, other property or evidence of
indebtedness so to be distributed which is applicable to one share of Common
Stock. Such adjustments shall be made successively whenever such a record date
is fixed; and in the event that such distribution is not so made, the Series B
Conversion Ratio shall again be adjusted to be the Series B Conversion Ratio
which would then be in effect if such record date had not been fixed.
(vi) For purposes of any computation under Article IV(B), paragraph
(7)(g) or paragraph (7)(h), the number of shares of Common Stock outstanding at
any given time shall not include shares owned or held by or for the account of
the Corporation.
(vii) No adjustment to the Series B Conversion Ratio pursuant to
Article IV(B), paragraphs (7)(h)(ii), (iii), (iv) and (v) above shall be
required unless such adjustment would require an increase or decrease of at
least 1% in the Series B Conversion Ratio; provided however, that any
adjustments which by reason of this Article IV(B), paragraph (7)(h)(vii) are not
required to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations under this Article IV(B), paragraph
(7)(h) shall be made to the nearest four decimal points.
(viii) In the event that, at any time as a result of the provisions of
this Article IV(B), paragraph (7)(h), the holders of the Series B Preferred
Stock upon subsequent conversion shall become entitled to receive any shares of
capital stock of the Corporation other than Common Stock, the number of such
other shares so receivable upon conversion of the Series B Preferred Stock shall
thereafter be subject to adjustment from time to time in a manner and on terms
as nearly equivalent as practicable to the provisions contained herein.
(ix) In the event:
(A) of any capital reorganization or reclassification of the Common
Stock (other than a subdivision or combination of the outstanding Common
Stock and other than a change in par value of the Common Stock) or of
any consolidation or merger to which the Corporation is a party and for
which approval of any stockholders of the Corporation is required (other
than a consolidation or merger in which the Corporation is the
continuing corporation and that does not result in any reclassification
or change of the Common Stock outstanding), or of the conveyance or
transfer of the properties and assets of the Corporation substantially
as an entirety; or
(B) of the voluntary or involuntary dissolution, liquidation or
winding-up of the Corporation; or
(C) the Corporation proposes to take any action (other than actions of
the character described in Article IV(B), paragraph (7)(h)(i)(I) or
(II)) that would
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require an adjustment pursuant to this Article IV(B), paragraph
(7)(h) to the number of shares purchasable upon conversion;
then the Corporation shall cause to be mailed by first-class mail to the holders
of Series B Preferred Stock, at least five days prior to the applicable record
or effective date hereinafter specified (10 days in the case of the events
referred to in clauses (A) and (B) above), a notice stating (x) the date as of
which the holders of Common Stock of record to be entitled to receive any such
rights, warrants or distributions are to be determined, or (y) the date on which
any such consolidation, merger, conveyance, transfer, dissolution, liquidation
or winding-up is expected to become effective, and the date as of which it is
expected that holders of Common Stock of record shall be entitled to exchange
their shares of Common Stock for securities or other property, if any,
deliverable upon such reorganization, reclassification, consolidation, merger,
conveyance, transfer, dissolution, liquidation or winding-up.
(i) All adjustments pursuant to this Article IV(B), paragraph
(7) shall be notified to the holders of this Series B Preferred Stock and such
notice shall be accompanied by a schedule of computation of the adjustments.
(8) Voting Rights.
(a) Except as otherwise provided by applicable law, the holders
of the shares of Series B Preferred Stock (i) shall be entitled to vote with the
holders of the Common Stock on all matters submitted for a vote of holders of
Common Stock, (ii) shall be entitled to a number of votes equal to the number of
votes to which shares of Common Stock issuable upon conversion of such shares of
Series B Preferred Stock would have been entitled if such shares of Common Stock
had been outstanding at the time of the applicable vote and related record date
and (iii) shall be entitled to notice of any stockholders' meeting in accordance
with the Amended and Restated Certificate of Incorporation and Bylaws of the
Corporation. Except as otherwise provided by applicable law and as set forth in
Article IV(D) below, the shares of Series B Preferred Stock shall vote together
with the shares of Common Stock as a single class.
(b) Except as otherwise required by applicable law or as set
forth herein, the shares of Series B Preferred Stock shall not have any
relative, participating, optional or other special voting rights and powers and
the consent of the holders thereof shall not be required for the taking of any
corporate action.
(9) Reports. So long as any of the Series B Preferred Stock is
outstanding, the Corporation will furnish the holders thereof with the quarterly
and audited annual financial reports that the Corporation is required to file
with the Securities and Exchange Commission pursuant to Section 13 or Section
15(d) of the Securities Exchange Act of 1934 or, in the event the Corporation is
not required to file such reports, reports containing substantially the same
information as would be required in such reports (it being understood that the
foregoing shall not be construed to require presentation in the manner required
by such Act and the regulations thereunder so long as the data required
thereunder is so provided).
(10) Prohibition of Payments Pending Redemption of the Series C
Preferred Stock. Notwithstanding anything to the contrary contained in this
Article IV(A), no payments of any kind (including but not limited to any
redemption or dividend payments) payable on the
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<PAGE> 23
Series B Preferred Stock shall be made unless and until at lest 95% of the
shares of Series C Preferred Stock issued pursuant to the Series C Purchase
Agreement shall have first been redeemed in accordance with Article IV(C),
paragraph (5) or converted, except that after August 3, 2000, the Corporation
shall be permitted to pay dividends on the Series B Preferred Stock, when and if
declared by the Board of Directors, for any Dividend Period after that date, but
only to the extent that (i) the payments relate to the current Dividend Period
and provide no payments for dividends accruing prior to the Dividend Payment
Date and (ii) full cumulative dividends on all outstanding shares of Series C
Preferred Stock shall have first been paid for the current and all Dividend
Periods prior to such payments. The limitation on payments set forth in this
Article IV(B), paragraph (10) shall terminate upon (a) a consolidation or merger
of the Corporation with one or more corporations, or (b) a sale or transfer of
all or substantially all of the Corporation's stock or assets; provided that, in
the event of (a) or (b), the Series C Preferred Stock has received its full
liquidation preference in accordance with Article IV(C), paragraph (4).
(C) Series C Preferred Stock.
The following is a statement of the designations, powers,
privileges, preferences and relative, participating, optional or other special
rights, and the qualifications, limitations or restrictions relating to the
Series C Preferred Stock:
(1) Number and Designation. 7,500,000 shares of the Preferred
Stock of the Corporation shall be designated as Series C Convertible Redeemable
Preferred Stock. Each share of Series C Preferred Stock shall rank equally in
all respects and shall be subject to the following provisions.
(2) Rank. The Series C Preferred Stock shall, with respect to
dividend rights, redemption rights and rights on liquidation, dissolution or
winding up, rank prior to the Corporation's Series A Preferred Stock, Series B
Preferred Stock and all classes of the Corporation's Common Stock, in each case,
as set forth in Article IV(C), paragraph (3) and Article IV(C), paragraph (4).
All equity securities of the Corporation to which the Series C Preferred Stock
ranks prior (whether with respect to dividends or upon liquidation, dissolution,
winding up or otherwise), including the Common Stock, are collectively referred
to in this Article IV(C) as the "JUNIOR SECURITIES." All equity securities of
the Corporation with which the Series C Preferred Stock ranks on a parity
(whether with respect to dividends or upon liquidation, dissolution or winding
up) are collectively referred to in this Article IV(C) as the "PARITY
SECURITIES." The respective definitions of Junior Securities and Parity
Securities in this Article IV(C) shall also include any rights or options
exercisable for or convertible into any of the Junior Securities and Parity
Securities, as the case may be. The Series C Preferred Stock shall be subject to
the creation of Junior Securities and Parity Securities.
(3) Dividends.
(a) After the second anniversary of the date of issuance of the
Series C Preferred Stock, the holders of shares of Series C Preferred Stock
shall be entitled to receive, when, as and if declared by the Board of
Directors, out of funds legally available for the payment of dividends, cash
dividends at the Applicable Rate (as defined below) in effect in respect of each
Dividend Period (as defined below). Notwithstanding the foregoing, if for any
Dividend Period the holder of such amount of Common Stock as a holder of Series
C Preferred Stock
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<PAGE> 24
would be entitled to receive upon conversion would be entitled to receive any
dividend and such dividend would, but for the provisions of this Article IV(C)
paragraph (3), exceed the dividend payable on one share of Series C Preferred
Stock in respect of such period, the dividend payable per share of Series C
Preferred Stock in respect of such period shall be increased so as to equal the
dividend payable on a share of Common Stock in respect of such period. Such
dividends shall be payable in arrears in equal amounts quarterly on March 31,
June 30, Sept. 30 and Dec. 31 of each year (unless such day is not a business
day, in which event on the next succeeding business day) (each of such dates
being a "DIVIDEND PAYMENT DATE" and each such quarterly period (or portion
thereof) being a "DIVIDEND PERIOD"). Such dividends shall be cumulative from the
date of issue, whether or not in any Dividend Period or Periods there shall be
funds of the Corporation legally available for the payment of such dividends.
Such dividends shall be paid to the holders of record at the close of business
on the date specified by the Board of Directors of the Corporation at the time
such dividend is declared, provided that such date shall not be more than 60
days nor less than 10 days prior to the respective Dividend Payment Date.
Accrued and unpaid dividends for any past Dividend Periods may be declared and
paid at any time, without reference to any Dividend Payment Date, to holders of
record on such date, not more than 45 days preceding the payment date thereof,
as may be fixed by the Board of Directors. As used herein, (x) "Applicable Rate"
in effect in respect of any Dividend Period after the second anniversary of the
date of issuance of the Series C Preferred Stock shall mean the rate per annum
equal to the greater of (A) $0.50 per share and (B) $4.00 per share multiplied
by the sum of the Prime Rate in effect on the first business day of such
Dividend Period plus 2%, and (y) "Prime Rate" means the rate of interest
publicly announced by Citibank, N.A. in The City of New York from time to time
as its prime rate.
(b) Except in the case where the amount of dividends payable is
determined pursuant to the second sentence of Article IV(C), paragraph 3(a), the
amount of dividends payable for each full Dividend Period for the Series C
Preferred Stock shall be computed by dividing the annual dividend rate by four,
and the amount of dividends payable for the initial Dividend Period, or any
other period shorter or longer than a full Dividend Period, on the Series C
Preferred Stock shall be computed on the basis of twelve 30-day months and a
360-day year. Holders of shares of Series C Preferred Stock shall not be
entitled to any dividends, whether payable in cash, property or stock, in excess
of cumulative dividends, as herein provided, on the Series C Preferred Stock. No
interest, or sum of money in lieu of interest, shall be payable in respect of
any dividend payment or payments on the Series C Preferred Stock that may be in
arrears.
(c) So long as any shares of the Series C Preferred Stock are
outstanding, no dividends, except as described in the next succeeding sentence,
shall be declared or paid or set apart for payment on Parity Securities, for any
period unless full cumulative dividends have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof set
apart for such payment on the Series C Preferred Stock for all Dividend Periods
terminating on or prior to the date of payment of the dividend on such class or
series of Parity Securities. When dividends are not paid in full or a sum
sufficient for such payment is not set apart, as aforesaid, all dividends
declared upon shares of the Series C Preferred Stock and all dividends declared
upon any other class or series of Parity Securities shall be declared ratably in
proportion to the respective amounts of dividends accumulated and unpaid on the
Series C Preferred Stock and accumulated and unpaid on such Parity Securities.
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<PAGE> 25
(d) So long as any shares of the Series C Preferred Stock are
outstanding, no dividends (other than dividends or distributions paid in shares
of, or options, warrants or rights to subscribe for or purchase shares of,
Junior Securities) shall be declared or paid or set apart for payment or other
distribution declared or made upon Junior Securities, nor shall any Junior
Securities be redeemed, purchased or otherwise acquired (other than a
redemption, purchase or other acquisition of shares of Common Stock made
pursuant to an employee incentive or benefit plan of the Corporation or any
subsidiary) (all such dividends, distributions, redemptions or purchases being
hereinafter referred to as a "JUNIOR SECURITIES DISTRIBUTION") for any
consideration (or any moneys be paid to or made available for a sinking fund for
the redemption of any shares of any such stock) by the Corporation, directly or
indirectly (except by conversion into or exchange for Junior Securities).
(4) Liquidation Preference. In the event of any liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
before any payment or distribution of the assets of the Corporation (whether
capital or surplus) shall be made to or set apart for the holders of Junior
Securities, the holders of the shares of Series C Preferred Stock shall be
entitled to receive the greater of (x) $5.00 per share of Series C Preferred
Stock (the "Original Liquidation Amount") plus an amount equal to all dividends
(whether or not earned or declared) accrued and unpaid thereon to the date of
final distribution to such holders and (y) the amount that would have been
received by a holder of one share of Series C Preferred Stock had it converted
such share as provided in Article IV(C), paragraph (7) immediately prior to such
liquidation, dissolution or winding-up (and assuming similar conversion by all
holders of Series C Preferred Stock). If, upon any liquidation, dissolution or
winding up of the Corporation, the assets of the Corporation, or proceeds
thereof, distributable among the holders of the shares of Series C Preferred
Stock shall be insufficient to pay in full the preferential amount aforesaid and
liquidating payments on any Parity Securities, then such assets, or the proceeds
thereof, shall be distributed among the holders of shares of Series C Preferred
Stock and any such other Parity Securities ratably in accordance with the
respective amounts that would be payable on such shares of Series C Preferred
Stock and any such other stock if all amounts payable thereon were paid in full.
For the purposes of this Article IV(C), paragraph (4), (i) a consolidation or
merger of the Corporation with one or more corporations, or (ii) a sale or
transfer of all or substantially all of the Corporation's assets, shall be
deemed to be a liquidation, dissolution or winding up, voluntary or involuntary,
of the Corporation; provided, however, that in the case of a transaction of the
type described in either clause (i) or (ii), no amount of accrued and unpaid
dividends shall be payable as part of a liquidation preference payment pursuant
to this Article (IV)(C), paragraph (4) if 100% of the consideration paid to the
Corporation or the stockholders of the Corporation consist of securities of the
acquiring entity.
(b) Subject to the rights of the holders of any Parity
Securities, after payment shall have been made in full to the holders of the
Series C Preferred Stock, as provided in this Article IV(C), paragraph (4), any
other series or class or classes of Junior Securities shall, subject to the
respective terms and provisions (if any) applying thereto, be entitled to
receive any and all assets remaining to be paid or distributed, and the holders
of the Series C Preferred Stock shall not be entitled to share therein.
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<PAGE> 26
(5) Redemption.
(a) To the extent the Corporation shall have funds legally
available for such payment, on July 15, 2005, if any shares of the Series C
Preferred Stock shall be outstanding, the Corporation shall redeem all then
outstanding shares of the Series C Preferred Stock, at a redemption price of
$5.00 per share in cash, together with accrued and unpaid dividends thereon to
such date, without interest.
(b) Shares of Series C Preferred Stock which have been issued
and reacquired in any manner, including shares purchased or redeemed, shall
(upon compliance with any applicable provisions of applicable state laws) have
the status of authorized and unissued shares of the class of Preferred Stock
undesignated as to series and may be redesignated and reissued as part of any
series of the Preferred Stock; provided that no such issued and reacquired
shares of Series C Preferred Stock shall be reissued or sold as Series C
Preferred Stock.
(c) If the Corporation is unable or shall fail to discharge its
obligation to redeem all outstanding shares of Series C Preferred Stock pursuant
to Article IV(C), paragraph (5)(a) (the "MANDATORY REDEMPTION OBLIGATION"), the
Mandatory Redemption Obligation shall be discharged as soon as the Corporation
is able to discharge such Mandatory Redemption Obligation. If and so long as any
Mandatory Redemption Obligation with respect to the Series C Preferred Stock
shall not be fully discharged, the Corporation shall not (i) directly or
indirectly, redeem, purchase, or otherwise acquire any Parity Security or
discharge any mandatory or optional redemption, sinking fund or other similar
obligation in respect of any Parity Securities (except in connection with a
redemption, sinking fund or other similar obligation to be satisfied pro rata
with the Series C Preferred Stock) or (ii) in accordance with Article IV(C),
paragraph (3)(d), declare or make any Junior Securities Distribution, or,
directly or indirectly, discharge any mandatory or optional redemption, sinking
fund or other similar obligation in respect of the Junior Securities.
(d) Notwithstanding the foregoing provisions of this Article
IV(C), paragraph (5), unless full cumulative cash dividends (whether or not
declared) on all outstanding shares of Series C Preferred Stock shall have been
paid or contemporaneously are declared and paid or set apart for payment for all
Dividend Periods terminating on or prior to the applicable redemption date, none
of the shares of Series C Preferred Stock shall be redeemed, and no sum shall be
set aside for such redemption, unless shares of Series C Preferred Stock are
redeemed (in accordance with the provisions of this Article IV(C), paragraph (5)
and for the redemption price plus accrued and unpaid dividends) pro rata among
the holders thereof.
(6) Procedure for Redemption.
(a) In the event that fewer than all the outstanding shares of
Series C Preferred Stock are to be redeemed, the number of shares to be
redeemed shall be determined by the Board of Directors and the shares to
be redeemed shall be pro rata (with any fractional shares being rounded
to the nearest whole share) (subject to Article IV(C), paragraph
(5)(d)).
(b) In the event the Corporation shall redeem shares of Series C
Preferred Stock, notice of such redemption shall be given by first class mail,
postage prepaid, mailed not
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<PAGE> 27
less than 30 days nor more than 60 days prior to the redemption date, to each
holder of record of the shares to be redeemed at such holder's address as the
same appears on the stock register of the Corporation; provided that neither the
failure to give such notice nor any defect therein shall affect the validity of
the giving of notice for the redemption of any share of Series C Preferred Stock
to be redeemed except as to the holder to whom the Corporation has failed to
give said notice or except as to the holder whose notice was defective. Each
such notice shall state: (i) the redemption date; (ii) the number of shares of
Series C Preferred Stock to be redeemed and, if fewer than all the shares held
by such holder are to be redeemed, the number of shares to be redeemed from such
holder; (iii) the redemption price; (iv) the place or places where certificates
for such shares are to be surrendered for payment of the redemption price; and
(v) that dividends on the shares to be redeemed will cease to accrue on such
redemption date.
(c) Notice having been mailed as aforesaid, from and after the
redemption date (unless default shall be made by the Corporation in providing
money for the payment of the redemption price of the shares called for
redemption), dividends on the shares of Series C Preferred Stock so called for
redemption shall cease to accrue, and all rights of the holders thereof as
stockholders of the Corporation (except the right to receive from the
Corporation the redemption price, together with accrued and unpaid dividends
thereon to the date fixed for redemption, without interest) shall cease. Upon
surrender in accordance with said notice of the certificates for any shares so
redeemed (properly endorsed or assigned for transfer, if the Board of Directors
of the Corporation shall so require and the notice shall so state), such share
shall be redeemed by the Corporation at the redemption price aforesaid. In case
fewer than all the shares represented by any such certificate are redeemed, a
new certificate shall be issued representing the unredeemed shares without cost
to the holder thereof.
(7) Conversion.
(a) Subject to the provisions of this Article IV(C), paragraph
(7), each holder of the shares of Series C Preferred Stock shall have the right,
at any time and from time to time, at such holder's option, to convert any or
all outstanding shares (and fractional shares) of Series C Preferred Stock, in
whole or in part, into fully paid and non-assessable shares of Common Stock.
(ii) Subject to the provisions of this Article IV(C), paragraph
(7), all of the outstanding shares (and fractional shares) of Series C Preferred
Stock shall be converted automatically into fully paid and non-assessable shares
of Common Stock upon the occurrence of a Series C Trigger Event. Any conversion
pursuant to this Article IV(C), paragraph 7(a)(ii) shall occur automatically,
without further action on the part of the holders or the Corporation.
(iii) The number of shares of Common Stock deliverable upon
conversion of a share of Series C Preferred Stock, adjusted as hereinafter
provided, is referred to in this Article IV(C) as the "SERIES C CONVERSION
RATIO." The Series C Conversion Ratio as of August 3, 1998 is one, subject to
adjustment from time to time pursuant to Article IV(C), paragraph (7)(h) hereof.
Notwithstanding any call for redemption pursuant to Article IV(C), paragraph
(5), the right to convert shares so called for redemption shall terminate at the
close of business on the date immediately preceding the date fixed for such
redemption unless the Corporation shall default in making payment of the amount
payable upon such redemption.
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(b) In order to exercise the conversion privilege and upon the
occurrence of a Series C Trigger Event, the holder of the shares of Series C
Preferred Stock to be converted shall surrender the certificate representing
such shares at the office of the Corporation, with, in the case of any
conversion pursuant to Article IV(C), paragraph (7)(a)(i), a written notice of
election to convert completed and signed, specifying the number of shares to be
converted. Unless the shares issuable on conversion are to be issued in the same
name as the name in which such shares of Series C Preferred Stock are
registered, each share surrendered for conversion shall, subject to the
provisions of the Securityholders Agreement, be accompanied by instruments of
transfer, in form satisfactory to the Corporation, duly executed by the holder
or the holder's duly authorized attorney and an amount sufficient to pay any
transfer or similar tax.
(ii) As promptly as practicable after the surrender by the holder
of the certificates for shares of Series C Preferred Stock as aforesaid, the
Corporation shall issue and shall deliver to such holder, or on the holder's
written order to the holder's transferee, a certificate or certificates for the
whole number of shares of Common Stock issuable upon the conversion of such
shares in accordance with the provisions of this Article IV(C), paragraph (7).
(iii) Each conversion shall be deemed to have been effected (x)
in the case of any conversion pursuant to Article IV(C), paragraph 7(a)(i),
immediately prior to the close of business on the date on which the certificates
for shares of Series C Preferred Stock shall have been surrendered and such
notice received by the Corporation as aforesaid or (y) in the case of any
conversion pursuant to Article IV(C), paragraph 7(a)(ii), on the date of the
Series C Trigger Event, and the person in whose name or names any certificate or
certificates for shares of Common Stock shall be issuable upon such conversion
shall be deemed to have become the holder of record of the shares of Common
Stock represented thereby at such time on such date and such conversion shall be
into a number of shares of Common Stock equal to the product of the number of
shares of Series C Preferred Stock surrendered times the Series C Conversion
Ratio in effect at such time on such date. All shares of Common Stock delivered
upon conversion of the Series C Preferred Stock will upon delivery be duly and
validly issued and fully paid and non-assessable, free of all liens and charges
and not subject to any preemptive rights. Upon the surrender of certificates
representing shares of Series C Preferred Stock, such shares shall no longer be
deemed to be outstanding and all rights of a holder with respect to such shares
surrendered for conversion shall immediately terminate except the right to
receive the Common Stock and other amounts payable pursuant to this Article
IV(C), paragraph (7).
(C) [Purposely left blank]
(d)(i) Upon delivery to the Corporation by a holder of shares
of Series C Preferred Stock of a notice of election to convert, the right of the
Corporation to redeem such shares of Series C Preferred Stock shall terminate,
regardless of whether a notice of redemption has been mailed as aforesaid.
(ii) From the date of delivery by a holder of shares of
Series C Preferred Stock of such holder's shares of Series C Preferred Stock
(and in the case of any conversion pursuant to Article IV(C), paragraph
7(a)(ii), upon the occurrence of a Series C Trigger Event), in lieu of dividends
on such Series C Preferred Stock pursuant to Article IV(C), paragraph (3), such
Series C Preferred Stock shall participate equally and ratably with the holders
of shares of Common Stock in all dividends paid on the Common Stock as if such
shares of Series C Preferred Stock
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<PAGE> 29
had been converted to shares of Common Stock at the time of such delivery or
Series C Trigger Event.
(iii) Except to the extent provided above in Article IV(C),
paragraph (7)(d)(ii) and in Article IV(C), paragraph (7)(h), the Corporation
shall make no payment or adjustment for accrued and unpaid dividends on the
shares of Series C Preferred Stock, whether or not in arrears, on conversion of
such shares or for dividends in cash on the shares of Common Stock issued upon
such conversion.
(e)(i) The Corporation covenants that it will at all times
reserve and keep available, free from preemptive rights, such number of its
authorized but unissued shares of Common Stock as shall be required for the
purpose of effecting conversions of the Series C Preferred Stock.
(ii) Prior to the delivery of any securities which the
Corporation shall be obligated to deliver upon conversion of the Series C
Preferred Stock, the Corporation shall comply with respect to the issuance of
such securities with all applicable federal and state laws and regulations which
require action to be taken by the Corporation.
(f) The Corporation will pay any and all documentary stamp
or similar issue or transfer taxes payable in respect of the issue or delivery
of shares of Common Stock on conversion of the Series C Preferred Stock pursuant
hereto; provided that the Corporation shall not be required to pay any tax which
may be payable in respect of any transfer involving the issue or delivery of
shares of Common Stock in a name other than that of the holder of the Series C
Preferred Stock to be converted and no such issue or delivery shall be made
unless and until the person requesting such issue or delivery has paid to the
Corporation the amount of any such tax or has established, to the satisfaction
of the Corporation, that such tax has been paid.
(g) In connection with the conversion of any shares of
Series C Preferred Stock, no fractions of shares of Common Stock shall be
issued, but in lieu thereof the Corporation shall pay a cash adjustment in
respect of such fractional interest in an amount equal to such fractional
interest multiplied by the Daily Price per share of Common Stock on the business
day on which such shares of Series C Preferred Stock are deemed to have been
converted.
(h)(i) In case the Corporation shall at any time after August
3, 1998 (I) declare a dividend or make a distribution on Common Stock payable in
Common Stock, (II) subdivide or split the outstanding Common Stock, (III)
combine or reclassify the outstanding Common Stock into a smaller number of
shares, (IV) issue any shares of its capital stock in a reclassification of
Common Stock (including any such reclassification in connection with a
consolidation or merger in which the Corporation is the continuing corporation,
other than any such consolidation or merger which results in the payment to the
holders of Series C Preferred Stock of the liquidation preference as provided in
Article IV(C), paragraph (4)), or (V) consolidate with, or merge with or into,
any other Person (other than any such consolidation or merger which results in
the payment to the holders of Series C Preferred Stock of the liquidation
preference as provided in Article IV(C), paragraph (4)), the Series C Conversion
Ratio in effect at the time of the record date for such dividend or distribution
or of the effective date of such subdivision, split, combination, consolidation,
merger or reclassification shall be proportionately adjusted so that
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<PAGE> 30
the conversion of the Series C Preferred Stock after such time shall entitle the
holder to receive the aggregate number of shares of Common Stock or other
securities of the Corporation (or shares of any security into which such shares
of Common Stock have been combined, consolidated, merged or reclassified
pursuant to clause (III), (IV) or (V) above) which, if this Series C Preferred
Stock had been converted immediately prior to such time, such holder would have
owned upon such conversion and been entitled to receive by virtue of such
dividend, distribution, subdivision, split, combination, consolidation, merger
or reclassification, assuming such holder of Common Stock of the Corporation (x)
is not a constituent person, or an affiliate of a constituent person and (y)
failed to exercise any rights of election as to the kind or amount of
securities, cash and other property receivable upon such reclassification,
change, consolidation, merger, recapitalization, sale or transfer (provided,
that if the kind or amount of securities, cash and other property receivable
upon such reclassification, change, consolidation, merger, recapitalization,
sale or transfer is not the same for each non-electing share of Common Stock of
the Corporation held immediately prior to such reclassification, change,
consolidation, merger, recapitalization, sale or transfer by other than a
constituent person or an affiliate thereof, then for the purpose of this Article
IV(C), subparagraph (h) the kind and amount of securities, cash and other
property receivable upon such reclassification, change, consolidation, merger,
recapitalization, sale or transfer by each non-electing share shall be deemed to
be the kind and amount so receivable per share by a plurality of the
non-electing shares). Such adjustment shall be made successively whenever any
event listed above shall occur.
(ii) In case the Corporation shall at any time after August
3, 1998 and until August 3, 1999 issue or sell any Common Stock (other than
Common Stock issued (I) upon conversion of the Series A Preferred Stock, the
Series B Preferred Stock, the Series C Preferred Stock or the Notes, (II)
pursuant to the Corporation's stock option plans or pursuant to any other Common
Stock related employee compensation plan of the Corporation approved by the
Corporation's Board of Directors, (III) upon exercise or conversion of any
security the setting of a record date for which or issuance of which caused an
adjustment under Article IV(C), paragraph (7)(h)(iii) or (h)(iv) hereto (IV)
upon exercise of warrants issued to lenders of the Corporation including,
without limitation, pursuant to the Bridge Securities Purchase Agreement or (V)
in connection with any bona fide, arms-length direct or indirect merger
acquisition or similar transaction) without consideration or for a consideration
per share less than the Conversion Price Per Common Share then in effect, the
Series C Conversion Ratio in effect immediately prior thereto shall be adjusted
to an amount equal to the quotient of the price per share at which the
Corporation issued or sold, or is deemed to have issued or sold the shares of
securities in the dilutive financing multiplied by the Series C Conversion Ratio
then in effect divided by the Conversion Price Per Common Share (for the Series
C Preferred Stock) then in effect. In case the Corporation shall at any time on
or after August 3, 1999 issue or sell any Common Stock (other than Common Stock
issued (I) upon conversion of the Series A Preferred Stock, the Series B
Preferred Stock, the Series C Preferred Stock or the Notes, (II) pursuant to the
Corporation's stock option plans or pursuant to any other Common Stock related
employee compensation plan of the Corporation approved by the Corporation's
Board of Directors, (III) upon exercise or conversion of any security the
setting of a record date for which or issuance of which caused an adjustment
under Article IV(C), paragraphs (7)(h)(iii) or (h)(iv) hereof, (IV) upon
exercise of warrants issued to lenders of the Corporation including, without
limitation, pursuant to the Bridge Securities Purchase Agreement or (V) in
connection with any bona fide, arms-length direct or indirect merger,
acquisition or similar transaction) without consideration or for a consideration
per share less than the Conversion Price Per Common Share then in effect the
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Series C Conversion Ratio to be in effect after such issuance or sale shall
be determined by multiplying the Series C Conversion Ratio in effect immediately
prior to such issuance or sale by a fraction, (A) the numerator of which shall
be the sum of (x) the product of the aggregate number of shares of Common Stock
outstanding immediately after such issuance or sale and the Current Valuation
Per Common Share immediately prior to such issuance or sale plus (y) the
aggregate of the product of each share of Fully Diluted Common Stock (other than
shares of Common Stock included in (A)(x) or employee stock options) outstanding
immediately prior to such issuance or sale and the Exercise Price applicable to
such share of Fully Diluted Common Stock and (B) the denominator of which shall
be the sum of (x) the number of shares of Common Stock outstanding immediately
prior to the time of such issuance or sale multiplied by the Current Valuation
Per Common Share immediately prior to such issuance or sale, plus (y) the
aggregate of the product of each share of Fully Diluted Common Stock (other than
shares of Common Stock included in (B)(x) or employee stock options) outstanding
immediately prior to such issuance or sale and the Exercise Price applicable to
such share of Fully Diluted Common Stock, plus (z) the aggregate consideration,
if any, to be received by the Corporation upon such issuance or sale. In case
any portion of the consideration to be received by the Corporation shall be in a
form other than cash, the fair market value of such noncash consideration shall
be utilized in the foregoing computation. Such fair market value shall be
determined by the Board of Directors of the Corporation; provided that if the
holders of 25% of the Series C Preferred Stock shall object to any such
determination, the Board of Directors shall retain an independent appraiser
reasonably satisfactory to such holders to determine such fair market value. The
holders shall be notified promptly of any consideration other than cash to be
received by the Corporation and furnished with a description of the
consideration and the fair market value thereof, as determined by the Board of
Directors.
(iii) In case the Corporation shall at any time after August
3, 1998 fix a record date for the issuance of rights, options or warrants to the
holders of its Common Stock or other securities of the Corporation entitling
such holders to subscribe for or purchase shares of Common Stock (or securities
convertible into shares of Common Stock) at a price per share of Common Stock
(or having a conversion price per share of Common Stock, if a security
convertible into shares of Common Stock) less than the then Conversion Price Per
Common Share on such record date, the maximum number of shares of Common Stock
issuable upon exercise of such rights, options or warrants (or conversion of
such convertible securities) shall be deemed to have been issued and outstanding
as of such record date and the Series C Conversion Ratio shall be adjusted
pursuant to Article IV(C), paragraph (7)(h)(ii) hereof, as though such maximum
number of shares of Common Stock had been so issued for the aggregate
consideration payable by the holders of such rights, options, warrants or
convertible securities prior to their receipt of such shares of Common Stock. In
case any portion of such consideration shall be in a form other than cash, the
fair market value of such noncash consideration shall be determined as set forth
in Article IV(C), paragraph (7)(h)(ii) hereof. Such adjustment shall be made
successively whenever such record date is fixed; and in the event that such
rights, options or warrants are not so issued or expire unexercised, or in the
event of a change in the number of shares of Common Stock to which the holders
of such rights, options or warrants are entitled (other than pursuant to
adjustment provisions therein comparable to those contained in this Article
IV(C), paragraph (7)(h)), the Series C Conversion Ratio shall again be adjusted
to be the Series C Conversion Ratio which would then be in effect if such record
date had not been fixed, in the former event, or the Series C Conversion Ratio
which would then be in effect if such
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holder had initially been entitled to such changed number of shares of Common
Stock, in the latter event.
(iv) In case the Corporation shall at any time after August
3, 1998 issue rights, options (other than options issued pursuant to a plan
described in clause II of Article IV(C), paragraph (h)(ii)) or warrants (other
than warrants described in clause IV of Article IV(C), paragraph (h) (ii))
entitling the holders thereof to subscribe for or purchase Common Stock (or
securities convertible into shares of Common Stock) or shall issue convertible
securities, and the price per share of Common Stock of such rights, options,
warrants or convertible securities (including, in the case of rights, options or
warrants, the price at which they may be exercised) is less than the then
Conversion Price Per Common Share, the maximum number of shares of Common Stock
issuable upon exercise of such rights, options or warrants or upon conversion of
such convertible securities shall be deemed to have been issued and outstanding
as of the date of such sale or issuance, and the Series C Conversion Ratio shall
be adjusted pursuant to Article IV(C), paragraph (7)(h)(ii) hereof as though
such maximum number of shares of Common Stock had been so issued for an
aggregate consideration equal to the aggregate consideration paid for such
rights, options, warrants or convertible securities and the aggregate
consideration payable by the holders of such rights, options, warrants or
convertible securities prior to their receipt of such shares of Common Stock. In
case any portion of such consideration shall be in a form other than cash, the
fair market value of such noncash consideration shall be determined as set forth
in Article IV(C), paragraph (7)(h)(ii) hereof. Such adjustment shall be made
successively whenever such rights, options, warrants or convertible securities
are issued; and in the event that such rights, options or warrants expire
unexercised, or in the event of a change in the number of shares of Common Stock
to which the holders of such rights, options, warrants or convertible securities
are entitled (other than pursuant to adjustment provisions therein comparable to
those contained in this Article IV(C), paragraph (7)(h)), the Series C
Conversion Ratio shall again be adjusted to be the Series C Conversion Ratio
which would then be in effect if such rights, options, warrants or convertible
securities had not been issued, in the former event, or the Series C Conversion
Ratio which would then be in effect if such holders had initially been entitled
to such changed number of shares of Common Stock, in the latter event. No
adjustment of the Series C Conversion Ratio shall be made pursuant to this
Article IV(C), paragraph (7)(h)(iv) to the extent that the Series C Conversion
Ratio shall have been adjusted pursuant to Article IV(C), paragraph (7)(h)(iii)
upon the setting of any record date relating to such rights, options, warrants
or convertible securities and such adjustment fully reflects the number of
shares of Common Stock to which the holders of such rights, options, warrants or
convertible securities are entitled and the price payable therefor.
(v) In case the Corporation shall at any time after August
3, 1998 fix a record date for the making of a distribution to holders of Common
Stock (including any such distribution made in connection with a consolidation
or merger in which the Corporation is the continuing corporation, other than any
such consolidation or merger which results in the payment to holders of Series C
Preferred Stock of the liquidation preference as provided in Article IV(C),
paragraph (4)) of evidences of indebtedness, assets or other property (other
than dividends payable in Common Stock or rights, options or warrants referred
to in, and for which an adjustment is made pursuant to Article IV(C), paragraph
(7)(h)(iii) hereof), the Series C Conversion Ratio to be in effect after such
record date shall be determined by multiplying the Series C Conversion Ratio in
effect immediately prior to such record date by a fraction, (A) the numerator of
which shall be the Current Valuation Per Common Share on such record date, and
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(B) the denominator of which shall be the Current Valuation Per Common Share on
such record date, less the fair market value (determined as set forth in Article
IV(C), paragraph (7)(h)(ii) hereof) of the portion of the assets, other property
or evidence of indebtedness so to be distributed which is applicable to one
share of Common Stock. Such adjustments shall be made successively whenever such
a record date is fixed; and in the event that such distribution is not so made,
the Series C Conversion Ratio shall again be adjusted to be the Series C
Conversion Ratio which would then be in effect if such record date had not been
fixed.
(vi) For purposes of any computation under Article IV(C),
paragraph (7)(g) or paragraph (7)(h), the number of shares of Common Stock
outstanding at any given time shall not include shares owned or held by or for
the account of the Corporation.
(vii) No adjustment to the Series C Conversion Ratio pursuant
to Article IV(C), paragraphs (7)(h)(ii), (iii), (iv) and (v) above shall be
required unless such adjustment would require an increase or decrease of at
least 1% in the Series C Conversion Ratio; provided however, that any
adjustments which by reason of this Article IV(C), paragraph (7)(h)(vii) are not
required to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations under this Article IV(C), paragraph
(7)(h) shall be made to the nearest four decimal points.
(viii) In the event that, at any time as a result of the
provisions of this Article IV(C), paragraph (7)(h), the holders of the Series C
Preferred Stock upon subsequent conversion shall become entitled to receive any
shares of capital stock of the Corporation other than Common Stock, the number
of such other shares so receivable upon conversion of the Series C Preferred
Stock shall thereafter be subject to adjustment from time to time in a manner
and on terms as nearly equivalent as practicable to the provisions contained
herein.
(ix) In the event:
(A) of any capital reorganization or reclassification of
the Common Stock (other than a subdivision or combination of the
outstanding Common Stock and other than a change in par value of
the Common Stock) or of any consolidation or merger to which the
Corporation is a party and for which approval of any stockholders
of the Corporation is required (other than a consolidation or
merger in which the Corporation is the continuing corporation and
that does not result in any reclassification or change of the
Common Stock outstanding), or of the conveyance or transfer of
the properties and assets of the Corporation substantially as an
entirety; or
(B) of the voluntary or involuntary dissolution,
liquidation or winding-up of the Corporation; or
(C) the Corporation proposes to take any action (other than
actions of the character described in Article IV(C), paragraph
(7)(h)(i)(I) or (II)) that would require an adjustment pursuant
to this Article IV(C), paragraph (7)(h) to the number of shares
purchasable upon conversion;
then the Corporation shall cause to be mailed by first-class mail to the holders
of Series C Preferred Stock, at least five days prior to the applicable record
or effective date hereinafter
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<PAGE> 34
specified (10 days in the case of the events referred to in clauses (A) and (B)
above), a notice stating (x) the date as of which the holders of Common Stock of
record to be entitled to receive any such rights, warrants or distributions are
to be determined, or (y) the date on which any such consolidation, merger,
conveyance, transfer, dissolution, liquidation or winding-up is expected to
become effective, and the date as of which it is expected that holders of Common
Stock of record shall be entitled to exchange their shares of Common Stock for
securities or other property, if any, deliverable upon such reorganization,
reclassification, consolidation, merger, conveyance, transfer, dissolution,
liquidation or winding-up.
(i) All adjustments pursuant to this Article IV(C), paragraph
(7) shall be notified to the holders of this Series C Preferred Stock and such
notice shall be accompanied by a schedule of computation of the adjustments.
(8) Voting Rights.
(a) Except as otherwise provided by applicable law, the holders
of the shares of Series C Preferred Stock (i) shall be entitled to vote with the
holders of the Common Stock on all matters submitted for a vote of holders of
Common Stock, (ii) shall be entitled to a number of votes equal to the number of
votes to which shares of Common Stock issuable upon conversion of such shares of
Series C Preferred Stock would have been entitled if such shares of Common Stock
had been outstanding at the time of the applicable vote and related record date
and (iii) shall be entitled to notice of any stockholders' meeting in accordance
with the Amended and Restated Certificate of Incorporation and Bylaws of the
Corporation. Except as otherwise provided by applicable law and as set forth in
Article IV(D) below, the shares of Series C Preferred Stock shall vote together
with the shares of Common Stock as a single class.
(b) Except as otherwise required by applicable law or as set
forth herein, the shares of Series C Preferred Stock shall not have any
relative, participating, optional or other special voting rights and powers and
the consent of the holders thereof shall not be required for the taking of any
corporate action.
(9) Reports. So long as any of the Series C Preferred Stock is
outstanding, the Corporation will furnish the holders thereof with the quarterly
and annual financial reports that the Corporation is required to file with the
Securities and Exchange Commission pursuant to Section 13 or Section 15(d) of
the Securities Exchange Act of 1934 or, in the event the Corporation is not
required to file such reports, reports containing substantially the same
information as would be required in such reports (it being understood that the
foregoing shall not be construed to require presentation in the manner required
by such Act and the regulations thereunder so long as the data required
thereunder is so provided). The Corporation will also deliver to the holders of
the Series C Preferred Stock (i) a copy of the Corporation's annual operating
plan at least 30 days prior to the beginning of the Corporation's fiscal year
and (ii) within 30 days of the end of each month, monthly financial statements
compared against the annual operating plan.
(D) Special Voting Rights of Series B and Series C Preferred
Stock
(1) Special Voting Rights of Series B Preferred Stock. So long
as there remain outstanding Notes and/or shares of Series B Preferred Stock
representing at least 25% of
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the aggregate number of shares of Fully Diluted Common Stock represented by the
Notes and shares of Series B Preferred Stock immediately following August 3,
1998 (determined taking into account any adjustment in accordance with the terms
of the Notes and the Series B Preferred Stock), the Corporation shall not,
without the written consent or affirmative vote at a meeting called for that
purpose of holders of 66 2/3% of the shares of Series B Preferred Stock then
outstanding, voting as a separate class, take, or permit any Significant
Subsidiary to take, any of the following actions:
(i) amend, alter or repeal, whether by merger, consolidation, or
otherwise, any of the provisions of the Amended and Restated
Certificate of Incorporation or the Bylaws of the Corporation or
any Significant Subsidiary in a manner adverse to the
preferences, privileges, voting rights or powers of the Series B
Preferred Stock;
(ii) voluntarily sell, convey, exchange or transfer (for cash,
shares of stock, securities or other consideration) all or
substantially all of the property or assets of the Corporation or
any Significant Subsidiary or merge into or consolidate with any
other corporation unless the holders of Common Stock would
receive in connection therewith consideration per share of Common
Stock held by them at least equal to $4.67 per share (as adjusted
to take into account any subdivisions, combinations or
reclassifications of the Common Stock after August 3, 1998); or
(iii) create, authorize, or issue any class or series of stock
ranking prior to the Series B Preferred Stock (whether with
respect to dividends or upon liquidation, dissolution or winding
up) or any Parity Securities, or increase the authorized number
of shares of any such class or series, or reclassify any
authorized stock of the Corporation into any such prior shares or
Parity Securities, or create, authorize or issue any obligation
or security convertible into or evidencing the right to purchase
any such prior shares or Parity Securities.
(2) Special Voting Rights of Series C Preferred Stock. So long as
there remain outstanding shares of Series C Preferred Stock representing at
least 25% of the aggregate number of shares of Fully Diluted Common Stock
represented by shares of Series C Preferred Stock immediately following August
3, 1998 (determined taking into account any adjustment in accordance with the
terms of the Series C Preferred Stock), the Corporation shall not, without the
written consent or affirmative vote at a meeting called for that purpose of
holders of a majority of the shares of Series C Preferred Stock then
outstanding, voting as a separate class, take, or permit any Significant
Subsidiary to take, any of the following actions:
(i) amend, alter or repeal, whether by merger, consolidation, or
otherwise, any of the provisions of the Amended and Restated
Certificate of Incorporation or the Bylaws of the Corporation or
any Significant Subsidiary in a manner adverse to the
preferences, privileges, voting rights or powers of the Series C
Preferred Stock; or
(ii) create, authorize, or issue any class or series of stock
ranking prior to the Series C Preferred Stock (whether with
respect to dividends or upon liquidation, dissolution or winding
up) or any Parity Securities, or increase the authorized
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number of shares of any such class or series, or reclassify any
authorized stock of the Corporation into any such prior shares or
Parity Securities, or create, authorize or issue any obligation
or security convertible into or evidencing the right to purchase
any such prior shares or Parity Securities.
(3) Special Voting Rights of Series B Preferred Stock and Series
C Preferred Stock. So long as there remain outstanding Notes, shares of Series B
Preferred Stock and/or shares of Series C Preferred Stock representing at least
25% of the aggregate number of shares of Fully Diluted Common Stock represented
by the Notes, shares of Series B Preferred Stock and shares of Series C
Preferred Stock immediately following August 3, 1998 (determined taking into
account any adjustment in accordance with the terms of the Notes, the Series B
Preferred Stock and the Series C Preferred Stock), the Corporation shall not,
without the written consent or affirmative vote at a meeting called for that
purpose of holders of 66 2/3% of the shares of Series B Preferred Stock and
Series C Preferred Stock then outstanding, voting as a separate class, take, or
permit any Significant Subsidiary to take, any of the following actions:
(i) voluntarily liquidate, dissolve, or wind up the Corporation
or any Significant Subsidiary;
(ii) increase the size of the Board of Directors of the
Corporation or any Significant Subsidiary;
(iii)(a) incur, assume, or at any time be liable with respect to,
any Debt, (b) refinance or renew any Debt or (c) discharge, repay
(other than pursuant to regularly scheduled payments thereof) or
cancel any Debt, other than (1) in the case of clause (a), (w)
any Debt at any time after the Closing which, after giving effect
to the incurrence or assumption thereof or liability therefor,
would not result in aggregate Debt outstanding at such time
(other than Debt then outstanding in respect of the Notes and the
Credit Agreement and Senior Notes (as such terms are defined
below), or any customer deposits) being more than $15,000,000,
(x) any Debt under the Credit Agreement (as it may be amended,
modified, supplemented or restated from time to time, the "Credit
Agreement") dated as of January 30, 1998, among Fleet National
Bank and each of the other Lenders (as defined in the Credit
Agreement) party thereto, and the Corporation, as borrower, and
related documents (provided, that the aggregate principal amount
of Debt outstanding under the Credit Agreement at any time shall
not exceed $40,000,000, which amount is exclusive of amounts that
may be owing in respect to interest, fees, costs, expenses,
indemnities and the like), (y) any Debt related to the 10 3/4%
Senior Notes of the Corporation due 2005, issued by the
Corporation pursuant to the Purchase Agreement between the
Corporation and Donaldson, Lufkin & Jenrette Securities
Corporation dated January 23, 1998 (the "Senior Notes")
(provided, that the aggregate principal amount of Debt
outstanding under the Senior Notes shall not exceed $110,000,000,
which amount is exclusive of amounts that may be owing in respect
to interest, fees, costs, expenses, indemnities and the like),
and (z) any Debt incurred the proceeds of which are to be applied
by the Corporation to redeem all (but not less than all) of the
then outstanding Notes, and shares of Series B Preferred Stock
and shares of Series C Preferred Stock in accordance with the
redemption provisions applicable
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to such securities and (2) in the case of clause (b) or (c), (x)
any extensions, renewals, refundings and refinancings of the Debt
outstanding under the Senior Notes and Credit Agreement
including, without limitation, the exchange of the Senior Notes
with new notes registered under the Securities Act of 1933, as
amended, as contemplated by the Registration Rights Agreement (as
defined in the Purchase Agreement) entered into upon the closing
of the Purchase Agreement and (y) any repayment or prepayment of
revolving working capital Debt under the Credit Agreement or any
mandatory prepayment or redemption of Debt required under the
terms and conditions of the Credit Agreement and the Indenture
(as defined in the Purchase Agreement) (including any indenture
related to the Senior Notes to be issued in the exchange offer
contemplated by the Purchase Agreement and the Registration
Rights Agreement) related to the Senior Notes dated January 30,
1998, between the Corporation and State Street Bank and Trust
Company of California, N.A. as Trustee;
(iv) except as expressly permitted in Article (IV)(B), paragraph
(5)(a) and Article (IV)(C), paragraph (5)(a), or as expressly
required in this Amended and Restated Certificate of
Incorporation, pay or declare dividends or distributions on the
capital stock of the Corporation or any Significant Subsidiary;
or
(v) except as expressly permitted in Article (IV)(B), paragraph
(5)(a) and Article (IV)(C), paragraph (5)(a), or as expressly
required in this Amended and Restated Certificate of
Incorporation, redeem or repurchase any shares of capital stock
of the Corporation or any Significant Subsidiary, phantom equity
or similar rights or interests or any warrants, options or other
rights to purchase, substitute for or acquire shares of capital
stock, phantom equity or similar rights or interests or
securities convertible into or exchangeable for any shares of
capital stock, phantom equity or similar rights or interests of
the Corporation or any Significant Subsidiary, except repurchases
of options or capital stock from employees at cost.
(4) Prohibition of Payments Pending Redemption of the Series C
Preferred Stock. Notwithstanding anything to the contrary contained in this
Article IV and except as provided in Article IV(A), paragraph (8) and Article
IV(B), paragraph (10), no payments of any kind (including but not limited to any
dividend or redemption payments) payable on either the Series A Preferred Stock
or Series B Preferred Stock shall be made unless and until at least 95% of the
shares of Series C Preferred Stock issued pursuant to the Series C Preferred
Stock Securities Purchase Agreement entered into by the Corporation on or about
August 3, 1998 (the "Series C Purchase Agreement") shall have first been
redeemed in accordance with Article IV(C), paragraph (5) or converted.
Additionally, pursuant to the terms of this Article IV and the and conditions of
the Inter-Securityholder Agreement entered into by the Corporation on or about
August 3, 1998 (the "Inter-Securityholder Agreement"), no interest, principal or
other payments of any kind shall be payable on the Notes (as defined in this
Amended and Restated Certificate of Incorporation and as specifically identified
on Schedule A to the Inter-Securityholder Agreement), and the Corporation shall
take no action to amend or exchange the Notes to provide any payments to the
holders of such Notes in contravention of this Article IV(C). The limitation on
payments set forth in this Article IV(D), paragraph (4) shall terminate upon (a)
a consolidation or merger of the Corporation with one or more corporations, or
(b) a sale or transfer of all or substantially all of the Corporation's stock or
assets; provided that, in the
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event of (a) or (b), the Series C Preferred Stock has received its full
liquidation preference in accordance with Article IV(C), paragraph (4).
(E) General Provisions Applicable to the Preferred Stock.
(1) Definitions. The following terms, as used in this Article IV,
have the following meanings:
"Bridge Securities Purchase Agreement" means the Bridge
Securities Purchase Agreement dated as of November 23, 1994 between the
Corporation and PM Funding, Inc.
"Common Stock" means the common stock of the Corporation and all
shares hereafter authorized of any class of common stock of the Corporation
which term shall include, in the case of a reclassification, recapitalization or
other change in such common stock, or in the case of a consolidation or merger
of the Corporation with or into another Person, such consideration to which a
holder of a share of common stock of the Corporation would have been entitled
upon the occurrence of such event.
"Conversion Price Per Common Share" shall mean, on any
determination date, the amount in dollars which is equal to (i) with respect to
the Series A Preferred Stock, $1.5555 divided by the Series A Conversion Ratio
immediately prior to such date, (ii) with respect to the Series B Preferred
Stock, $1.5555 divided by the Series B Conversion Ratio immediately prior to
such date and (iii) with respect to the Series C Preferred Stock, $4.00 divided
by the Series C Conversion Ratio immediately prior to such date (unless after
August 3, 1998 and prior to August 3, 1999, the Corporation shall have issued or
sold, or is deemed to have issued or sold shares of Common Stock at a price per
share less than the Conversion Price Per Common Share then in effect, in which
case the $4.00 amount in this item (iii) shall be replaced with the actual price
per share that the Common Stock was issued or sold, or is deemed to be issued or
sold, in the dilutive financing).
"Current Market Price Per Common Share" shall mean, on any
determination date, the average (weighted by daily trading volume) of the Daily
Prices per share of the applicable class of Common Stock for the 20 consecutive
trading days immediately prior to such date.
"Current Valuation Per Common Share" means, on any determination
date, the greater of the Current Market Price Per Common Share and the
Conversion Price Per Common Share.
"Daily Price" means, on any determination date, (i) if the shares
of such class of Common Stock then are listed and traded on the New York Stock
Exchange, Inc. ("NYSE"), the closing price on such day as reported on the NYSE
Composite Transactions Tape; (ii) if the shares of such class of Common Stock
then are not listed and traded on the NYSE, the closing price on such day as
reported by the principal national securities exchange on which the shares are
listed and traded; (iii) if the shares of such class of Common Stock then are
not listed and traded on any such securities exchange, the last reported sale
price on such day on the National Market of the National Association of
Securities Dealers, Inc. Automated Quotation System ("NASDAQ"); (iv) if the
shares of such class of Common Stock then are not traded on the NASDAQ National
Market, the average of the highest reported bid and lowest reported asked
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price on such day as reported by NASDAQ; or (v) if the shares of such class of
Common Stock are not so listed or admitted to unlisted trading privileges and
bid and asked prices are not so reported, an amount, not less than book value,
determined in good faith to be the fair market value in such reasonable manner
as may be prescribed by the Board of Directors of the Corporation.
"Debt" of any Person means at any date, without duplication, (i)
all obligations, including accrued and unpaid interest and premium, of such
Person for borrowed money, (ii) all obligations of such Person evidenced by
bonds, debentures, notes or other similar instruments, (iii) all obligations of
such Person in respect of letters of credit, bankers' acceptance or other
similar instruments (or reimbursement obligations with respect thereto), (iv)
all obligations of such Person to pay the deferred purchase price of property or
services, except Trade Payables, (v) all obligations of such Person as lessee
which are capitalized in accordance with generally accepted accounting
principles, (vi) all Debt of others secured by a Lien on any asset of such
Person, whether or not such Debt is assumed by such Person, and (vii) all Debt
of others Guaranteed by such Person.
"Derivative Security" means any security convertible into or
exchangeable for Common Stock, or any stock appreciation right or option,
warrant or other irrevocable right to purchase or subscribe for Common Stock or
any security convertible into or exchangeable for Common Stock.
"Exercise Price" means, with respect to any Derivative Security
on any determination date, the exercise price or conversion price per share of
Common Stock applicable to such Derivative Security on such date.
"Fully Diluted Common Stock" means, with respect to Common Stock
and without duplication, all outstanding shares and all shares issuable in
respect of securities convertible into or exchangeable for Common Stock, stock
appreciation rights or options, warrants and other irrevocable rights to
purchase or subscribe for Common Stock or securities convertible into or
exchangeable for Common Stock, and any Person shall be deemed to own such number
of Fully Diluted shares of Common Stock as such Person has the right to acquire
from any other Person (including the Issuer).
"Guarantee" by any Person means any obligation, contingent or
otherwise, of such Person directly or indirectly guaranteeing any Debt of any
other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Debt of such other Person (whether arising by virtue of partnership
arrangements, by agreement to keep-well, to purchase assets, goods, securities
or services, to take-or-pay, or to maintain financial statement conditions or
otherwise) or (ii) entered into for the purpose of assuring in any other manner
the obligee of such Debt for the payment thereof or to protect such obligee
against loss in respect thereof (in whole or in part); provided that the term
Guarantee shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning.
"Lien" means, with respect to any asset, any mortgage, lien,
pledge, charge, security interest or encumbrance of any kind in respect of such
asset. For the purposes of the
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Notes, the Corporation shall be deemed to own subject to a Lien any asset which
it has acquired or holds subject to the interest of a vendor or lessor under any
conditional sale agreement, capitalized lease or other title retention agreement
relating to such asset.
"Notes" shall have the meaning set forth in the Securities
Purchase Agreement.
"outstanding," when used with reference to shares of stock, shall
mean issued shares, excluding shares held by the Corporation or a subsidiary.
"Person" means any corporation, limited liability company,
partnership, trust, organization, association, other entity or individual.
"Securities Purchase Agreement" means the Securities Purchase
Agreement dated as of November 23, 1994 among the Corporation, the DLJ Buyers
(as defined therein), Arthur J. Cormier and John F. Schaefer.
"Securityholders Agreement" means the Amended and Restated
Securityholders Agreement dated as of August 3, 1998 among the Corporation, the
DLJ Entities (as defined therein), PM Funding, Inc., Arthur J. Cormier, John F.
Schaefer, certain other securityholders and ABS Capital Partners II, L.P.
"Series A Trigger Event" means the earlier to occur of (i) the
completion of an initial public offering of shares of Common Stock pursuant to
an effective registration statement resulting in net proceeds to the Corporation
of not less than $15 million at a price per share of Common Stock of not less
than $6.00 (as adjusted to take into account any subdivisions, combinations or
reclassifications of the Common Stock after August 3, 1998) or (ii) the
conversion into Common Stock of Notes and/or shares of Series B Preferred Stock
and/or shares of Series C Preferred Stock representing at least 30% of the
aggregate number of shares of Fully Diluted Common Stock represented by the
Notes, shares of Series B Preferred Stock and shares of Series C Preferred Stock
immediately following August 3, 1998 (taking into account any adjustment in
accordance with the terms of the Notes, the Series B Preferred Stock and the
Series C Preferred Stock).
"Series B Trigger Event" and "Series C Trigger Event" means the
completion of an initial public offering of shares of Common Stock pursuant to
an effective registration statement resulting in net proceeds to the Corporation
of not less than $15 million at a price per share of Common Stock of not less
than $6.00 per share (as adjusted to take into account any subdivisions,
combinations or reclassifications of the Common Stock after the date hereof).
"Significant Subsidiary" means any Subsidiary that would meet the
definition of "Significant Subsidiary" under Regulation S-X promulgated under
the Securities Exchange Act of 1934 if the Corporation were subject to the
periodic reporting obligations set forth in such Act.
"Subsidiary" means any entity of which securities or other
ownership interests having ordinary voting power to elect a majority of the
board of directors or persons performing similar functions are at the time
directly or indirectly owned by the Corporation.
40
<PAGE> 41
"Trade Payables" means accounts payable or any other indebtedness
or monetary obligations to trade creditors created or assumed by the Corporation
or any Subsidiary of the Corporation in the ordinary course of business in
connection with the obtaining of materials or services.
(2) Headings. The headings of the paragraphs, subparagraphs,
clauses and subclauses of this Article IV are for convenience of reference only
and shall not define, limit or affect any of the provisions hereof.
ARTICLE V
The number of directors of the Corporation shall be fixed from
time to time by, or in the manner provided in, the Bylaws or amendment thereof
duly adopted by the Board of Directors or by the stockholders of the
Corporation.
ARTICLE VI
A director of the Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director; provided, however, that the foregoing shall not eliminate or
limit the liability of a director (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the General Corporation Law of Delaware or (iv)
for any transaction from which the director derived an improper personal
benefit. If the General Corporation Law of Delaware is hereafter amended to
permit further elimination or limitation of the personal liability of directors,
then the liability of a director of the Corporation shall be eliminated or
limited to the fullest extent permitted by the General Corporation Law of
Delaware as so amended. Any repeal or modification of this Article VI shall not
adversely affect any right or protection of a director of the Corporation
existing at the time of such repeal or modification.
ARTICLE VII
To the fullest extent permitted by applicable law, the
Corporation shall indemnify (and advance expenses to) its directors and is also
authorized to provide indemnification of (and advancement of expenses to) its
officers and any other person to which Delaware law permits this Corporation to
provide indemnification through Bylaw provisions, agreements with such agents or
other persons, vote of stockholders or disinterested directors or otherwise,
with respect to actions for breach of duty to the Corporation, its stockholders,
and others. Any repeal or modification of any of the foregoing provisions of
this Article VII shall not adversely affect any right or protection of a
director, officer, agent or other person existing at the time of, or increase
the liability of any director of this Corporation with respect to any acts or
omissions of such director, officer or agent occurring prior to such repeal or
modification.
* * *
THREE: The foregoing amendments have been duly approved by the
required vote of stockholders in accordance with Section 228 of the Delaware
General
41
<PAGE> 42
Corporation Law and the Certificate of Incorporation of the Corporation.
The total number of currently outstanding shares of Common Stock, Series A
Convertible Preferred Stock and Series B Convertible Participating Preferred
Stock of the Corporation are 5,600,057 shares, 412,500 shares and 192,864
shares, respectively. The number of shares voting in favor of the amendment
equaled or exceeded the vote required. The vote required was the affirmative
vote of (i) the holders of a majority of the total outstanding shares of the
Corporation, (ii) the holders of a majority of the outstanding shares of Series
A Convertible Preferred Stock voting together as a single class and (iii) the
holders of at least 66-2/3% of the outstanding shares of Series B Convertible
Participating Preferred Stock voting together as a single class.
42
<PAGE> 43
IN WITNESS WHEREOF, the undersigned have executed this Amended
and Restated Certificate of Incorporation on July 30, 1998.
/s/ JOHN F. SCHAEFER
-----------------------------------
John F. Schaefer, President
/s/ RICHARD A. FINK
-----------------------------------
Richard A. Fink, Secretary
43
<PAGE> 1
EXHIBIT 10.11
AMENDED AND RESTATED SECURITYHOLDERS AGREEMENT
dated as of August 3, 1998
among
DLJ MERCHANT BANKING PARTNERS, L.P.,
DLJ INTERNATIONAL PARTNERS, C.V.,
DLJ OFFSHORE PARTNERS, C.V.,
DLJ MERCHANT BANKING FUNDING, INC.,
DLJ FIRST ESC, L.P.,
DLJ ESC II, L.P.,
DLJ CAPITAL CORPORATION,
SPROUT GROWTH II, L.P.,
SPROUT CAPITAL VI, L.P.,
PM FUNDING, INC.,
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION,
ABS CAPITAL PARTNERS II, L.P.,
ARTHUR J. CORMIER,
JOHN F. SCHAEFER,
THE FREEDLAND 1994 UNITRUST,
THE MORARU 1994 UNITRUST,
THE LE 1994 UNITRUST,
THE NAJJAR 1994 UNITRUST,
NEIL H. BRUMBERGER,
HART H. BRUMBERGER,
ROGER D. PETERS AND MARY ANNE CHRISTINE PETERS LIVING
TRUST,
JEFFREY K. RHOTON AND YVONNE H. RHOTON LIVING TRUST,
RAYMOND M. KARAM,
RANDALL E. BYE,
PEDRO A. AYLWIN,
DR. GILBERT F. AMELIO,
WILLIAM E. TERRY
and
PHASE METRICS, INC.
<PAGE> 2
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
ARTICLE 1
DEFINITIONS
<S> <C> <C>
SECTION 1.01. Definitions.....................................................2
ARTICLE 2
CORPORATE GOVERNANCE
SECTION 2.01. Composition of the Board.......................................10
SECTION 2.02. Removal........................................................10
SECTION 2.03. Vacancies......................................................11
SECTION 2.04. Termination of Rights and Obligations..........................11
SECTION 2.05. Action by the Board............................................12
SECTION 2.06. Certificate of Incorporation and Bylaws........................12
ARTICLE 3
RESTRICTIONS ON TRANSFER
SECTION 3.01. General........................................................12
SECTION 3.02. Legend on Securities...........................................13
SECTION 3.03. Permitted Transferees..........................................14
ARTICLE 4
RIGHTS OF FIRST REFUSAL; TAG ALONG RIGHTS; PREEMPTIVE RIGHTS; DRAG ALONG
RIGHTS; TERMINATION AND INAPPLICABILITY OF PROVISIONS
SECTION 4.01. Right of First Refusal; Tag along Rights.......................14
SECTION 4.02. Preemptive Rights..............................................20
SECTION 4.03. Right to Compel Participation in Certain Transfers.............21
SECTION 4.04. Improper Transfer..............................................23
SECTION 4.05. Termination of Agreement.......................................23
SECTION 4.06. Inapplicability of Transfer Restrictions and Corporate
Governance Provisions to PM Funding, Inc..............................23
ARTICLE 5
REGISTRATION RIGHTS
SECTION 5.01. Demand Registration............................................24
SECTION 5.02. Incidental Registration........................................26
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
SECTION 5.03. Holdback Agreements............................................28
SECTION 5.04. Registration Procedures........................................29
SECTION 5.05. Indemnification by the Issuer..................................32
SECTION 5.06. Indemnification by Participating Securityholders...............32
SECTION 5.07. Conduct of Indemnification Proceedings.........................33
SECTION 5.08. Contribution...................................................34
SECTION 5.09. Participation in Public Offering...............................36
ARTICLE 6
CERTAIN COVENANTS AND AGREEMENTS
SECTION 6.01. Confidentiality................................................36
SECTION 6.02. No Inconsistent Agreements.....................................37
ARTICLE 7
MISCELLANEOUS
SECTION 7.01. Entire Agreement...............................................37
SECTION 7.02. Binding Effect; Benefit........................................37
SECTION 7.03. Assignability..................................................38
SECTION 7.04. Amendment; Waiver; Termination.................................38
SECTION 7.05. Exclusive Financial Advisor and Investment Banking
Advisor...............................................................38
SECTION 7.06. Notices........................................................38
SECTION 7.07. Headings.......................................................44
SECTION 7.08. Counterparts...................................................44
SECTION 7.09. Applicable Law.................................................44
SECTION 7.10. Specific Enforcement...........................................44
SECTION 7.11. Consent to Jurisdiction........................................44
</TABLE>
ii
<PAGE> 4
AMENDED AND RESTATED SECURITYHOLDERS AGREEMENT
AMENDED AND RESTATED AGREEMENT dated as of August 3,
1998 among DLJ Merchant Banking Partners, L.P., DLJ International Partners,
C.V., DLJ Offshore Partners, C.V., DLJ Merchant Banking Funding, Inc., DLJ
First ESC, L.P., DLJ ESC II, L.P., DLJ Capital Corporation, Sprout Growth II,
L.P., Sprout Capital VI, L.P., PM Funding, Inc., a Delaware corporation,
Donaldson Lufkin & Jenrette Securities Corporation (each of the foregoing, a
"DLJ ENTITY", and collectively, the "DLJ ENTITIES"), ABS Capital Partners II,
L.P. ("ABS"), Arthur J. Cormier ("CORMIER"), John F. Schaefer ("SCHAEFER"),
Phase Metrics, Inc. (the "ISSUER"), Richard J. Freedland and Nanette A.
Freedland as Trustees of the Freedland 1994 Unitrust, Alex Moraru and Liliana
Moraru as Trustees of the Moraru 1994 Unitrust, Hung Ba Le and Anh Le as
Trustees of the Le 1994 Unitrust, Loai Najjar and Mickie Najjar as Trustees of
the Najjar 1994 Unitrust (the "SHAREHOLDER TRUSTS"), Neil A. Brumberger and Hart
H. Brumberger (collectively, "BRUMBERGER"), Roger D. and Mary Anne Christine
Peters and Roger D. Peters and Mary Anne Christine Peters, as trustees for the
Roger D. Peters and Mary Anne Christine Peters Living Trust (collectively,
"PETERS"); Jeffrey K. and Yvonne H. Rhoton and Jeffrey K. Rhoton and Yvonne H.
Rhoton, as trustees for the Jeffrey K. Rhoton and Yvonne H. Rhoton Living Trust
(collectively, "RHOTONS"), Raymond M. Karam ("KARAM"), Randall E. Bye ("BYE"),
Pedro A. Aylwin ("AYLWIN"), Dr. Gilbert F. Amelio ("AMELIO") and William E.
Terry ("TERRY").
W I T N E S S E T H :
WHEREAS, the DLJ Entities, Cormier, Schaefer and the Issuer entered into
a Stockholders Agreement dated as of November 23, 1994 (the "ORIGINAL
AGREEMENT") in connection with the acquisition of securities of the Issuer by
certain of such parties pursuant to the Securities Purchase Agreement dated as
of November 23, 1994 (the "1994 SECURITIES PURCHASE AGREEMENT") among the DLJ
Entities (other than PM Funding, Inc.) Cormier, Schaefer and the Issuer;
WHEREAS, the First Amendment to Securityholders Agreement dated as of
June 30, 1995 amended the Original Agreement in certain respects and made the
Shareholder Trusts parties to the Original Agreement;
WHEREAS, the Second Amendment to Securityholders Agreement dated as of
July 18, 1995 further amended the Original Agreement as set forth therein and
made Brumberger a party to the Original Agreement;
<PAGE> 5
WHEREAS, the Third Amendment to Securityholders Agreement dated as of
January 18, 1996 further amended the Original Agreement as set forth therein and
made Peters and Rhotons parties to the Original Agreement;
WHEREAS, the Fourth Amendment to Securityholders Agreement dated as of
August 23, 1996 further amended the Original Agreement as set forth therein;
WHEREAS, the Fifth Amendment to Securityholders Agreement dated as of
December 31, 1996 further amended the Original Agreement as set forth therein
and made Karam, Bye and Aylwin parties to the Original Agreement; and
WHEREAS, pursuant to the Securities Purchase Agreement dated as of July
31, 1998 (the "SECURITIES PURCHASE AGREEMENT") among the DLJ Entities (other
than PM Funding, Inc.), ABS and the Issuer, the DLJ Entities (other than PM
Funding, Inc., DLJ International Partners, C.V. and DLJ Offshore Partners, C.V.)
and ABS, concurrently with the execution of this Agreement, are acquiring
securities of the Issuer; and
WHEREAS, the parties to this Amended and Restated Agreement, which
applies to all of the Securities of the Issuer outstanding on the date hereof
and held by the parties, as well as Securities acquired by them hereafter,
desire to amend and restate the Original Agreement in its entirety to govern
certain of their rights, duties and obligations after consummation of the
transactions contemplated by the Purchase Agreement;
NOW, THEREFORE the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.01. Definitions. (a) The following terms, as used herein,
have the following meanings:
"AFFILIATE" means, with respect to any Person, any other Person directly
or indirectly controlling, controlled by, or under common control with such
Person, provided that no securityholder of the Issuer shall be deemed an
Affiliate of any other securityholder solely by reason of any investment in the
Issuer. For the purpose of this definition, the term "CONTROL" (including with
correlative meanings, the terms "CONTROLLING", "CONTROLLED BY" and "UNDER COMMON
CONTROL WITH"), as used with respect to any Person, shall mean the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and
2
<PAGE> 6
policies of such Person, whether through the ownership of voting securities or
by contract or otherwise.
"AFFILIATED EMPLOYEE BENEFIT TRUST" means any trust that is a successor
to the assets held by a trust established under an employee benefit plan subject
to ERISA or any other trust established directly or indirectly under such plan
or any other such plan having the same sponsor.
"ALLOWABLE TRANSFER AMOUNT" shall mean, as to Schaefer or Cormier, as
the case may be, at any time in any given calendar year, that number of shares
of Common Stock that equals the excess, if any, of (i) 25% of the shares of
Fully Diluted Common Stock owned by such individual on November 23, 1994 over
(ii) the aggregate number of shares of Fully Diluted Common Stock theretofore
transferred (other than to Permitted Transferees) by such individual up to such
time in such calendar year, provided that the Allowable Transfer Amount of
either such individual shall equal zero at such point as such individual shall
have transferred in aggregate after November 23, 1994 (other than to Permitted
Transferees) 50% of the shares of Fully Diluted Common Stock owned by him on
November 23, 1994 (it being understood that all such determinations shall be
made taking into account any adjustments in accordance with the terms of the
applicable securities).
"BENCHMARK SHARES" means shares of Common Stock sold or proposed to be
sold by the DLJ Entities (other than to their Permitted Transferees) subsequent
to the Closing Date until the aggregate number of shares of Common Stock so sold
or proposed to be sold by the DLJ Entities (other than as aforesaid) equals
5,500,000 (taking into account any stock dividend, stock split or reverse stock
split subsequent to the Closing Date).
"BOARD" means the board of directors of the Issuer.
"BRIDGE SECURITIES PURCHASE AGREEMENT" means the Bridge Securities
Purchase Agreement dated as of November 23, 1994 between the Issuer and PM
Funding, Inc.
"BUSINESS DAY" means any day except a Saturday, Sunday or other day on
which commercial banks in New York City are authorized by law to close.
"COMMON STOCK" shall have the meaning set forth in the Securities
Purchase Agreement.
3
<PAGE> 7
"EQUITY SECURITIES" means Common Stock, securities convertible into or
exchangeable for Common Stock and options, warrants or other rights to acquire
Common Stock.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"FULLY DILUTED" means, with respect to Common Stock and without
duplication, all outstanding shares and all shares issuable in respect of
securities convertible into or exchangeable for Common Stock, stock appreciation
rights or options, warrants and other irrevocable rights to purchase or
subscribe for Common Stock or securities convertible into or exchangeable for
Common Stock and any Person shall be deemed to own such number of Fully Diluted
shares of Common Stock as such Person has the right to acquire from any other
Person (including the Issuer).
"HELIOS SHAREHOLDERS" means each Person who received shares of Common
Stock of the Issuer pursuant to that certain Stock Purchase and Exchange
Agreement dated as of June 30, 1995, among the Issuer, Helios Incorporated and
each of the other parties signatory thereto.
"INITIAL PUBLIC OFFERING" means the initial sale after the date hereof
of Common Stock pursuant to an effective registration statement under the
Securities Act (other than a registration statement on Form S-8 or any successor
form).
"NOTES" shall have the meaning set forth in the Securities Purchase
Agreement.
"OTHER SECURITYHOLDERS" means all Securityholders other than any DLJ
Entity, and their respective Permitted Transferees.
"PERCENTAGE OWNERSHIP" means, with respect to any Securityholder or any
group of Securityholders at any time, (i) the number of shares of Fully Diluted
Common Stock that such Securityholder or group of Securityholders owns at such
time, divided by (ii) the total number of shares of Fully Diluted Common Stock
at such time.
"PERMITTED TRANSFEREE" means:
(i) in the case of any DLJ Entity, (A) any other DLJ Entity, (B) any
general or limited partner of any such entity (a "DLJ PARTNER"), and
4
<PAGE> 8
any corporation, partnership, Affiliated Employee Benefit Trust or other
entity which is an Affiliate of any DLJ Partner (collectively, the "DLJ
AFFILIATES"), (C) any managing director, general partner, director,
limited partner, officer or employee of such DLJ Entity or a DLJ
Affiliate, or the heirs, executors, administrators, testamentary
trustees, legatees or beneficiaries of any of the foregoing Persons
referred to in this clause (C) (collectively, "DLJ ASSOCIATES"), (D) any
trust, the beneficiaries of which, or any corporation, limited liability
company or partnership, the stockholders, members or general or limited
partners of which, include only such DLJ Entity, DLJ Affiliates, DLJ
Associates, their spouses or their lineal descendants and (E) a voting
trustee for one or more DLJ Entities, DLJ Affiliates or DLJ Associates
under the terms of a voting trust designed to conform with the
requirements of the Insurance Law of the State of New York;
(ii) in the case of any Other Securityholder, (A) the Issuer, (B) (x)
such Securityholder's spouse or (y) such Securityholder's siblings or
lineal descendants, so long as such Securityholder retains the right to
vote such Securities, (C) a Person who acquires Securities from any such
Securityholder pursuant to a will or the laws of descent and
distribution, and (D) any trust the beneficiaries of which consist only
of such Securityholders and/or such Securityholder's spouse, siblings
and lineal descendants and (E) any Securityholder other than any DLJ
Entity or its Permitted Transferees;
(iii) in the case of the Helios Shareholders, in addition to the Permitted
Transferees enumerated in paragraph (ii) above, any beneficiary and/or
trustee of any Helios Shareholder that is a trust; provided, that such
transferee shall have agreed in writing to be bound by the terms of this
Agreement;
(iv) in the case of Schaefer and Cormier, notwithstanding clause (E) of
subsection (ii) above, the DLJ Entities; provided that in no event shall
Schaefer or Cormier transfer to the DLJ Entities in excess of 50,000
shares each of the Series A Preferred Stock in reliance on this
subsection (iv); and
(v) in the case of ABS, (A) any general or limited partner of ABS (an
"ABS PARTNER"), and any corporation, partnership, Affiliated Employee
Benefit Trust or other entity which is an Affiliate of any ABS Partner
(collectively, the "ABS AFFILIATES"), (B) any managing director, general
partner, director, limited partner, officer or employee of such ABS
Affiliate, or the heirs, executors, administrators, testamentary
trustees,
5
<PAGE> 9
legatees or beneficiaries of any of the foregoing Persons referred to in
this clause (B) (collectively, "ABS ASSOCIATES") and (C) any trust, the
beneficiaries of which, or any corporation, limited liability company or
partnership, the stockholders, members or general or limited partners of
which, include only ABS or such ABS Affiliates, ABS Associates, their
spouses or their lineal descendants.
"PERSON" means an individual, corporation, partnership, association,
trust or other entity or organization, including a government or political
subdivision or an agency or instrumentality thereof.
"REGISTRABLE STOCK" means any shares of Common Stock until (i) a
registration statement covering such shares of Common Stock has been declared
effective by the SEC and such shares have been disposed of pursuant to such
effective registration statement, (ii) such shares are sold under circumstances
in which all of the applicable conditions of Rule 144 (or any similar provisions
then in force) under the Securities Act are met or such shares may be sold
pursuant to Rule 144(k) or (iii) such shares are otherwise transferred, the
Issuer has delivered a new certificate or other evidence of ownership for such
shares not bearing the legend required pursuant to this Agreement and such
shares may be resold without subsequent registration under the Securities Act.
"REGISTRATION EXPENSES" means (i) all registration and filing fees, (ii)
fees and expenses of compliance with securities or blue sky laws (including
reasonable fees and disbursements of counsel in connection with blue sky
qualifications of the Securities), (iii) printing expenses, (iv) internal
expenses of the Issuer (including, without limitation, all salaries and expenses
of its officers and employees performing legal or accounting duties), (v)
reasonable fees and disbursements of counsel for the Issuer and customary fees
and expenses for independent certified public accountants retained by the Issuer
(including expenses relating to any comfort letters or costs associated with the
delivery by independent certified public accountants of a comfort letter or
comfort letters requested pursuant to Section 5.04(h) hereof), (vi) the
reasonable fees and expenses of any special experts retained by the Issuer in
connection with such registration, (vii) reasonable fees and expenses of one
counsel for the Securityholders participating in the offering, selected by the
DLJ Entities, in the case of an offering in which any of the DLJ Entities
participate, or selected by Cormier and Schaefer in any other case involving
exercise of registration rights under Sections 5.01 or 5.02, (viii) fees and
expenses in connection with any review of underwriting arrangements by the
National Association of Securities Dealers, Inc. (the "NASD") including fees and
expenses of any "QUALIFIED INDEPENDENT UNDERWRITER" and (ix) fees and
disbursements of underwriters customarily paid by issuers or sellers of
securities, but shall not include any
6
<PAGE> 10
underwriting fees, discounts or commissions attributable to the sale of
Registrable Stock, or any out-of-pocket expenses (except as set forth in clause
(vii) above) of the Securityholders or any fees and expenses of underwriter's
counsel.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SECURITIES" means Notes, shares of Common Stock, Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, the Warrants, and
other voting securities of the Issuer held by the Securityholders.
"SECURITYHOLDER" means each Person (other than the Issuer) who shall be
a party to this Agreement, whether in connection with the execution and delivery
hereof as of the date hereof, pursuant to Section 7.03 or otherwise, so long as
such Person shall "BENEFICIALLY OWN" (as such term is defined in Rule 13d-3
under the Exchange Act) any Securities.
"SERIES A PREFERRED STOCK" shall have the meaning set forth in the
Securities Purchase Agreement.
"SERIES B PREFERRED STOCK" shall have the meaning set forth in the
Securities Purchase Agreement.
"SERIES C BENCHMARK SHARES" means shares of Common Stock sold or
proposed to be sold by holders of the Series C Preferred Stock (other than to
their Permitted Transferees) subsequent to the Closing Date until the aggregate
number of shares of Common Stock so sold or proposed to be sold by holders of
the Series C Preferred Stock equals 3,750,000 (taking into account any stock
dividend, stock split of reverse stock split subsequent to the Closing Date).
"SERIES C PERCENTAGE OWNERSHIP" means with respect to any Securityholder
or group of Securityholders that holds Series C Preferred Stock at any time, (i)
the number of shares of Fully Diluted Common Stock represented by each such
Securityholder's shares of Series C Preferred Stock divided by (ii) the total
number of shares of Fully Diluted Common Stock represented by the total number
of shares of Series C Preferred Stock at such time.
"SERIES C PREFERRED STOCK" shall have the meaning set forth in the
Securities Purchase Agreement.
"SPROUT ENTITIES" means DLJ Capital Corporation, Sprout Growth II, L.P.
and Sprout Capital VI, L.P.
7
<PAGE> 11
"SUBSIDIARY" means, with respect to any Person, any entity of which
securities or other ownership interests having ordinary voting power to elect a
majority of the board of directors or other persons performing similar functions
are at the time directly or indirectly owned by such Person.
"THIRD PARTY" means a prospective purchaser of shares in an arm's-length
transaction from a Securityholder where such purchaser is not a Permitted
Transferee of such Securityholder.
"TRANSACTION DOCUMENTS" mean this Agreement, the Securities Purchase
Agreement and the inter-securityholder agreement of even date herewith to be
entered into by the parties thereto.
"UNDERWRITTEN PUBLIC OFFERING" means an underwritten public offering of
Registrable Stock of the Issuer pursuant to an effective registration statement
under the Securities Act.
"WARRANTS" means the warrants exercisable to purchase Common Stock
issued to PM Funding, Inc. pursuant to the Bridge Securities Purchase Agreement.
(b) The term "DLJ ENTITIES", to the extent such entities shall have
transferred any of their Securities to "PERMITTED TRANSFEREES", shall mean the
DLJ Entities and the Permitted Transferees of the DLJ Entities, taken together,
and any right or action that may be taken at the election of the DLJ Entities
may be taken at the election of the DLJ Entities, and such Permitted
Transferees.
(c) The term "ABS", to the extent such entity shall have transferred any
of its Securities to "PERMITTED TRANSFEREES", shall mean ABS and the Permitted
Transferees of ABS, taken together, and any right or action that may be taken at
the election of ABS may be taken at the election of ABS, and such Permitted
Transferees.
(d) The term "OTHER SECURITYHOLDERS", to the extent such shareholders
shall have transferred any of their Securities to "PERMITTED TRANSFEREES", shall
mean the other Securityholders and the Permitted Transferees of the other
Securityholders, as the case may be, and any right or action that may be taken
at the election of the other Securityholders may be taken at the election of the
other Securityholders and the Permitted Transferees of the other
Securityholders, as the case may be.
(e) Each of the following terms is defined in the Section set forth
opposite such term:
8
<PAGE> 12
<TABLE>
<CAPTION>
Term Section
<S> <C>
ABS 1.01(c)
ABS Affiliate 1.01(a)
ABS Associates 1.01(a)
ABS Partner 1.01(a)
Additional Directors 2.01
Aggregate Tag Amount 4.01(g)(i)
Associate 2.01
beneficially own 1.01(a)
Cause 2.02
Confidential Information 6.01(b)
control 1.01(a)
Demand Registration 5.01(a)
DLJ Entities 1.01(b)
DLJ Associates 1.01(a)
DLJ Affiliate 1.01(a)
DLJ Non-Election 4.01(g)(v)
DLJ Partner 1.01(a)
DLJSC 7.05
Electing Individual 4.01(g)(v)
Holders 5.01(a)(ii)
Incidental Registration 5.02(a)
Indemnified Party 5.07
Indemnifying Party 5.07
Inspectors 5.04(g)
Maximum Offering Size 5.01(d)
NASD 1.01(a)
Nominee 2.03(a)
other Securityholders 1.01(d)
Private Transaction 3.01(b)
qualified independent underwriter 1.01(a)
Records 5.04(g)
Representatives 6.01(b)
Section 4.01(h) Aggregate Tag Amount 4.01(h)
Section 4.01(h) Tag along Notice Period 4.01(h)
Section 4.01(h) Tag along Right 4.01(h)
Section 4.01(h) Tag along Sale 4.01(h)
Section 4.01(h) Tag along Seller 4.01(h)
Section 4.01(h) Tagging Person 4.01(h)
Section 3.01(b) Termination Date 3.01(b)
Section 4.01 Offer 4.01(a)
Section 4.01 Offer Notice 4.01(a)
Section 4.01 Offer Price 4.01(a)
</TABLE>
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<PAGE> 13
<TABLE>
<CAPTION>
Term Section
<S> <C>
Section 4.02 Notice 4.02
Section 4.03 Agreement 4.03(a)
Section 4.03 Notice 4.03(a)
Section 4.03 Notice Period 4.03(a)
Section 4.03 Sale 4.03(a)
Section 4.03 Sale Price 4.03(a)
Selling Securityholder 5.01(a)
Selling Party 4.01(a)
Tag along Notice Period 4.01(g)(i)
Tag along Right 4.01(g)(i)
Tag along Sale 4.01(g)(i)
Tag along Seller 4.01(g)(i)
Tagging Person 4.01(g)(i)
transfer 3.01(a)
</TABLE>
(f) Capitalized terms used herein and not otherwise defined herein shall
have the meanings herein that are assigned to such terms in the Securities
Purchase Agreement.
ARTICLE 2
CORPORATE GOVERNANCE
SECTION 2.01. Composition of the Board. The Board shall consist of seven
members, of whom one shall be designated by DLJ Merchant Banking Partners, L.P.,
one shall be designated by Sprout Growth II, L.P., one shall be designated by
ABS, one shall be designated by Schaefer, one shall be designated by Cormier,
and two shall be individuals (the "ADDITIONAL DIRECTORS") (i) one designated by
Cormier and Schaefer and acceptable to the DLJ Entities and (ii) one designated
by the DLJ Entities, which individuals are neither an "AFFILIATE" nor an
"ASSOCIATE" (as those terms are used within the meaning of Rule 12b-2 of the
General Rules and Regulations under the Exchange Act) of the DLJ Entities, ABS,
Schaefer or Cormier. Each Securityholder entitled to vote for the election of
directors to the Board agrees that it will vote its Securities or execute
consents, as the case may be, and take all other necessary action (including
causing the Issuer to call a special meeting of shareholders) in order to ensure
that the composition of the Board is as set forth in this Section 2.01.
SECTION 2.02. Removal. Each Securityholder agrees that if, at any time,
it is then entitled to vote for the removal of directors of the Issuer, it will
not vote any of its Securities in favor of the removal of any director who shall
have been designated or nominated pursuant to Section 2.01 unless such removal
shall be for Cause or the Person entitled to designate or nominate such director
shall have
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<PAGE> 14
consented to such removal in writing; provided that any of the DLJ Entities,
ABS, Cormier or Schaefer may remove, or vote its Securities in favor of the
removal of, the Additional Directors. Removal for "CAUSE" shall mean removal of
a director because of such director's (a) willful and continued failure to
substantially perform his duties with the Issuer in his established position,
(b) willful conduct which is significantly injurious to the Issuer, monetarily
or otherwise, or (c) conviction for, or guilty plea to, a felony. Subject to
Section 2.03, nothing contained in this Section 2.02 shall affect the right of
any Securityholder to designate members of the Board pursuant to Section 2.01.
SECTION 2.03. Vacancies. If, as a result of death, disability,
retirement, resignation, removal (with or without Cause) or otherwise, there
shall exist or occur any vacancy on the Board:
(a) the Person entitled under Section 2.01 to designate or nominate such
director whose death, disability, retirement, resignation or removal resulted in
such vacancy, or its Permitted Transferees, may, subject to the provisions of
Sections 2.01 and 2.04, designate another individual (the "NOMINEE") to fill
such capacity and serve as a director of the Issuer; and
(b) each Securityholder then entitled to vote for the election of the
Nominee as a director of the Issuer agrees that it will vote its Securities, or
execute a written consent, as the case may be, in order to ensure that the
Nominee be elected to the Board.
SECTION 2.04. Termination of Rights and Obligations. The right to
designate one or more members of the Board pursuant to this Article 2 shall
terminate (i) as to Cormier, at such time as Cormier and his Permitted
Transferees in the aggregate own and have the right to acquire less than 5% of
the Fully Diluted Common Stock then outstanding, (ii) as to Schaefer, at such
time as Schaefer and his Permitted Transferees in the aggregate own and have the
right to acquire less than 5% of the Fully Diluted Common Stock then
outstanding, (iii) as to Sprout Growth II, L.P., at such time as the DLJ
Entities in the aggregate own and have the right to acquire less than 5% of the
Fully Diluted Common Stock then outstanding, (iv) as to DLJ Merchant Banking
Partners, L.P., at such time as the DLJ Entities (other than PM Funding, Inc.)
in the aggregate own and have the right to acquire less than 5% of the Fully
Diluted Common Stock then outstanding and (v) as to ABS, at such time as ABS in
the aggregate owns and has the right to acquire less than 5% of the Fully
Diluted Common Stock then outstanding. The obligations imposed on
Securityholders to give effect to the rights to designate directors set forth in
Section 2.01 shall terminate as to any Person when such Person's right to
designate a director is terminated.
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<PAGE> 15
SECTION 2.05. Action by the Board. A quorum of the Board shall consist
initially of four directors. All actions of the Board shall require the
affirmative vote of at least a majority of the directors at a duly convened
meeting of the Board at which a quorum is present or the unanimous written
consent of the Board; provided that, in the event there is a vacancy on the
Board and an individual has been nominated to fill such vacancy, the first order
of business shall be to fill such vacancy.
SECTION 2.06. Certificate of Incorporation and Bylaws. (a) The
Certificate of Incorporation and Bylaws of the Issuer, as in effect on the date
hereof, are attached as Exhibits B and A, respectively, to the Securities
Purchase Agreement.
(b) Each Securityholder shall vote its Securities, and shall take all
other actions necessary, to ensure that the Issuer's Certificate of
Incorporation and Bylaws facilitate and do not at any time conflict with any
provision of this Agreement.
ARTICLE 3
RESTRICTIONS ON TRANSFER
SECTION 3.01. General. (a) No Securityholder may directly or indirectly,
sell, assign, transfer, grant a participation in, pledge or otherwise dispose of
("TRANSFER") any Securities (or solicit any offers to buy or otherwise acquire,
or to take a pledge of, any Securities) except, subject to Section 3.01(b), (i)
transfers permitted by Section 3.03, (ii) transfers in a bona fide Underwritten
Public Offering upon exercise of registration rights pursuant to Article 5,
(iii) transfers pursuant to Rule 144 (or any successor provisions under the
Securities Act), (iv) pledges by Schaefer pursuant to the terms of the
Cormier-Schaefer Agreement as in effect on November 23, 1994 or as amended,
supplemented or modified with the prior consent of the DLJ Entities, (v) subject
to Section 4.01, transfers to any other Person in any Private Transaction (as
defined below); provided that no Securities may be transferred pursuant to
clause (v) to any Person unless such Person shall have agreed in writing to be
bound by the terms of this Agreement applicable to such Securityholder; provided
further that in the case of Schaefer and Cormier, such a transfer shall exclude
any transaction covered by clause (iv) above, and (vi) in the case of any Other
Securityholder, transfers pursuant to Section 4.03 hereof. As used herein,
"PRIVATE TRANSACTION" means any transfer not covered by clause (i), (ii), (iii)
or (vi) above.
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<PAGE> 16
(b) Notwithstanding anything else contained herein, except pursuant to
Sections 3.03 or 4.03, no transfer of any shares of Common Stock may be made by
Cormier or Schaefer at any time to the extent that the number of shares then
sought to be transferred by Cormier or Schaefer, as the case may be, would
exceed the Allowable Transfer Amount applicable to such individual at such time.
From and after the Section 3.01(b) Termination Date (as defined below), (x) the
restriction contained in the preceding sentence shall terminate as to transfers
pursuant to Section 3.01(a)(ii) and 3.01(a)(iii), and (y) transfers of shares of
Common Stock may be made by Cormier or Schaefer pursuant to Section 3.01(a)(ii)
or 3.01(a)(iii) without regard to the Allowable Transfer Amount but only to the
extent such transfers are otherwise in accordance with the provisions of
Articles 3 and 4. The earlier of (i) November 23, 2000 and (ii) such time as the
aggregate number of shares of Fully Diluted Common Stock held by the DLJ
Entities is less than 25% of the aggregate number of shares of Fully Diluted
Common Stock held by the DLJ Entities on the date hereof (determined taking into
account any adjustments in accordance with the terms of the applicable
securities) is referred to as the "SECTION 3.01(B) TERMINATION DATE."
(c) No Securityholder may transfer any Securities at any time except in
compliance with applicable federal or state securities laws.
SECTION 3.02. Legend on Securities. (a) In addition to any other
legend that may be required, each certificate for Securities that is issued to
any Securityholder shall bear a legend in substantially the following form:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED OR SOLD EXCEPT
IN COMPLIANCE THEREWITH. THIS SECURITY IS ALSO SUBJECT TO ADDITIONAL
RESTRICTIONS ON TRANSFER AS SET FORTH IN THE SECURITYHOLDERS AGREEMENT DATED AS
OF JULY 31, 1998, COPIES OF WHICH MAY BE OBTAINED UPON REQUEST FROM PHASE
METRICS, INC. AND ANY SUCCESSOR THERETO."
(b) If any Securities cease to be subject to any and all restrictions on
transfer set forth in this Agreement, the Issuer shall, upon the written request
of the holder thereof, issue to such holder a new certificate evidencing such
Securities without the second sentence of the legend required by Section 3.02(a)
endorsed thereon.
SECTION 3.03. Permitted Transferees. Notwithstanding anything in this
Agreement to the contrary, any Securityholder may at any time transfer any or
all of its Securities to one or more of its Permitted Transferees without the
consent of
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<PAGE> 17
the Board or any other Securityholder or group of Securityholders and without
compliance with Section 4.01 so long as (a) such Permitted Transferee shall have
agreed in writing to be bound by the terms of this Agreement and (b) the
transfer to such Permitted Transferee is not in violation of applicable federal
or state securities laws.
ARTICLE 4
RIGHTS OF FIRST REFUSAL; TAG ALONG RIGHTS; PREEMPTIVE RIGHTS; DRAG ALONG
RIGHTS; TERMINATION AND INAPPLICABILITY OF PROVISIONS
SECTION 4.01. Right of First Refusal; Tag along Rights. (a) Subject to
the provisions of Sections 4.01(g) and 4.01(h), if any Securityholder receives
from or otherwise negotiates with a Third Party in a Private Transaction an
offer to purchase for cash (or, subject to clause (f), non-cash consideration)
any or all of the Securities owned or held by such Securityholder that is
otherwise permitted under this Agreement (including, without limitation, Section
3.01 hereof) (a "SECTION 4.01 OFFER") and such Securityholder (a "SELLING
PARTY") intends to pursue such sale of such Securities to such Third Party in
such Private Transaction, such Selling Party shall provide the Issuer and each
other Securityholder written notice of such Section 4.01 Offer (a "SECTION 4.01
OFFER NOTICE"). The Section 4.01 Offer Notice shall identify the number and type
of Securities subject to the Section 4.01 Offer, the cash price at which a sale
is proposed to be made (the "SECTION 4.01 OFFER PRICE") and all other material
terms and conditions of the Section 4.01 Offer.
(b) Subject to the provisions of Sections 4.01(g) and 4.01(h), the
receipt of a Section 4.01 Offer Notice by the Issuer and each other
Securityholder from any Selling Party shall constitute an offer by such Selling
Party to sell, to the Issuer and each other Securityholder, for cash (or,
subject to clause (f), non-cash consideration) in whole and not in part, with
the Issuer having priority with respect to the acceptance of the Section 4.01
Offer. If the Issuer does not accept the offer, in whole and not in part, in
accordance herewith, then such offer may be accepted, in whole and not in part,
at the Section 4.01 Offer Price by the other Securityholders on a pro rata basis
based on each other Securityholder's Percentage Ownership (unless the other
Securityholders shall agree to another allocation resulting in acceptance of the
Section 4.01 Offer with respect to all Securities subject to the Section 4.01
Offer); provided that in the event there is an undersubscription by the other
Securityholders at the end of the 45-day period referred to below, the
unsubscribed Securities shall be apportioned among those other Securityholders
whose written notice of acceptance referred to below specified a number of
additional shares such Securityholder would like to
14
<PAGE> 18
purchase pursuant to this Section 4.01, which apportionment shall be on a pro
rata basis among such Securityholders in accordance with such other
Securityholders' Percentage Ownership. Such offer shall be irrevocable for 45
days after receipt of such Section 4.01 Offer Notice by the Issuer and each
other Securityholder. During such 45-day period, subject to the Issuer's
priority right of exercise as set forth above, each other Securityholder shall
have the right to accept such offer (as provided above) within such 45-day
period. The Section 4.01 Offer may be accepted by giving a written irrevocable
notice of acceptance to such Selling Party prior to the expiration of such
45-day period.
(c) The Issuer or the Securityholders, as the case may be, shall purchase
for cash (or, subject to clause (f), non-cash consideration) at the Section 4.01
Offer Price and pay for all Securities set forth in the Section 4.01 Offer
Notice within a 20-day period following acceptance of the Section 4.01 Offer;
provided that if the purchase and sale of such Securities is subject to
expiration of any applicable statutory waiting period, the time period during
which such purchase and sale may be consummated shall be extended until the
expiration of five Business Days after such waiting period shall have expired;
provided further that such time period shall not exceed 60 days without the
written consent of the Selling Party. If such purchase and sale are not
consummated by the Issuer and the Securityholders within such time period, such
Section 4.01 Offer shall be deemed to be rejected.
(d) Upon the rejection or deemed rejection of the Section 4.01 Offer by
the Issuer and the Securityholders or the failure to obtain any required consent
for the purchase of the Securities subject thereto within 60 days, there shall
commence a 90-day period during which the Selling Party shall have the right,
subject to Section 4.01(g), to consummate the sale to the Third Party making the
Section 4.01 Offer of all but not less than all of the Securities subject to the
Section 4.01 Offer at a price not less than the Section 4.01 Offer Price;
provided that (i) such Third Party shall have agreed in writing to be bound by
the terms of this Agreement and (ii) the transfer to such Third Party is not in
violation of applicable federal or state or foreign securities laws.
Notwithstanding the foregoing, if the purchase and sale of such Securities is
subject to any prior regulatory approval, the time period during which such
purchase and sale may be consummated shall be extended until the expiration of
five Business Days after all such approvals shall have been received but in no
event shall such time period exceed 120 days without the consent of the Issuer.
If such Selling Party does not consummate the sale of any Securities subject to
the Section 4.01 Offer in accordance with the time limitations set forth above
and in Section 4.01(g), such Selling Party may not sell any Securities without
repeating the foregoing procedures.
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<PAGE> 19
(e) Notwithstanding anything in this Agreement to the contrary, the
provisions of this Section 4.01 will not be applicable to transfers made
pursuant to and in compliance with Section 3.03, Section 4.03 or Article 5.
(f) A Securityholder may transfer Securities in accordance with the
foregoing provisions of this Section 4.01 for consideration other than cash only
if such Securityholder has first obtained and delivered to each other
Securityholder and the Issuer an opinion of an investment banking firm of
national standing indicating that the fair market value of the non-cash
consideration that such Securityholder proposes to accept as consideration for
such Securities, together with any cash consideration, is at least equal to the
Section 4.01 Sale Price.
(g) (i) If any Section 4.01 Offer constitutes a proposed transfer by
Brumberger, Cormier, Schaefer, Peters, Rhotons, Karam, Bye, Aylwin, Amelio,
Terry or the Helios Shareholders (each a "TAG ALONG SELLER") in a Private
Transaction permitted by Section 3.01(a)(v) and 3.01(b) (a "TAG ALONG SALE"),
the DLJ Entities or ABS or both may, at their option, elect to exercise their
rights under this Section 4.01(g) in lieu of their rights under Section 4.01(b)
(or, in the event of a DLJ Non-Election (as defined below) and an ABS
Non-Election (as defined below), the Electing Individual (as defined below) may
elect to exercise his rights under this Section 4.01(g) in lieu of his rights
under Section 4.01(b)). In the event that the DLJ Entities or ABS or both so
elect to exercise their rights under this Section 4.01(g) in lieu of their
rights under Section 4.01(b) (or, in the case of a DLJ Non-Election and an ABS
Non-Election, the Electing Individual elects to exercise his rights under this
Section 4.01(g) in lieu of his rights under Section 4.01(b)), the DLJ Entities
or ABS or both and such of Brumberger, Cormier, Schaefer, Peters, Rhotons,
Karam, Bye, Aylwin, Amelio, Terry and the Helios Shareholders as is not a Tag
along Seller in such Private Transaction (each of the DLJ Entities, ABS and such
entity or individual, a "TAGGING PERSON") shall have the right (a "TAG ALONG
RIGHT"), exercisable by written notice given to the Tag along Seller within 45
days after receipt of the Section 4.01 Offer Notice (the "TAG ALONG NOTICE
PERIOD"), to request the Tag along Seller to include in the proposed transfer to
the Third Party the number of shares of Common Stock or Securities convertible
into shares of Common Stock held by such Tagging Person as is specified in such
notice; provided that (x) the Tag along Seller shall be required only to include
in the proposed transfer a number (the "AGGREGATE TAG AMOUNT") of shares of
Common Stock or Securities that are convertible into Common Stock held by such
Tagging Persons equal to not more than the number of shares of Common Stock
proposed to be sold by the Tag along Seller to such Third Party in such
transaction multiplied by a fraction, the numerator of which is the number of
shares of Fully Diluted Common Stock owned by all such Tagging Persons
immediately prior to the Tag along Sale, and the denominator of which is
the total number of shares of Fully Diluted Common Stock immediately prior to
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<PAGE> 20
the Tag along Sale and (y) if the aggregate number of shares of Common Stock
proposed to be sold by all Tagging Persons in such transaction exceeds the
Aggregate Tag Amount, the Aggregate Tag Amount of shares permitted to be sold
shall be allocated among all Tagging Persons pro rata based on Percentage
Ownership. If the DLJ Entities or ABS or both exercise their Tag along Right
hereunder (or, in the case of a DLJ Non-Election and an ABS Non-Election, if the
Electing Individual exercises his Tag along Right hereunder), each Tagging
Person shall deliver to the Tag along Seller the certificate or certificates
representing the Securities of such Tagging Person to be included in the
transfer, together with a limited power-of-attorney authorizing the Tag along
Seller to transfer such Securities on the terms set forth in the Section 4.01
Offer Notice. Delivery of such certificate or certificates representing the
Securities to be transferred and the limited power-of-attorney authorizing the
Tag along Seller to transfer such Securities shall constitute an irrevocable
acceptance of the Tag along Sale by such Tagging Persons. If, at the end of a
120-day period after such delivery, the Tag along Seller has not completed the
transfer of all such Securities, the Tag along Seller shall return to each
Tagging Person the limited power-of- attorney (and all copies thereof) together
with all certificates representing the Securities which such Tagging Person
delivered for transfer pursuant to this Section 4.01(g), then Brumberger,
Schaefer, Peters, Rhotons, Karam, Bye, Aylwin, Cormier, Amelio, Terry and the
Helios Shareholders may not effect another Tag along Sale without repeating the
foregoing procedures.
(ii) The per share consideration to be paid to the Tag along Seller and
the Tagging Persons in any Tag along Sale shall be the Section 4.01 Offer Price
in the case of sales of Common Stock and in the case of Securities convertible
into Common Stock shall be the Section 4.01 Offer Price multiplied by the number
of shares of Common Stock into which the Securities in question are convertible.
(iii) Concurrently with the consummation of the Tag along Sale, the Tag
along Seller shall notify the Tagging Persons thereof, shall remit to the
Tagging Persons the total consideration for the Securities of the Tagging
Persons transferred pursuant thereto (computed pursuant to Section 4.01(g)(ii)),
and shall, promptly after the consummation of such Tag along Sale furnish such
other evidence of the completion and time of completion of such transfer and the
terms thereof as may be reasonably requested by the Tagging Persons.
(iv) If at the termination of the Tag along Notice Period any Tagging
Person shall not have elected to participate in the Tag along Sale, such Tagging
Person will be deemed to have waived its rights under this Section 4.01(g) with
respect to the transfer of its Securities pursuant to such Tag along Sale.
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<PAGE> 21
(v) In any Tag along Sale in which the DLJ Entities or ABS or both have
exercised their Tag along Right, the right of any party pursuant to Section
4.01(b) to accept the offer referred to therein shall be deemed to have
terminated. If both the DLJ Entities and ABS elect not to exercise their Tag
along Right in any Tag along Sale and elect to accept the offer referred to in
Section 4.01(b), no other Person may exercise any Tag along Right under this
Section 4.01(g). In the event that (A) the DLJ Entities elect neither to
exercise their Tag along Right in any Tag along Sale pursuant to Section 4.01(g)
nor to accept the offer referred to in Section 4.01(b) (an "DLJ NON-ELECTION")
and (B) ABS elects neither to exercise its Tag along Right in any Tag along Sale
pursuant to Section 4.01(g) nor to accept the offer referred to in Section
4.01(b) (an "ABS NON-ELECTION"), such of Brumberger, Cormier, Schaefer, Peters,
Rhotons, Karam, Bye, Aylwin, Amelio, Terry or the Helios Shareholders as is not
a Selling Party under Section 4.01(a) or a Tag along Seller under Section
4.01(g) (the "ELECTING INDIVIDUAL") may elect, subject to the provisions of this
Section 4.01, either (i) to accept the offer referred to in Section 4.01(b) or
(ii) to exercise a Tag along Right in any Tag along Sale pursuant to Section
4.01(g).
(h) (i) If any Section 4.01 Offer constitutes a proposed transfer by the
DLJ Entities or ABS, as the case may be, (each a "SECTION 4.01(h) TAG ALONG
SELLER") in a Private Transaction permitted by Section 3.01(a)(v) (each a
"SECTION 4.01(h) TAG ALONG SALE") and, in the case of a Section 4.01(h)
Tag-along Sale by the DLJ Entities, the DLJ Entities have not exercised their
right to compel a sale pursuant to Section 4.03, either of ABS or the DLJ
Entities that is not proposing such Section 4.01(h) Tag along Sale (each a
"SECTION 4.01(h) TAGGING PERSON") may, at their option, elect to exercise its
rights under this Section 4.01(h) in lieu of its rights under Section 4.01(b).
In the event that a Section 4.01(h) Tagging Person so elects to exercise its
rights under this Section 4.01(h) in lieu of its rights under Section 4.01(b),
the Section 4.01(h) Tagging Person shall have the right (a "SECTION 4.01(h) TAG
ALONG RIGHT"), exercisable by written notice given to the Section 4.01(h) Tag
along Seller within 45 days after receipt of the Section 4.01 Offer Notice (the
"SECTION 4.01(h) TAG ALONG NOTICE PERIOD"), to request the Section 4.01(h) Tag
along Seller to include in the proposed transfer to the Third Party the number
of shares of Common Stock or Securities convertible into shares of Common Stock
held by the Section 4.01(h) Tagging Person as is specified in such notice;
provided that (x) the Section 4.01(h) Tag along Seller shall be required only to
include in the proposed transfer a number (the "SECTION 4.01(h) AGGREGATE TAG
AMOUNT") of shares of Common Stock or Securities that are convertible into
Common Stock held by the Section 4.01(h) Tagging Person equal to not more than
the number of shares of Common Stock proposed to be sold by the Section 4.01(h)
Tag along Seller to such Third Party in such transaction multiplied by a
fraction, the numerator of which is the number of shares of Fully Diluted Common
Stock owned by the Section 4.01(h) Tagging Person
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immediately prior to the Section 4.01(h) Tag along Sale, and the denominator of
which is the total number of shares of Fully Diluted Common Stock held by the
Section 4.01(h) Seller and the Section 4.01(h) Tagging Person immediately prior
to the Section 4.01(h) Tag along Sale and (y) if the aggregate number of shares
of Common Stock proposed to be sold by the Section 4.01(h) Tagging Person in
such transaction exceeds the Section 4.01(h) Aggregate Tag Amount, the number of
shares permitted to be sold by the Section 4.01(h) Tagging Person shall be
reduced to the Section 4.01(h) Aggregate Tag Amount. If the Section 4.01(h)
Tagging Person exercises its Section 4.01(h) Tag along Right hereunder, the
Section 4.01(h) Tagging Person shall deliver to the entity designated by the
Section 4.01(h) Tag along Seller certificate or certificates representing the
Securities of the Section 4.01(h) Tagging Person to be included in the transfer,
together with a limited power-of-attorney authorizing the Section 4.01(h) Tag
along Seller to transfer such Securities on the terms set forth in the Section
4.01 Offer Notice. Delivery of such certificate or certificates representing the
Securities to be transferred and the limited power-of-attorney authorizing the
Section 4.01(h) Tag along Seller to transfer such Securities shall constitute an
irrevocable acceptance of the Section 4.01(h) Tag along Sale by the Section
4.01(h) Tagging Person. If, at the end of a 120-day period after such delivery,
the Section 4.01(h) Tag along Seller have not completed the transfer of all such
Securities, the Section 4.01(h) Tag along Seller shall return to the Section
4.01(h) Tagging Person the limited power-of-attorney (and all copies thereof)
together with all certificates representing the Securities which the Section
4.01(h) Tagging Person delivered for transfer pursuant to this Section 4.01(h),
then the Section 4.01(h) Tag along Seller may not effect another Section 4.01(h)
Tag along Sale without repeating the foregoing procedures.
(ii) The per share consideration to be paid to the DLJ Entities and ABS in
any Section 4.01(h) Tag along Sale shall be the Section 4.01 Offer Price in the
case of sales of Common Stock and in the case of Securities convertible into
Common Stock shall be the Section 4.01 Offer Price multiplied by the number of
shares of Common Stock into which the Securities in question are convertible.
(iii) Concurrently with the consummation of the Section 4.01(h) Tag along
Sale, the Section 4.01(h) Tag along Seller shall notify the Section 4.01(h)
Tagging Person thereof, shall remit to the Section 4.01(h) Tagging Person the
total consideration for the Securities of the Section 4.01(h) Tagging Person
transferred pursuant thereto (computed pursuant to Section 4.01(h)(ii)), and
shall, promptly after the consummation of such Section 4.01(h) Tag along Sale
furnish such other evidence of the completion and time of completion of such
transfer and the terms thereof as may be reasonably requested by the Section
4.01(h) Tagging Person.
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(iv) If at the termination of the Section 4.01(h) Tag along Notice
Period ABS or the DLJ Entities, as the case may be, shall not have elected to
participate in the Section 4.01(h) Tag along Sale, ABS or the DLJ Entities, as
the case may be, will be deemed to have waived their rights under this Section
4.01(h) with respect to the transfer of their Securities pursuant to such
Section 4.01(h) Tag along Sale.
(v) In any Section 4.01(h) Tag along Sale in which a Section 4.01(h)
Tagging Person has exercised its Section 4.01(h) Tag along Right, the right of
any party pursuant to Section 4.01(b) to accept the offer referred to therein
shall be deemed to have terminated. If ABS or the DLJ Entities, as the case may
be, elects not to exercise their Section 4.01(h) Tag along Right in any Section
4.01(h) Tag along Sale and elect to accept the offer referred to in Section
4.01(b), no other Person may exercise any Tag along Right under this Section
4.01(h).
SECTION 4.02. Preemptive Rights. For so long as any Notes, shares of
Series B Preferred Stock or shares of Series C Preferred Stock remain
outstanding, the Issuer shall provide each Securityholder with a written notice
(a "SECTION 4.02 NOTICE") of any proposed issuance by the Issuer of Equity
Securities at least 60 days prior to the proposed issuance date. Such notice
shall specify the price at which the Equity Securities are to be issued and the
other material terms of the issuance. Each Securityholder shall be entitled to
purchase, at the price and on the terms specified in such Section 4.02 Notice,
the Equity Securities proposed to be issued on a pro rata basis based upon such
Securityholder's Percentage Ownership. A Securityholder may exercise its rights
under this Section 4.02 by delivering written notice of its election to purchase
Equity Securities to the Issuer within 30 days of receipt of the Section 4.02
Notice. Each Securityholder shall deliver a copy of any such written notice to
the Issuer and each other Securityholder at least five Business Days prior to
the expiration of such 30-day period. A delivery of such a written notice (which
notice shall specify the number of shares (or amount) of Equity Securities to be
purchased by the Securityholder submitting such notice) by a Securityholder
shall constitute a binding agreement of such Securityholder to purchase, at the
price and on the terms specified in the Section 4.02 Notice, the number of
shares (or amount) of Equity Securities specified in such Securityholder's
written notice. In the case of any issuance of Equity Securities, the Issuer
shall have 90 days from the date of the Section 4.02 Notice to consummate the
proposed issuance of any or all of such Equity Securities which the
Securityholders have not elected to purchase at the price and upon terms that
are not materially less favorable to the Issuer than those specified in the
Section 4.02 Notice. At the consummation of such issuance, the Issuer shall
issue certificates representing the Equity Securities to be purchased by each
Securityholder exercising preemptive rights pursuant to this Section 4.02
registered in the name of such Securityholder, against payment by such
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Securityholder of the purchase price for such Equity Securities. If the Issuer
proposes to issue Equity Securities after such 90-day period, it shall again
comply with the procedures set forth in this Section. Notwithstanding the
foregoing, no Securityholder shall be entitled to purchase Equity Securities as
contemplated by this Section 4.02 in connection with issuances of Equity
Securities (i) to employees of the Issuer or any Subsidiary of the Issuer
pursuant to employee benefit plans or arrangements approved by the Board
(including upon the exercise of employee stock options), (ii) in connection with
an Initial Public Offering, (iii) in connection with any bona fide, arm's-length
restructuring of outstanding debt of the Issuer or any Subsidiary of the Issuer,
(iv) in connection with any bona fide, arm's-length direct or indirect merger,
acquisition or similar transaction, or (v) upon the conversion of any shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or
Notes into Common Stock. The Issuer shall not be under any obligation to
consummate any proposed issuance of Equity Securities, regardless of whether it
shall have delivered a Section 4.02 Notice in respect of such proposed issuance.
Unless earlier terminated pursuant to the terms of this Section 4.02, the
provisions of this Section 4.02 shall terminate upon the consummation of an
Initial Public Offering.
SECTION 4.03. Right to Compel Participation in Certain Transfers. (a) If
the DLJ Entities should propose to transfer for consideration of cash or stock
of no less than $5.00 per share (as adjusted to take into account any
subdivisions, combinations or reclassifications of the Common Stock after the
date hereof) of Common Stock all shares of Common Stock that they own or have
the right to acquire to any Third Party (a "SECTION 4.03 SALE"), the DLJ
Entities may, at their option, require all but not less than all the Other
Securityholders to participate in such transfer and, in the case of Other
Securityholders that hold any shares of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock, (together, "PREFERRED STOCK")
require such Securityholders to convert such shares of Preferred Stock to Common
Stock upon consummation of such transfer; provided that in any sale for cash
consideration the DLJ Entities may only require Securityholders that hold Series
C Preferred Stock to participate in such transfer and convert their shares if
the cash consideration to be received upon sale of the Common Stock received
upon such conversion causes the total cash consideration received, divided by
the number of shares of Series C Preferred Stock so converted, to equal or
exceed the applicable liquidation preference for a share of Series C Preferred
Stock as set forth in the Issuer's Certificate of Incorporation. The DLJ
Entities shall provide written notice of such Section 4.03 Sale to the Other
Securityholders (a "SECTION 4.03 NOTICE") and a copy of the agreement pursuant
to which such shares are proposed to be transferred (the "SECTION 4.03
AGREEMENT"). The Section 4.03 Notice shall identify the transferee, the number
of shares of Common Stock subject to the Section 4.03 Sale, the consideration
per share of Common Stock for which a transfer is proposed to be made (the
"SECTION
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4.03 SALE PRICE") and all other material terms and conditions of the Section
4.03 Sale. Each Other Securityholder shall be required to participate in the
Section 4.03 Sale on the terms and conditions set forth in the Section 4.03
Notice and to tender all its shares of Common Stock, and Securities convertible
into Common Stock as set forth below. The price of such transfer shall be the
Section 4.03 Sale Price in the case of shares of Common Stock, and in the case
of Securities convertible into Common Stock shall be the Section 4.03 Sale Price
multiplied by the number of shares of Common Stock into which such Securities
are convertible. Within ten Business Days following the date of the Section 4.03
Notice (the "SECTION 4.03 NOTICE PERIOD"), each of the Other Securityholders,
except ABS, shall deliver to a representative of the DLJ Entities designated in
the Section 4.03 Notice certificates representing all shares of Common Stock
held by such Other Securityholder and all Securities convertible into Common
Stock held by such Other Securityholder, duly endorsed, together with all other
documents required to be executed in connection with such Section 4.03 Sale or,
if such delivery is not permitted by applicable law, an unconditional agreement
to deliver such Securities pursuant to this Section 4.03(a) at the closing for
such Section 4.03 Sale against delivery to such Other Securityholder of the
consideration therefor. If an Other Securityholder should fail to deliver such
certificates to the DLJ Entities, the Issuer shall cause the books and records
of the Issuer to show that such Securities are bound by the provisions of this
Section 4.03(a) and that such Securities shall be transferred to the Third Party
immediately upon surrender for transfer by the Other Securityholder thereof.
Within the Section 4.03 Notice Period, ABS shall deliver to a representative of
the DLJ Entities designated in the Section 4.03 Notice an unconditional
agreement to deliver certificates representing all shares of Common Stock held
by ABS and all Securities convertible into Common Stock held by ABS, duly
endorsed, together with all other documents required to be executed in
connection with such Section 4.03 Sale pursuant to this Section 4.03(a) at the
closing for such Section 4.03 Sale against delivery to ABS of the consideration
therefor. If ABS should fail to deliver such certificates to the closing for
such Section 4.03 Sale, the Issuer shall cause the books and records of the
Issuer to show that such Securities are bound by the provisions of this Section
4.03(a) and that such Securities shall be transferred to the Third Party
immediately upon surrender for transfer by ABS.
(b) If, within 120 days after the DLJ Entities give the Section 4.03
Notice, they have not completed the transfer of all the Securities subject to
the Section 4.03 Sale, the DLJ Entities shall return to each of the Other
Securityholders, except ABS, all certificates representing Securities that such
Other Securityholder delivered for transfer pursuant hereto, together with any
documents in the possession of the DLJ Entities executed by the Other
Securityholder in connection with such proposed transfer, and all the
restrictions on transfer contained in this Agreement or otherwise applicable at
such time with
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respect to Securities owned by the Other Securityholders shall again be in
effect. If, within 120 days after the DLJ Entities give the Section 4.03 Notice,
they have not completed the transfer of all the Securities subject to the
Section 4.03 Sale, the DLJ Entities shall return to ABS the unconditional
agreement of ABS and all the restrictions on transfer contained in this
Agreement or otherwise applicable at such time with respect to Securities owned
by ABS shall again be in effect.
(c) Promptly after the consummation of the transfer of Securities of the
DLJ Entities and the Other Securityholders pursuant to this Section 4.03, the
DLJ Entities shall give notice thereof to the Other Securityholders, except ABS,
shall remit to each of the Other Securityholders who have surrendered their
certificates the total consideration for the shares of Common Stock and
Securities convertible into Common Stock transferred pursuant hereto and shall
furnish such other evidence of the completion and time of completion of such
transfer and the terms thereof as may be reasonably requested by such Other
Securityholders.
SECTION 4.04. Improper Transfer. Any attempt to transfer any Securities
not in compliance with this Agreement shall be null and void and neither the
Issuer nor any transfer agent shall give any effect in the Issuer's records to
such attempted transfer.
SECTION 4.05. Termination of Agreement. This Agreement shall
terminate upon the earliest of
(i) the tenth anniversary of the date hereof;
(ii) such time as at least 50% of the shares of Fully Diluted Common
Stock are held by Persons (other than any Securityholder) who acquired
their shares in a sale pursuant to (x) Rule 144 under the Securities Act
or (y) a public offering registered under the Securities Act; and
(iii) such time as the DLJ Entities own less than 5% of the aggregate
number of shares of Fully Diluted Common Stock.
SECTION 4.06. Inapplicability of Transfer Restrictions and Corporate
Governance Provisions to PM Funding, Inc. Notwithstanding anything else
contained herein, PM Funding, Inc. shall not be bound by or subject to any of
(i) the restrictions on or obligations with respect to transfers of Securities
set forth in Article 3 or in Section 4.01(a) through (f) or Section 4.01(h) or
(ii) the corporate governance provisions set forth in Article 2.
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ARTICLE 5
REGISTRATION RIGHTS
SECTION 5.01. Demand Registration. (a) Commencing on the date which is
six months after the Initial Public Offering Schaefer and Cormier may make a
written request, commencing on the date which is the first anniversary of the
date hereof (x) holders of a majority of the outstanding shares of Series C
Preferred Stock may make a written request and (y) ABS may make a written
request, and at any time the DLJ Entities may make a written request (any such
requesting Person, a "SELLING SECURITYHOLDER") that the Issuer effect the
registration under the Securities Act of all or a portion of such Selling
Securityholder's Registrable Stock, and specifying the intended method of
disposition thereof (it being understood that (A) all such written requests will
be sent to the Issuer and each potential Selling Securityholder and (B) more
than one Selling Securityholder may request a Demand Registration at the same
time). The Issuer will promptly give written notice of such requested
registration (a "DEMAND REGISTRATION") at least 30 days prior to the anticipated
filing date of the registration statement relating to such Demand Registration
to the other Securityholders and thereupon will use its best efforts to effect,
as expeditiously as possible, the registration under the Securities Act of:
(i) the Registrable Stock which the Issuer has been so requested to
register by the Selling Securityholders, then held by the Selling
Securityholders; and
(ii) subject to Section 5.02, all other Registrable Stock which any other
Securityholder entitled to request the Issuer to effect an Incidental
Registration (as such term is defined in Section 5.02) pursuant to
Section 5.02 (all such Securityholders, together with the Selling
Securityholders, the "HOLDERS") has requested the Issuer to register by
written request received by the Issuer within 15 days after the receipt
by such Holders of such written notice given by the Issuer,
all to the extent necessary to permit the disposition (in accordance with the
intended methods thereof as aforesaid) of the Registrable Stock so to be
registered; provided that, subject to Section 5.01(c) hereof, the Issuer shall
not be obligated to effect more than one Demand Registration for Schaefer and
Cormier collectively, one Demand Registration for the holders of the Series C
Preferred Stock, collectively, one Demand Registration for ABS and four Demand
Registrations for the DLJ Entities collectively, pursuant to this Section 5.01
other than any such Demand Registrations effected on Form S-3; and provided
further that the Issuer shall not be obligated to effect a Demand Registration
unless the Registrable Stock requested to be included in such Demand
Registration
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constitutes at least 25% of the Common Stock then outstanding or to be issued
upon conversion of the Notes and/or Series B Preferred Stock or, in the case of
a Demand Registration by the holders of a majority of the outstanding shares of
Series C Preferred Stock, 25% of the Common Stock issued or to be issued upon
conversion of the Series C Preferred Stock. In no event will the Issuer be
required to effect more than two Demand Registrations on Form S-3 within any 12
month period.
Promptly after the expiration of the 15-day period referred to in
Section 5.01(a)(ii) hereof, the Issuer will notify all the Holders to be
included in the Demand Registration of the other Holders and the number of
shares of Registrable Stock requested to be included therein. The Selling
Securityholders requesting a registration under this Section 5.01(a) may, at any
time prior to the effective date of the registration statement relating to such
registration, revoke such request, without liability to any of the other
Holders, by providing a written notice to the Issuer revoking such request, in
which case such request, so revoked, shall be considered a Demand Registration
unless such revocation arose out of the fault of the Issuer, in which case such
request shall not be considered a Demand Registration. Notwithstanding anything
contained in this Agreement to the contrary, nothing herein shall be construed
as requiring the Issuer to register any of its securities other than Common
Stock.
(b) The Issuer will pay all Registration Expenses in connection with any
Demand Registration.
(c) A registration requested pursuant to this Section 5.01 shall not be
deemed to have been effected unless the registration statement relating thereto
(i) has become effective under the Securities Act and (ii) has remained
effective for a period of at least 90 days (or such shorter period in which all
Registrable Stock of the Holders included in such registration has actually been
sold thereunder); provided that if after any registration statement requested
pursuant to this Section 5.01 becomes effective (i) such registration statement
is interfered with by any stop order, injunction or other order or requirement
of the SEC or other governmental agency or court or (ii) less than 75% of the
Registrable Stock included in such registration statement has been sold
thereunder, such registration statement shall be at the sole expense of the
Issuer and shall not be considered a Demand Registration, unless any such
interference referred to in clause (i) of this proviso arose out of the fault of
the Selling Securityholders, in which case such registration statement shall be
considered a Demand Registration.
(d) If a Demand Registration involves an Underwritten Public Offering and
the managing underwriter shall advise the Issuer and the Selling Securityholders
that, in its view, (i) the number of shares of Common Stock
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requested to be included in such registration (including Common Stock which the
Issuer proposes to be included which is not Registrable Stock) or (ii) the
inclusion of some or all of the Securities owned by the Holders, in either case,
exceeds the largest number of Securities which can be sold without having an
adverse effect on such offering, including the price at which such Securities
can be sold (the "MAXIMUM OFFERING SIZE"), the Issuer will include in such
registration, in the priority listed below, up to the Maximum Offering Size:
(A) first, all Benchmark Shares requested to be registered by
the DLJ Entities (allocated, if necessary for the offering not to
exceed the Maximum Offering Size, pro rata among the DLJ Entities
on the basis of the relative number of shares of Registrable
Stock requested to be included in such registration) and all
Series C Benchmark Shares requested to be registered by holders
of the Series C Preferred Stock (allocated among the holders of
the Series C Preferred Stock that requested such registration pro
rata based on Series C Percentage Ownership) allocated pro rata
between the Benchmark Shares and the Series C Benchmark Shares,
based upon the total Percentage Ownership represented by the
holders of the Benchmark Shares and the holders of the Series C
Benchmark Shares, respectively;
(B) second, all Registrable Stock requested to be registered
by any one or more Selling Securityholders that have requested
the Demand Registration pursuant to Section 5.01 (allocated, if
necessary for the offering not to exceed the Maximum Offering
Size, pro rata among such Selling Securityholders on the basis of
the relative number of shares of Registrable Stock (excluding any
Benchmark Shares and Series C Benchmark Shares) so requested to
be included in such registration);
(C) third, all Registrable Stock requested to be included in
such registration by any other Holder (allocated, if necessary
for the offering not to exceed the Maximum Offering Size, pro
rata among such other Holders on the basis of the relative number
of shares of Registrable Stock (excluding any Benchmark Shares
and Series C Benchmark Shares) so requested to be included in
such registration); and
(D) fourth, any Common Stock proposed to be registered by the
Issuer.
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SECTION 5.02. Incidental Registration. (a) If the Issuer proposes to
register any of its Common Stock under the Securities Act (other than a
registration (A) in connection with an Initial Public Offering, (B) on Form S-8
or S-4 or any successor or similar forms, (C) relating to Common Stock issuable
upon exercise of employee stock options or in connection with any employee
benefit or similar plan of the Issuer or (D) in connection with a direct or
indirect merger, acquisition or other similar transaction) whether or not for
sale for its own account, it will each such time, subject to the provisions of
Section 5.02(b) hereof, give prompt written notice at least 30 days prior to the
anticipated filing date of the registration statement relating to such
registration to each Securityholder, which notice shall set forth such
Securityholders' rights under this Section 5.02 and shall offer all
Securityholders the opportunity to include in such registration statement such
number of shares of Registrable Stock as each such Securityholder may request
(an "INCIDENTAL REGISTRATION"). Upon the written request of any such
Securityholder made within 15 days after the receipt of notice from the Issuer
(which request shall specify the number of shares of Registrable Stock intended
to be disposed of by such Securityholder), the Issuer will use its best efforts
to effect the registration under the Securities Act of all Registrable Stock
which the Issuer has been so requested to register by such Securityholders, to
the extent requisite to permit the disposition of the Registrable Stock so to be
registered; provided that (i) if such registration involves an Underwritten
Public Offering, all such Securityholders requesting to be included in the
Issuer's registration must sell their Registrable Stock to the underwriters
selected as provided in Section 5.04(f) on the same terms and conditions as
apply to the Issuer and the Selling Securityholders and (ii) if, at any time
after giving written notice of its intention to register any stock pursuant to
this Section 5.02(a) and prior to the effective date of the registration
statement filed in connection with such registration, the Issuer shall determine
for any reason not to register such stock, the Issuer shall give written notice
to all such Securityholders and, thereupon, shall be relieved of its obligation
to register any Registrable Stock in connection with such registration. No
registration effected under this Section 5.02 shall relieve the Issuer of its
obligations to effect a Demand Registration to the extent required by Section
5.01 hereof. The Issuer will pay all Registration Expenses in connection with
each registration of Registrable Stock requested pursuant to this Section 5.02.
(b) If a registration pursuant to this Section 5.02 involves an
Underwritten Public Offering (other than in the case of an Underwritten Public
Offering requested by any Securityholder in a Demand Registration, in which case
the provisions with respect to priority of inclusion in such offering set forth
in Section 5.01(d) shall apply) and the managing underwriter advises the Issuer
that, in its view, the number of shares of Common Stock which the Issuer and the
selling Securityholders intend to include in such registration exceeds the
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Maximum Offering Size, the Issuer will include in such registration, in the
following priority, up to the Maximum Offering Size:
(i) first, so much of the Common Stock proposed to be registered
by the Issuer as would not cause the offering to exceed the Maximum
Offering Size;
(ii) second, all Benchmark Shares requested to be included in
such registration statement by any DLJ Entity pursuant to this Section
5.02 (allocated, if necessary for the offering not to exceed the Maximum
Offering Size, pro rata among such DLJ Entities on the basis of the
relative number of shares of Registrable Stock requested to be so
included) and all Series C Benchmark Shares requested to be included in
such registration statement by holders of the Series C Preferred Stock
(allocated among the holders of the Series C Preferred Stock that
requested such registration pro rata based on Series C Percentage
Ownership) allocated between the Benchmark Shares and the Series C
Benchmark Shares pro rata based upon the total Percentage Ownership
represented by the holders of the Benchmark Shares and the holders of
the Series C Benchmark Shares, respectively;
(iii) third, all Registrable Stock other than Benchmark Shares
and Series C Benchmark Shares requested to be included in such
registration by any Securityholder pursuant to this Section 5.02
(allocated, if necessary for the offering not to exceed the Maximum
Offering Size, pro rata and such Securityholders on the basis of the
relative number of shares of Registrable Stock (excluding any Benchmark
Shares and Series C Benchmark Shares) so requested to be included in
such registration).
SECTION 5.03. Holdback Agreements. If any registration of Registrable
Stock shall be in connection with an Underwritten Public Offering, each
Securityholder agrees not to effect any public sale or distribution, including
any sale pursuant to Rule 144, or any successor provision, under the Securities
Act, of any Registrable Stock, and not to effect any such public sale or
distribution of any other Common Stock of the Issuer or of any stock convertible
into or exchangeable or exercisable for any Common Stock of the Issuer (in each
case, other than as part of such Underwritten Public Offering) during the 14
days prior to the effective date of such registration statement (except as part
of such registration) or during the period after such effective date that such
managing underwriter and the Issuer shall agree (but not to exceed 90 days). Any
waiver of any restriction on sales or distributions referred to in this Section
5.03 shall be effective as to each of ABS, Brumberger, Cormier, Schaefer,
Peters, Rhotons, Karam, Bye, Aylwin, Amelio, Terry, the Helios Shareholders and
the DLJ
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Entities, regardless of whether the waiver was in fact requested by, or granted
to, only certain of such Persons.
SECTION 5.04. Registration Procedures. Whenever Securityholders request
that any Registrable Stock be registered pursuant to Section 5.01 or 5.02
hereof, the Issuer will, subject to the provisions of such Sections, use its
best efforts to effect the registration and the sale of such Registrable Stock
in accordance with the intended method of disposition thereof as quickly as
practicable, and in connection with any such request:
(a) The Issuer will as expeditiously as possible prepare and file with
the SEC a registration statement on any form for which the Issuer then qualifies
or which counsel for the Issuer shall deem appropriate and which form shall be
available for the sale of the Registrable Stock to be registered thereunder in
accordance with the intended method of distribution thereof, and use its best
efforts to cause such filed registration statement to become and remain
effective for a period of not less than 90 days (or such shorter period in which
all of the Registrable Stock of the Holders included in such registration
statement shall have actually been sold thereunder).
(b) The Issuer will, if requested, prior to filing a registration
statement or prospectus or any amendment or supplement thereto, furnish to each
Securityholder and each underwriter, if any, of the Registrable Stock covered by
such registration statement copies of such registration statement as proposed to
be filed, and thereafter the Issuer will furnish to such Securityholder and
underwriter, if any, such number of copies of such registration statement, each
amendment and supplement thereto (in each case including all exhibits thereto
and documents incorporated by reference therein), the prospectus included in
such registration statement (including each preliminary prospectus) and such
other documents as such Securityholder or underwriter may reasonably request in
order to facilitate the disposition of the Registrable Stock owned by such
Securityholder.
(c) After the filing of the registration statement, the Issuer will
promptly notify each Securityholder holding Registrable Stock covered by such
registration statement of any stop order issued or threatened by the SEC and
take all reasonable actions required to prevent the entry of such stop order or
to remove it if entered.
(d) The Issuer will use its best efforts to (i) register or qualify the
Registrable Stock covered by such registration statement under such other
securities or blue sky laws of such jurisdictions in the United States as any
Securityholder holding such Registrable Stock reasonably (in light of such
Securityholder's intended plan of distribution) requests and (ii) cause such
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Registrable Stock to be registered with or approved by such other governmental
agencies or authorities as may be necessary by virtue of the business and
operations of the Issuer and do any and all other acts and things that may be
reasonably necessary or advisable to enable such Securityholder to consummate
the disposition of the Registrable Stock owned by such Securityholder; provided
that the Issuer will not be required to (A) qualify generally to do business in
any jurisdiction where it would not otherwise be required to qualify but for
this paragraph (d), (B) subject itself to taxation in any such jurisdiction or
(C) consent to general service of process in any such jurisdiction.
(e) The Issuer will immediately notify each Securityholder holding such
Registrable Stock covered by such registration statement, at any time when a
prospectus relating thereto is required to be delivered under the Securities
Act, of the occurrence of an event requiring the preparation of a supplement or
amendment to such prospectus so that, as thereafter delivered to the purchasers
of such Registrable Stock, such prospectus will not contain an untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading and promptly
prepare and make available to each such Securityholder and file with the SEC any
such supplement or amendment.
(f) Subject to Section 7.05, the Issuer may select, in its sole
discretion, the underwriter or underwriters in connection with any Underwritten
Public Offering as it may deem appropriate. Notwithstanding the foregoing, (i)
the DLJ Entities will have the right, in their sole discretion, to select the
underwriter or underwriters in connection with any underwritten Demand
Registration requested by any of the DLJ Entities pursuant to Section 5.01, (ii)
Cormier and Schaefer will have the right, in their sole discretion, to select
the underwriter or underwriters in connection with any underwritten Demand
Registration requested by them only (and not also by any DLJ Entity) pursuant to
Section 5.01 and (iii) ABS will have the right, in its sole discretion, to
select the underwriter or underwriters in connection with any underwritten
Demand Registration requested by it only (and not also by any DLJ Entity)
pursuant to Section 5.01; provided that if such Demand Registration referred to
in clause (iii) is also requested by any DLJ Entity, such DLJ Entity will have
the right, in its sole discretion, to select the lead managing underwriter in
connection with such underwritten Demand Registration and ABS will have the
right, in its sole discretion, to select a co- managing underwriter in
connection with such underwritten Demand Registration. Any Affiliate of any of
the DLJ Entities may be selected as underwriter for an Underwritten Public
Offering. The Issuer will enter into customary agreements (including an
underwriting agreement in customary form) and take such other actions as are
reasonably required in order to expedite or facilitate the disposition of such
Registrable Stock, including the engagement of a "QUALIFIED INDEPENDENT
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UNDERWRITER" in connection with the qualification of the underwriting
arrangements with the NASD.
(g) The Issuer will make available for inspection by any Securityholder
and any underwriter participating in any disposition pursuant to a registration
statement being filed by the Issuer pursuant to this Section 5.04 and any
attorney, accountant or other professional retained by any such Securityholder
or underwriter (collectively, the "INSPECTORS"), all financial and other
records, pertinent corporate documents and properties of the Issuer
(collectively, the "RECORDS") as shall be reasonably requested by any such
Person, and cause the Issuer's officers, directors and employees to supply all
information reasonably requested by any Inspectors in connection with such
registration statement.
(h) The Issuer will furnish to each such Securityholder and to each such
underwriter, if any, a signed counterpart, addressed to such underwriter, of (i)
an opinion or opinions of counsel to the Issuer and (ii) a comfort letter or
comfort letters from the Issuer's independent public accountants, each in
customary form and covering such matters of the type customarily covered by
opinions or comfort letters, as the case may be, as a majority of such
Securityholders or the managing underwriter therefor reasonably requests.
(i) The Issuer will otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC, and make available to its
securityholders, as soon as reasonably practicable, an earnings statement
covering a period of 12 months, beginning within three months after the
effective date of the registration statement, which earnings statement shall
satisfy the provisions of Section 11(a) of the Securities Act.
The Issuer may require each such Securityholder to promptly furnish in
writing to the Issuer such information regarding the distribution of the
Registrable Stock as the Issuer may from time to time reasonably request and
such other information as may be legally required in connection with such
registration.
Each such Securityholder agrees that, upon receipt of any notice from
the Issuer of the happening of any event of the kind described in Section
5.04(e) hereof, such Securityholder will forthwith discontinue disposition of
Registrable Stock pursuant to the registration statement covering such
Registrable Stock until such Securityholder's receipt of the copies of the
supplemented or amended prospectus contemplated by Section 5.04(e) hereof, and,
if so directed by the Issuer, such Securityholder will deliver to the Issuer all
copies, other than any permanent file copies then in such Securityholder's
possession, of the most recent prospectus covering such Registrable Stock at the
time of receipt of such notice. In the event that the Issuer shall give such
notice, the Issuer shall extend the
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<PAGE> 35
period during which such registration statement shall be maintained effective
(including the period referred to in Section 5.04(a) hereof) by the number of
days during the period from and including the date of the giving of notice
pursuant to Section 5.04(e) hereof to the date when the Issuer shall make
available to such Securityholder a prospectus supplemented or amended to conform
with the requirements of Section 5.04(e) hereof.
SECTION 5.05. Indemnification by the Issuer. The Issuer agrees to
indemnify and hold harmless each Securityholder holding Registrable Stock
covered by a registration statement, its officers, directors and agents, and
each Person, if any, who controls such Securityholder within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act from and
against any and all losses, claims, damages and liabilities caused by any untrue
statement or alleged untrue statement of a material fact contained in any
registration statement or prospectus relating to the Registrable Stock (as
amended or supplemented if the Issuer shall have furnished any amendments or
supplements thereto) or any preliminary prospectus, or caused by any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except insofar as
such losses, claims, damages or liabilities are caused by any such untrue
statement or omission or alleged untrue statement or omission so made in strict
conformity with information furnished in writing to the Issuer by such
Securityholder or on such Securityholder's behalf expressly for use therein;
provided that with respect to any untrue statement or omission or alleged untrue
statement or omission made in any preliminary prospectus, or in any prospectus,
as the case may be, the indemnity agreement contained in this paragraph shall
not apply to the extent that any such loss, claim, damage, liability or expense
results from the fact that a current copy of the prospectus (or, in the case of
a prospectus, the prospectus as amended or supplemented) was not sent or given
to the Person asserting any such loss, claim, damage, liability or expense at or
prior to the written confirmation of the sale of the Registrable Stock concerned
to such Person if it is determined that the Issuer has provided such prospectus
and it was the responsibility of such Securityholder to provide such Person with
a current copy of the prospectus (or such amended or supplemented prospectus, as
the case may be) and such current copy of the prospectus (or such amended or
supplemented prospectus, as the case may be) would have cured the defect giving
rise to such loss, claim, damage, liability or expense. The Issuer also agrees
to indemnify any underwriters of the Registrable Stock, their officers and
directors and each person who controls such underwriters on substantially the
same basis as that of the indemnification of the Securityholders provided in
this Section 5.05.
SECTION 5.06. Indemnification by Participating Securityholders. (a)
Subject to Section 5.06(b), each Securityholder holding Registrable Stock
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<PAGE> 36
included in any registration statement agrees, severally but not jointly, to
indemnify and hold harmless the Issuer, its officers, directors and agents and
each Person, if any, who controls the Issuer within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act to the same
extent as the foregoing indemnity from the Issuer to such Securityholder, but
only (i) with respect to information furnished in writing by such Securityholder
or on such Securityholder's behalf expressly for use in any registration
statement or prospectus relating to the Registrable Stock, or any amendment or
supplement thereto, or any preliminary prospectus or (ii) to the extent that any
loss, claim, damage, liability or expense described in Section 5.05 results from
the fact that a current copy of the prospectus (or, in the case of a prospectus,
the prospectus as amended or supplemented) was not sent or given to the Person
asserting any such loss, claim, damage, liability or expense at or prior to the
written confirmation of the sale of the Registrable Stock concerned to such
Person if it is determined that it was the responsibility of such Securityholder
to provide such Person with a current copy of the prospectus (or such amended or
supplemented prospectus, as the case may be) and such current copy of the
prospectus (or such amended or supplemented prospectus, as the case may be)
would have cured the defect giving rise to such loss, claim, damage, liability
or expense. Subject to Section 5.06(b), each such Securityholder also agrees to
indemnify and hold harmless underwriters of the Registrable Stock, their
officers and directors and each person who controls such underwriters on
substantially the same basis as that of the indemnification of the Issuer
provided in this Section 5.06. As a condition to including Registrable Stock in
any registration statement filed in accordance with Article 5 hereof, the Issuer
may require that it shall have received an undertaking reasonably satisfactory
to it from any underwriter to indemnify and hold it harmless to the extent
customarily provided by underwriters with respect to similar securities.
(b) No Securityholder shall be liable under Section 5.06(a) for any
damage thereunder in excess of the net proceeds realized by such Securityholder
in the sale of the Registrable Stock of such Securityholder.
SECTION 5.07. Conduct of Indemnification Proceedings. In case any
proceeding (including any governmental investigation) shall be instituted
involving any Person in respect of which indemnity may be sought pursuant to
this Article 5, such Person (an "INDEMNIFIED PARTY") shall promptly notify the
Person against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in
writing and the Indemnifying Party shall assume the defense thereof, including
the employment of counsel reasonably satisfactory to such Indemnified Party, and
shall assume the payment of all fees and expenses; provided that the failure of
any Indemnified Party so to notify the Indemnifying Party shall not relieve the
Indemnifying Party of its obligations hereunder except to the extent that the
Indemnifying Party is materially prejudiced by such failure to notify. In any
such
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<PAGE> 37
proceeding, any Indemnified Party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Party unless (i) the Indemnifying Party and the Indemnified
Party shall have mutually agreed to the retention of such counsel or (ii) in the
reasonable judgment of such Indemnified Party representation of both parties by
the same counsel would be inappropriate due to actual or potential differing
interests between them. It is understood that the Indemnifying Party shall not,
in connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the reasonable fees and expenses of more than one
separate firm of attorneys (in addition to any local counsel) at any time for
all such Indemnified Parties, and that all such fees and expenses shall be
reimbursed as they are incurred. In the case of any such separate firm for the
Indemnified Parties, such firm shall be designated in writing by the Indemnified
Parties. The Indemnifying Party shall not be liable for any settlement of any
proceeding effected without its written consent, but if settled with such
consent, or if there be a final judgment for the plaintiff, the Indemnifying
Party shall indemnify and hold harmless such Indemnified Parties from and
against any and all losses, claims, damages, liabilities and expenses or
liability (to the extent stated above) by reason of such settlement or judgment.
No Indemnifying Party shall, without the prior written consent of the
Indemnified Party, effect any settlement of any pending or threatened proceeding
in respect of which any Indemnified Party is or could have been a party and
indemnity could have been sought hereunder by such Indemnified Party, unless
such settlement includes an unconditional release of such Indemnified Party from
all liability arising out of such proceeding.
SECTION 5.08. Contribution. If the indemnification provided for in this
Article 5 is held by a court of competent jurisdiction to be unavailable to the
Indemnified Parties in respect of any losses, claims, damages or liabilities
referred to herein, then each such Indemnifying Party, in lieu of indemnifying
such Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such losses, claims, damages or liabilities (i)
as between the Issuer and the Securityholders holding Registrable Stock covered
by a registration statement on the one hand and the underwriters on the other,
in such proportion as is appropriate to reflect the relative benefits received
by the Issuer and such Securityholders on the one hand and the underwriters on
the other, from the offering of the Registrable Stock, or if such allocation is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits but also the relative fault of the Issuer and
such Securityholders on the one hand and of such underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations and (ii) as between the Issuer on the one hand and each such
Securityholder on the other, in such proportion as is appropriate to reflect the
relative fault of the Issuer and of each such
34
<PAGE> 38
Securityholder in connection with such statements or omissions, as well as any
other relevant equitable considerations. The relative benefits received by the
Issuer and such Securityholders on the one hand and such underwriters on the
other shall be deemed to be in the same proportion as the total proceeds from
the offering (net of underwriting discounts and commissions but before deducting
expenses) received by the Issuer and such Securityholders bear to the total
underwriting discounts and commissions received by such underwriters, in each
case as set forth in the table on the cover page of the prospectus. The relative
fault of the Issuer and such Securityholders on the one hand and of such
underwriters on the other shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Issuer and such Securityholders or by such underwriters. The
relative fault of the Issuer on the one hand and of each such Securityholder on
the other shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by such party,
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The Issuer and the Securityholders agree that it would not be just and
equitable if contribution pursuant to this Section 5.08 were determined by pro
rata allocation (even if the underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an Indemnified Party as a result of the losses,
claims, damages or liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such Indemnified Party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 5.08, no underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Registrable Stock underwritten by it and distributed to the
public were offered to the public exceeds the amount of any damages which such
underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission, and no Securityholder
shall be required to contribute any amount in excess of the amount by which the
net proceeds realized on the sale of the Registrable Stock of such
Securityholder exceeds the amount of any damages which such Securityholder has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. Each Securityholder's obligation to
35
<PAGE> 39
contribute pursuant to this Section 5.08 is several in the proportion that the
proceeds of the offering received by such Securityholder bears to the total
proceeds of the offering received by all such Securityholders and not joint.
SECTION 5.09. Participation in Public Offering. No Person may
participate in any Underwritten Public Offering hereunder unless such Person (a)
agrees to sell such Person's securities on the basis provided in any
underwriting arrangements approved by the Persons entitled hereunder to approve
such arrangements and (b) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents reasonably
required under the terms of such underwriting arrangements and the provisions of
this Agreement in respect of registration rights.
ARTICLE 6
CERTAIN COVENANTS AND AGREEMENTS
SECTION 6.01. Confidentiality. (a) Each Securityholder hereby agrees
that Confidential Information (as defined below) furnished and to be furnished
to it was and will be made available in connection with such Securityholder's
investment in the Issuer. Each Securityholder agrees that it will not use the
Confidential Information in any way to the competitive disadvantage of the
Issuer. Each Securityholder further acknowledges and agrees that it will not
disclose any Confidential Information to any Person; provided that Confidential
Information may be disclosed (i) to such Securityholder's Representatives (as
defined below) in the normal course of the performance of their duties, (ii) to
the extent required by applicable law, rule or regulation (including complying
with any oral or written questions, interrogatories, requests for information or
documents, subpoena, civil investigative demand or similar process to which a
Securityholder is subject), (iii) to any Person to whom such Securityholder is
contemplating a transfer of its Securities (provided that such transfer would
not be in violation of the provisions of this Agreement and as long as such
potential transferee is advised of the confidential nature of such information
and agrees to be bound by a confidentiality agreement in form and substance
satisfactory to the Issuer and consistent with the provisions hereof) or (iv) if
the prior written consent of the Board shall have been obtained. Nothing
contained herein shall prevent the use of Confidential Information in connection
with the assertion or defense of any claim by or against the Issuer or any
Securityholder.
(b) "CONFIDENTIAL INFORMATION" means any information concerning the
Issuer, its financial condition, business, operations or prospects in the
possession of or to be furnished to any Securityholder in its capacity as a
shareholder of the Issuer or by virtue of its present or former right to
designate a director of the Issuer; provided that the term "CONFIDENTIAL
INFORMATION" does not include
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<PAGE> 40
information which (i) becomes generally available to the public other than as a
result of a disclosure by a Securityholder or its partners, directors, officers,
employees, agents, counsel, investment advisers or representatives (all such
persons being collectively referred to as "REPRESENTATIVES") in violation of any
of the Transaction Documents (as such term is defined in the Securities Purchase
Agreement), (ii) is or was available to such Securityholder on a nonconfidential
basis prior to its disclosure to such Securityholder or its Representatives by
the Issuer or (iii) was or becomes available to such Securityholder on a non-
confidential basis from a source other than the Issuer, provided that such
source is or was (at the time of receipt of the relevant information) not, to
the best of such Securityholder's knowledge, bound by a confidentiality
agreement with (or other confidentiality obligation to) the Issuer or another
Person.
SECTION 6.02. No Inconsistent Agreements. Neither the Issuer nor any
Securityholder is presently a party to or will hereafter enter into any
agreement with respect to any Securities which is inconsistent with the rights
granted to any Securityholder by this Agreement or any other agreements relating
to the Securities to which the Securityholders are parties or which otherwise
conflicts with the provisions hereof or thereof, or will in the future grant or
cause to be granted to any holder or prospective holder of any Securities, any
rights relating thereto, including, for example, registration rights, which are,
in the aggregate, made available on more favorable terms (including, without
limitation, terms which are more favorable than those set forth in Article 5) to
such holder than those granted to the Securityholders hereunder and thereunder,
unless the Securityholders are given all of the benefits of such favorable terms
and consent thereto.
ARTICLE 7
MISCELLANEOUS
SECTION 7.01. Entire Agreement. The Transaction Documents constitute the
entire agreement between the parties with respect to the subject matter of the
Transaction Documents and supersede all prior agreements and understandings,
both oral and written, between the parties with respect to the subject matter of
this Agreement and the other Transaction Documents.
SECTION 7.02. Binding Effect; Benefit. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective heirs,
successors, legal representatives and permitted assigns. Nothing in this
Agreement, expressed or implied, is intended to confer on any Person other than
the parties hereto, and their respective heirs, successors, legal
representatives and
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<PAGE> 41
permitted assigns, any rights, remedies, obligations or liabilities under or by
reason of this Agreement.
SECTION 7.03. Assignability. Neither this Agreement nor any right,
remedy, obligation or liability arising hereunder or by reason hereof shall be
assignable by the Issuer or any Securityholder, except in connection with a
transfer of securities of the Issuer pursuant to the terms hereof; provided that
any Person acquiring Securities who is required by the terms of this Agreement
to become a party hereto shall execute and deliver to the Issuer an agreement to
be bound by this Agreement and shall thenceforth be a "SECURITYHOLDER". Any
Securityholder who ceases to beneficially own any Securities shall cease to be
bound by the terms hereof (other than Sections 5.06, 5.07, 5.08 and 6.01).
SECTION 7.04. Amendment; Waiver; Termination. (a) No provision of this
Agreement may be waived except by an instrument in writing executed by the party
against whom the waiver is to be effective. No provision of this Agreement may
be amended or otherwise modified except by an instrument in writing executed by
the Issuer with the approval of the Board and Securityholders holding or having
the right to acquire at least 85% of the Fully Diluted Common Stock held by
parties to this Agreement.
(b) In addition, any amendment, modification or termination of any
provision of this Agreement that would adversely affect a DLJ Entity may be
effected only with the consent of such DLJ Entity.
(c) In addition, any amendment, modification or termination of any
provision of this Agreement that would adversely affect Cormier or Schaefer may
be effected only with the consent of Cormier or Schaefer, respectively.
(d) In addition, any amendment, modification or termination of any
provision of this Agreement that would adversely affect ABS may be effected only
with the consent of ABS.
SECTION 7.05. Exclusive Financial Advisor and Investment Banking
Advisor. During the period from the date hereof through and including November
23, 1998, Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC"), or any
Affiliate of DLJSC that the DLJ Entities may choose in their sole discretion,
shall be engaged as the exclusive financial advisor and investment banker for
the Issuer for an annual retainer fee (i) which shall be $200,000 effective for
November 23, 1998 and (ii) which thereafter shall be on commercially reasonable
terms to be agreed between the Issuer and DLJSC.
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<PAGE> 42
SECTION 7.06. Notices. All notices and other communications given or
made pursuant hereto or pursuant to any other agreement among the parties,
unless otherwise specified, shall be in writing and shall be deemed to have been
duly given or made if sent by fax (with confirmation in writing), delivered
personally or sent by registered or certified mail (postage prepaid, return
receipt requested) to the parties at the fax number or address set forth below
or at such other addresses as shall be furnished by the parties by like notice,
and such notice or communication shall be deemed to have been given or made upon
receipt:
if to the DLJ Entities, to:
DLJ Merchant Banking Funding, Inc.
DLJ Merchant Banking Partners, L.P.
277 Park Avenue
New York, New York 10172
Attention: Thompson Dean
Fax: (212) 892-7552
and to:
DLJ International Partners, C.V.
DLJ Offshore Partners, C.V.
c/o DLJ Offshore Management N.V.
John B. Gorsiraweg 6
Willemstad, Curacao
Netherlands Antilles
Attention: Germaine Sprock
MeesPierson Trust (Curacao) N.V.
DLJ Capital Corporation
Sprout Growth II, L.P.
Sprout Capital VI, L.P.
3000 Sand Hill Road
Building 3, Suite 170
Menlo Park, California 94025
Attention: Robert Finzi
Fax: (650) 234-2779
39
<PAGE> 43
Donaldson, Lufkin & Jenrette
Securities Corporation
277 Park Avenue
New York, New York 10172
Attention: Ivy Dodes
Fax: (212) 892-2689
with a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: George R. Bason, Jr.
Fax: (212) 450-4800
if to ABS, to:
ABS Capital Partners II, L.P.
101 California Street, 47th Floor
San Francisco, California 94111
Attention: Andrew T. Sheehan
Fax: 415-477-3229
and to:
ABS Capital Partners II, L.P.
One South Street
Baltimore, Maryland 21202
Attention: Donald B. Hebb, Jr.
Fax: 410-895-4380
with a copy to:
Hogan & Hartson, L.L.P.
111 South Calvert Street, Suite 1600
Baltimore, Maryland 21202
Attention: Walter G. Lohr, Jr.
Fax: 410-539-6981
40
<PAGE> 44
if to Cormier, to:
Arthur J. Cormier
P.O. Box 1714
Rancho Sante Fe, CA 92067
with a copy to:
Paul, Hastings, Janofsky & Walker
695 Town Center Drive
17th Floor
Costa Mesa, CA 92626
Attention: Robert R. Burge
Fax: (714) 979-1921
if to Schaefer or the Issuer, to:
Phase Metrics, Inc.
10260 Sorrento Valley Blvd.
San Diego, CA 92121
Attention: John F. Schaefer
Fax: (619) 646-4846
with a copy to:
Brobeck, Phleger & Harrison LLP
38 Technology Drive
Newport Beach, CA 92618
Attention: Richard A. Fink
Fax: (949) 790-6301
if to the Helios Shareholders to:
Richard J. Freedland and Nanette A. Freedland
as Trustees of the Freedland 1994 Unitrust
1010 Madison Drive
Mountain View, CA 94040
Hung Ba Le and Anh Le
as Trustees of the Le 1994 Unitrust
2051 Edgegate
San Jose, CA 95122
41
<PAGE> 45
Alex Moraru and Liliana Moraru
as Trustees of the Moraru 1994 Unitrust
4349 Nicolet
Fremont, CA 94536
Loai Najjar and Mickie Najjar
as Trustees of the Najjar 1994 Unitrust
P.O. Box 3307
Santa Clara, CA 94087
with a copy to:
Fenwick & West
Two Palo Alto Square, Suite 800
Palo Alto, CA 94306
Attention: Dennis Debroeck
Fax: (415) 857-0361
if to Brumberger to:
Neil A. Brumberger
121 Fiesta Circle
Orinda, CA 94563
Fax: (510) 376-4609
with a copy to:
Latham & Watkins
505 Montgomery Street
Suite 1900
San Francisco, CA 94111
Attn: Christopher L. Kaufman, Esq.
Fax: (415) 395-8095
if to Peters to:
Roger D. Peters
Mary Anne Christine Peters
152 Chicago Way
San Francisco, CA 94112
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<PAGE> 46
with a copy to:
Bronson, Bronson & McKinnon
505 Montgomery Street
San Francisco, CA 94111-2514
Attn: William T. Manierre, Esq.
Fax: (415) 982-1394
if to Rhotons to:
Jeffrey K. Rhoton
Yvonne H. Rhoton
30 Woodland Court
San Ramon, CA 94583
with a copy to:
Bronson, Bronson & McKinnon
505 Montgomery Street
San Francisco, CA 94111-2514
Attn: William T. Manierre, Esq.
Fax: (415) 982-1394
if to Karam to:
Raymond M. Karam
226 East Junipero
Santa Barbara, CA 93105
with a copy to:
Price, Postel & Parma LLP
200 East Carrillo Street
Suite 400
Santa Barbara, CA 93101
Attn: Raymond P. Le Blanc
Fax: (805) 965-3978
43
<PAGE> 47
if to Bye to:
Randall E. Bye
535 Chalkhill Road
Solvang, CA 93463
with a copy to:
Price, Postel & Parma LLP
200 East Carrillo Street, Suite 400
Santa Barbara, CA 93101
Attn: Raymond P. Le Blanc
Fax: (805) 965-3978
if to Aylwin to:
Pedro A. Aylwin
1054 Miramonte Drive, #3
Santa Barbara, CA 93107
with a copy to:
Price, Postel & Parma LLP
200 East Carrillo Street, Suite 400
Santa Barbara, CA 93101
Attn: Raymond P. Le Blanc
Fax: (805) 965-3978
if to Amelio to:
Dr. Gilbert F. Amelio
The Parkside Group
650 California Street, #2400
San Francisco, CA 94108
Fax: (408) 295-1737
if to Terry to:
William E. Terry
925 Laurel Glen Drive
Palo Alto, CA 94304-1323
Fax: (650) 948-8960 or (650) 852-2955
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Any Person who becomes a Securityholder shall provide its address and
fax number to the Issuer, which shall promptly provide such information to each
other Securityholder.
SECTION 7.07. Headings. The headings contained in this Agreement are for
convenience only and shall not affect the meaning or interpretation of this
Agreement.
SECTION 7.08. Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original and all of
which together shall be deemed to be one and the same instrument.
SECTION 7.09. Applicable Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York, without regard
to the conflicts of law rules of such state.
SECTION 7.10. Specific Enforcement. Each party hereto acknowledges that
the remedies at law of the other parties for a breach or threatened breach of
this Agreement would be inadequate and, in recognition of this fact, any party
to this Agreement, without posting any bond, and in addition to all other
remedies which may be available, shall be entitled to obtain equitable relief in
the form of specific performance, a temporary restraining order, a temporary or
permanent injunction or any other equitable remedy which may then be available.
SECTION 7.11. Consent to Jurisdiction. Any suit, action or proceeding
seeking to enforce any provision of, or based on any matter arising out of or in
connection with, this Agreement or the transactions contemplated hereby may be
brought in the United States District Court for the Southern District of New
York or any other New York State court sitting in New York City, and each of the
parties hereby consents to the non-exclusive jurisdiction of such courts (and of
the appropriate appellate courts therefrom) in any such suit, action or
proceeding and irrevocably waives, to the fullest extent permitted by law, any
objection which it may now or hereafter have to the laying of the venue of any
such suit, action or proceeding in any such court or that any such suit, action
or proceeding which is brought in any such court has been brought in an
inconvenient form. Process in any such suit, action or proceeding may be served
on any party anywhere in the world, whether within or without the jurisdiction
of any such court. Without limiting the foregoing, each party agrees that
service of process on such party as provided in Section 7.06 shall be deemed
effective service of process on such party.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
DLJ MERCHANT BANKING
PARTNERS, L.P.
By: DLJ MERCHANT BANKING, INC.
Managing General Partner
By: /s/ IVY DODES
---------------------------------------
Name: Ivy Dodes
Title: Vice President
DLJ INTERNATIONAL PARTNERS,
C.V.
By: DLJ MERCHANT BANKING, INC.
Advisory General Partner
By: /s/ IVY DODES
---------------------------------------
Name: Ivy Dodes
Title: Vice President
DLJ OFFSHORE PARTNERS, C.V.
By: DLJ MERCHANT BANKING, INC.
Advisory General Partner
By: /s/ IVY DODES
---------------------------------------
Name: Ivy Dodes
Title: Vice President
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<PAGE> 50
DLJ MERCHANT BANKING FUNDING,
INC.
By: /s/ IVY DODES
---------------------------------------
Name: Ivy Dodes
Title: Vice President
DLJ FIRST ESC, L.P.
DLJ ESC II, L.P.
By: DLJ LBO PLANS MANAGEMENT
CORPORATION
Their General Partner
By: /s/ IVY DODES
----------------------------------------
Title: Vice President
DLJ CAPITAL CORPORATION
By: /s/ ROBERT FINZI
----------------------------------------
Robert Finzi
Vice President
SPROUT GROWTH II, L.P.
By: DLJ CAPITAL CORPORATION
Managing General Partner
By: /s/ ROBERT FINZI
----------------------------------------
Robert Finzi
Vice President
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<PAGE> 51
SPROUT CAPITAL VI, L.P.
By: DLJ CAPITAL CORPORATION
Managing General Partner
By: /s/ ROBERT FINZI
----------------------------------------
Robert Finzi
Vice President
ABS CAPITAL PARTNERS II, L.P.
By: ABS PARTNERS II, L.L.C.
Its General Partner
By: /s/ DONALD B. HEBB
----------------------------------------
Name: Donald B. Hebb, Jr.
Title: Managing Member
PM FUNDING, INC.
By: /s/ ROBERT GREEN
----------------------------------------
Name: Robert Green
Title: Senior Vice President
/s/ ARTHUR J. CORMIER
----------------------------------------
Arthur J. Cormier
/s/ JOHN F. SCHAEFER
----------------------------------------
John F. Schaefer
PHASE METRICS, INC.
By: /s/ JOHN F. SCHAEFER
----------------------------------------
Name: John F. Schaefer
Title: CEO
48
<PAGE> 52
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ IVY DODES
---------------------------------------
Ivy Dodes
Vice President
THE FREEDLAND 1994 UNITRUST
By:
---------------------------------------
Richard J. Freedland, Trustee
By:
---------------------------------------
Nanette A. Freedland, Trustee
THE MORARU 1994 UNITRUST
By:
---------------------------------------
Alex Moraru, Trustee
By:
---------------------------------------
Liliana Moraru, Trustee
THE LE 1994 UNITRUST
By:
---------------------------------------
Hung Ba Le, Trustee
By:
---------------------------------------
Anh Le, Trustee
49
<PAGE> 53
THE NAJJAR 1994 UNITRUST
By:
----------------------------------------
Loai Najjar, Trustee
By:
----------------------------------------
Mickie Najjar, Trustee
----------------------------------------
Neil H. Brumberger
----------------------------------------
Hart H. Brumberger
ROGER D. PETERS AND MARY
ANNE CHRISTINE PETERS LIVING
TRUST
By:
----------------------------------------
Roger D. Peters, individually and as Co-
Trustee with Mary Anne Christine Peters
By:
----------------------------------------
Mary Anne Christine Peters,
individually and as Co-Trustee with
Roger D. Peters
JEFFREY K. RHOTON AND
YVONNE H. RHOTON LIVING
TRUST
By:
----------------------------------------
Jeffrey K. Rhoton, individually and as
Co-Trustee with Yvonne H. Rhoton
By:
----------------------------------------
Yvonne H. Rhoton, individually and as
Co-Trustee with Jeffrey K. Rhoton
50
<PAGE> 54
---------------------------------------
Raymond M. Karam
---------------------------------------
Randall E. Bye
---------------------------------------
Pedro A. Aylwin
/s/ GILBERT F. AMELIO
---------------------------------------
Dr. Gilbert F. Amelio
/s/ WILLIAM E. TERRY
---------------------------------------
William E. Terry
ACKNOWLEDGMENT OF SPOUSES:
The undersigned spouses of the foregoing individuals acknowledge and agree to be
bound by the terms and conditions of this Agreement
- ---------------------------------
- ---------------------------------
- ---------------------------------
/s/ MRS. AMELIO
- ---------------------------------
/s/ MRS. TERRY
- ---------------------------------
51
<PAGE> 55
<TABLE>
<CAPTION>
CROSS-REFERENCE TARGET LIST
NOTE: DUE TO THE NUMBER OF TARGETS SOME TARGET NAMES MAY NOT APPEAR IN THE TARGET PULL-DOWN LIST.
(This list is for the use of the wordprocessor only, is not a part of this document and may be discarded.)
ARTICLE/SECTION TARGET NAME ARTICLE/SECTION TARGET NAME ARTICLE/SECTION TARGET NAME ARTICLE/SECTION TARGET NAME
<S> <C> <C> <C> <C> <C> <C> <C>
1.01(a).....................terms
1.01(b)........extent transferred
1.01(c)....................extent
1.01(d)..................election
2.................corp.governance
2.01...............composition.bd
2.03....................vacancies
2.03(a)........entitled.designate
2.04............term.rights.oblig
3....................restrictions
3.01......................general
3.01(a).............until.earlier
3.01(a)(ii)....transfers.bonafide
3.01(a)(iii)....transfers.rule144
3.01(a)(v)...no.securities.transf
3.01(b)...............no.transfer
3.02(a)...............bear.legend
3.03...........permitted.transfer
4...........art.right.1st.refusal
4.01............right.1st.refusal
4.01(a).................negotiate
4.01(b)...................receipt
4.01(g).........proposed.transfer
4.01(g)(i).........elect.exercise
4.01(g)(ii)...share.consideration
4.01(g)(v)...........accept.offer
4.01(h).....offer consitutes prop
4.01(h)(ii)....per share consider
?.........................in.lieu
?.....................offer.price
4.02............preemptive.rights
4.03.................right.compel
4.03(a).............transfer.cash
5...................regist.rights
5.01................demand.regist
5.01(a)...........written.request
5.01(a)(ii).....registrable.stock
5.01(a)(ii)...............removal
5.01(c)..........regist.requested
5.01(d)........underwriter.advise
5.01(d)........underwriter.advise
5.02............incidental.regist
5.02(a)...........issuer.proposes
5.02(b)...........underwritten.po
5.03................holdback.agts
5.04............regist.procedures
5.04(a)............issuer.prepare
5.04(e).............issuer.notify
5.04(f).............issuer.select
5.04(g).................available
5.04(h)............issuer.furnish
5.05..............indemnification
5.06.........indemn.participating
5.06(a)...................holding
5.06(b)....................liable
5.07......................conduct
5.08.................contribution
6.01..............confidentiality
6.01(b)...............confid.info
7.03................assignability
7.05..........exclusive.finan.adv
7.06......................notices
</TABLE>
<PAGE> 56
<TABLE>
<CAPTION>
ARTICLE/SECTION TARGET NAME ARTICLE/SECTION TARGET NAME ARTICLE/SECTION TARGET NAME ARTICLE/SECTION TARGET NAME
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
2
<PAGE> 1
EXHIBIT 10.14
INTER-SECURITYHOLDER AGREEMENT
THIS INTER-SECURITYHOLDER AGREEMENT (this "Agreement") is made as of
this 3d day of August, 1998, by and among DLJ Merchant Banking Partners, L.P., a
Delaware limited partnership ("DLJMBP"), DLJ International Partners, C.V., a
Netherlands Antilles limited partnership ("DLJIP"), DLJ Offshore Partners, C.V.,
a Netherlands Antilles limited partnership ("DLJOP"), DLJ Merchant Banking
Funding, Inc., a Delaware corporation ("DLJMBF"), DLJ Capital Corporation, a
Delaware corporation ("DLJCC"), DLJ First ESC, L.P., A Delaware limited
partnership ("ESC"), Sprout Growth II, L.P., a Delaware limited partnership
("Sprout II") and Sprout Capital VI, L.P., a Delaware limited partnership
("Sprout VI"), in their respective capacities as holders of certain notes of
Phase Metrics, Inc. (each of the foregoing, a "Note Holder"), ABS Capital
Partners II, L.P., a Delaware limited partnership, DLJMBP, DLJMBF, DLJCC,
Donaldson, Lufkin & Jenrette Securities Corporation, a Delaware corporation, DLJ
ESC II, L.P., a Delaware limited partnership ("ESC II"), Sprout II, Sprout VI,
William E. Terry and Dr. Gilbert F. Amelio, in their respective capacities as
holders of certain preferred stock of Phase Metrics, Inc. (each of the
foregoing, a "Series C Holder"), and Phase Metrics, Inc., a Delaware corporation
(the "Issuer"), in order to induce the Series C Holders to purchase shares of
the Issuer's Series C Convertible Redeemable Preferred Stock, $.0001 par value
per share (the "Series C Preferred Stock"), pursuant to that certain Securities
Purchase Agreement dated as of the date hereof between the Series C Holders and
the Issuer (the "Purchase Agreement"), which shall be fair and sufficient
consideration for the execution of this Agreement.
1. Construction and Definitions. In addition to terms defined
elsewhere in this Agreement, the following terms shall have the following
meanings when used herein:
"ISSUER'S CERTIFICATE OF INCORPORATION" shall mean the
Amended and Restated Certificate of Incorporation of the Issuer as filed with
the Secretary of State of Delaware on August 3, 1998, as the same may be amended
or modified from time to time.
"JUNIOR OBLIGATIONS" shall mean, as the same may be
amended, modified, extended, renewed, supplemented, refinanced, consolidated or
replaced from time to time, all present and future obligations, indebtedness and
liabilities of Issuer to each of the Note Holders under the Notes, of every kind
and nature, whether arising under or in connection with the Notes, the
indebtedness evidenced thereby, the Note Purchase Agreement, the other Note
Holder Documents or otherwise (including, without limitation, all principal
amounts, including future advances, interest (including interest charges and
accrued interest), late charges, fees and all other charges and sums, as well as
all costs and expenses, including attorneys' fees and expenses, payable or
reimbursable by the Issuer to the Note Holders under or in connection with the
Notes, the indebtedness evidenced thereby, the Note Purchase Agreement, the
other Note Holder Documents or otherwise), whether direct or indirect,
contingent or noncontingent, matured or unmatured, accrued or not accrued,
liquidated or unliquidated, secured or unsecured, including, without limitation,
obligations of the Issuer to the Note Holders in connection with guaranties by
the Issuer of obligations to the Note Holders of other persons, and claims
against the Issuer acquired by assignment of the Note Holders, as well as all
claims, demands, actions, causes of
<PAGE> 2
action and judgments arising from or relating to any of the foregoing. The
Junior Obligations, as defined above, shall include, for purposes of this
Agreement, as all of the same may be amended, modified, extended, renewed,
supplemented, refinanced, consolidated or replaced from time to time, all
claims, demands, actions, causes of action and judgments arising from or
relating to any of such obligations, indebtedness and liabilities.
"NOTE HOLDER DOCUMENTS" shall mean, as the same may be
amended, modified, extended, renewed, supplemented or replaced from time to
time, the Notes and any and all other agreements, contracts, promissory notes
and other instruments, security agreements, assignments, pledge agreements,
indemnification agreements, mortgages, deeds of trust, guaranties and other
documents (a) executed and/or delivered in connection with the Notes or any of
the Junior Obligations, or (b) evidencing, guaranteeing, securing (directly or
indirectly), or in any other manner relating to, any of the Junior Obligations.
"NOTE PURCHASE AGREEMENT" shall mean the Securities
Purchase Agreement dated November 23, 1994, as amended and as the same may be
amended, modified, renewed or extended from time to time, by and among the
Issuer, the Note Holders and the other parties listed on the signature pages
thereto.
"NOTES" shall mean the Convertible Subordinated Notes Due
1999 of the Issuer, dated November 23, 1994, as amended and as the same may be
amended, modified, renewed or extended from time to time.
"PERSON" shall mean any individual, corporation,
partnership, joint venture, association, trust, government (or subdivision,
agency or department thereof) or other entity of any kind.
"SENIOR OBLIGATIONS" shall mean, as the same may be
amended, modified, extended, renewed, supplemented, refinanced, consolidated or
replaced from time to time, all present and future obligations, indebtedness and
liabilities of Issuer to the Series C Holders with respect to the Series C
Preferred Stock purchased pursuant to the Purchase Agreement (whether purchased
on the date of the Purchase Agreement or pursuant to an additional closing
contemplated by the Purchase Agreement), including, without limitation, all
rights of the Series C Holders to receive from the Issuer dividends on the
Series C Preferred Stock, payments upon redemption of the Series C Preferred
Stock and payments in respect of the Series C Preferred Stock in the event of a
Liquidation (as defined in the Issuer's Certificate of Incorporation), all as
set forth in the Issuer's Certificate of Incorporation, including interest
charges, fees and all other charges and sums, as well as all costs and expenses,
including attorneys' fees and expenses, payable or reimbursable by the Issuer
under or in connection with the rights of the Series C Holders as set forth in
the Issuer's Certificate of Incorporation, whether direct or indirect,
contingent or noncontingent, matured or unmatured, accrued or not accrued,
liquidated or unliquidated, secured or unsecured, including, without limitation,
obligations of the Issuer to the Series C Holders in connection with all claims,
demands, actions, causes of action and judgments arising from or relating to any
of the foregoing. The Senior Obligations, as defined above, shall include, for
purposes of this Agreement, as all of the same may be amended, modified,
extended,
2
<PAGE> 3
renewed, supplemented, refinanced, consolidated or replaced from time to time,
all claims, demands, actions, causes of action and judgments arising from or
relating to any of such obligations, indebtedness and liabilities.
2. Subordination of Junior Obligations.
(a) Each Note Holder, the Issuer and each Series C Holder agrees
that all of the Junior Obligations are hereby subordinated, and shall be junior
in right of payment, to all of the Senior Obligations, to the extent and upon
the terms and conditions provided in this Agreement.
(b) Each Note Holder agrees that, except as otherwise provided in
this Agreement, it will not, without the prior written consent of the holders of
a majority of the shares of Series C Preferred Stock then outstanding, demand,
sue for, take or receive (directly or indirectly, by way of setoff, by reason of
any other obligations, indebtedness or liabilities of Issuer being subordinated
to the Junior Obligations, or in any other manner) all or any part of the Junior
Obligations unless and until all of the Senior Obligations have been
indefeasibly paid in full, which payment in full, for purposes of this
Agreement, shall occur only when (a) the Series C Preferred Stock has been
either (i) converted into Common Stock with payment in full of the conversion
price as set forth in the Issuer's Certificate of Incorporation; or (ii)
redeemed with payment in full of the redemption price, together with accrued and
unpaid dividends, as set forth in the Issuer's Certificate of Incorporation; or
(b) there has occurred an event of Liquidation (as defined in the Issuer's
Certification of Incorporation) of the Issuer and the holders of the Series C
Preferred Stock have received payment in full of their Liquidation preference,
together with accrued and unpaid dividends when applicable, as set forth in the
Certificate of Incorporation, and there exists no commitment to the Series C
Holders or term or condition of the Series C Preferred Stock which could give
rise to any Senior Obligations. Issuer agrees that, except as otherwise provided
in this Agreement, it will not, without the prior written consent of the holders
of a majority of the shares of Series C Preferred Stock then outstanding, pay
(directly or indirectly, by way of setoff, by reason of any other obligations,
indebtedness or liabilities of Issuer being subordinated to the Junior
Obligations, or in any other manner) all or any part of the Junior Obligations
unless and until all of the Senior Obligations have been indefeasibly paid in
full as set forth above and there exists no commitment to the Series C Holders
or term or condition of the Series C Preferred Stock which could give rise to
any Senior Obligations.
(c) In the event of any distribution, division or application,
partial or complete, voluntary or involuntary, by operation of law or otherwise,
of all or any part of the assets of Issuer, or the proceeds thereof, to
creditors of Issuer, or upon any indebtedness of Issuer, by reason of the
liquidation, dissolution or other winding up of Issuer, or Issuer's business or
affairs, or in the event of any sale, receivership, insolvency or bankruptcy
proceeding, assignment for the benefit of creditors or any other proceeding by
or against Issuer for any relief under any bankruptcy or insolvency law or laws
relating to the relief of debtors, readjustment of indebtedness,
reorganizations, compositions or extensions, then, and in each event, each
payment or distribution of any kind or character, either in cash, securities or
other property, which shall be payable or deliverable upon or with respect to
any of the Junior Obligations shall, until all of the
3
<PAGE> 4
Senior Obligations have been paid in full as set forth above, be paid or
delivered directly to the Series C Holders for application on account of the
Senior Obligations in accordance with the terms of the Issuer's Certificate of
Incorporation. The Note Holders hereby irrevocably authorize and empower the
Series C Holders to demand, sue for, collect and receive every payment and
distribution, and give acquittance therefor and to file claims and take any
other proceedings as the Series C Holders may deem necessary or advisable for
the enforcement hereof. The Note Holders agree to execute and deliver to the
Series C Holders any assignments and other instruments as may be requested by
the Series C Holders in order to enable the Series C Holders to enforce and to
collect and receive any and all payments and distributions. Should any payment,
distribution or other amount be received by any Note Holder (directly or
indirectly, by way of setoff, by reason of any other obligations, indebtedness
or liabilities of Issuer being subordinated to the Junior Obligations, or in any
other manner) upon or with respect to any of the Junior Obligations in
contravention of the provisions of this Agreement, the Note Holders shall
promptly pay over and deliver the same to the Series C Holders (together with
any indorsements or assignments thereof as may be requested by the Series C
Holders) for application on account of the Senior Obligations in accordance with
the terms of Issuer's Certificate of Incorporation, and, until so delivered, the
same shall be held in trust by the Note Holder for the benefit of the Series C
Holders.
(d) If all of the Senior Obligations shall have been indefeasibly
paid in full as set forth above and there exists no commitment to the Series C
Holders or term or condition of the Series C Preferred Stock which could give
rise to any Senior Obligations, the Note Holders shall be subrogated to the
rights of the Series C Holders to receive payments and distributions, whether in
cash, securities or other property, with respect to the Senior Obligations until
the Junior Obligations shall have been paid in full. For purposes of
subrogation, no payments or distributions to the Series C Holders on account of
the Senior Obligations, whether in cash, securities or other property, to which
the Note Holders would have been entitled except for the provisions of this
Agreement, and no payments over by the Note Holders to the Series C Holders on
account of the provisions of this Agreement, shall, as among Issuer, the Note
Holders and Issuer's creditors other than the Series C Holders, be deemed to be
a payment or distribution on account of the Senior Obligations.
(e) The provisions of this Agreement are, and are intended,
solely for the purpose of defining the relative rights of the Series C Holders
and the Note Holders with respect to the Senior Obligations and the Junior
Obligations. Nothing contained in this Agreement is intended to or shall (a)
impair, as among Issuer, the Note Holders and Issuer's creditors other than the
Series C Holders, the obligation of Issuer to pay to the Note Holders the Junior
Obligations as and when the same become due, or (b) affect the relative rights
against Issuer of the Note Holders and Issuer's creditors other than the Series
C Holders.
(f) No right of the Series C Holders to enforce the subordination
of the Junior Obligations under this Agreement shall be impaired, diminished or
otherwise prejudiced by any act or failure to act of Issuer, the Note Holders or
the Series C Holders or by any failure of Issuer, the Note Holders or the Series
C Holders to comply with any provisions of this Agreement, regardless of any
actual or constructive notice or knowledge of Issuer of any act or failure to
act.
4
<PAGE> 5
3. Assignments, Legends and Amendments. The Series C Holders may
assign, delegate or otherwise transfer their rights and obligations under this
Agreement to transferees of the Series C Preferred Stock provided that the
transfer of Series C Preferred Stock to any such transferee is permitted by the
terms of the Securityholders Agreement of even date herewith between the Issuer,
the Series C Holders and the other parties listed on the signature pages
thereto. Each Note Holder agrees that, so long as any of the Senior Obligations
remain unpaid or there exists any contingent or noncontingent commitment of
Issuer which could give rise to any Senior Obligations, the Note Holder will not
sell, assign, transfer or convey to any person any of the Junior Obligations, or
any interest therein, unless the sale, assignment, transfer or conveyance is
expressly, and in writing, made subject to the terms of this Agreement. Issuer
and each Note Holder agrees to place, or cause to be placed, on each Note and
all other Note Holder Documents a conspicuous statement, reasonably satisfactory
to the Series C Holders, to the effect that the Junior Obligations are subject
to the terms of this Agreement. Each of the Note Holders and Issuer agree that,
so long as any of the Senior Obligations remain unpaid or there exists any
commitment to the Series C Holders or term or condition of the Series C
Preferred Stock which could give rise to any Senior Obligations, without the
prior written consent of the holders of a majority of the shares of Series C
Preferred Stock then outstanding, none of the Note Holder Documents shall be
amended, modified, extended, renewed, supplemented or replaced in any manner
adverse to the rights of the Series C Holders hereunder.
4. Further Assurances. Each of the Note Holders and Issuer agrees
promptly to execute and deliver all additional and further instruments and
documents as the Series C Holders may request in good faith to vest in and
assure to the Series C Holders their rights hereunder. Each of the Note Holders
and Issuer agrees to provide to the Series C Holders from time to time, upon the
request of any Series C Holder, copies of any or all Note Holder Documents.
5. Waiver of Trial by Jury. Each of the Note Holders, the Issuer
and the Series C Holders agrees that any action, suit or proceeding involving
any claim, counterclaim or cross-claim arising out of or in any way relating,
directly or indirectly, to this Agreement, or any liabilities, rights or
interests of the Note Holders, Issuer, the Series C Holders or any other person
arising out of or in any way relating, directly or indirectly, to any of the
foregoing, shall be tried by a court and not by a jury. Each of the Note
Holders, Issuer and the Series C Holders hereby waives any right to trial by
jury in any action, suit or proceeding, with the understanding and agreement
that this waiver constitutes a waiver of trial by jury of all claims,
counterclaims and cross-claims against all parties to the actions, suits or
proceedings, including claims, counterclaims and cross-claims against parties
who are not parties to this Agreement. This waiver is knowingly, willingly and
voluntarily made by each of the Note Holders, Issuer and the Series C Holders,
and each of the Note Holders, Issuer and the Series C Holders acknowledges and
agrees that this waiver of trial by jury is a material aspect of the agreements
among them and that no representations of fact or opinion have been made by any
person to induce this waiver of trial by jury or to modify, limit or nullify its
effect.
5
<PAGE> 6
6. Additional Waivers. Each Note Holder hereby waives diligence
in the enforcement or collection of all of the Senior Obligations. Each Note
Holder also hereby waives notice of any event, circumstance or condition which
might otherwise constitute a legal or equitable discharge of any Note Holder
from any of the provisions of this Agreement and agrees that, without necessity
for any express reservation of rights against Note Holders, neither the
occurrence or existence of such act, event or condition, nor Issuer's commission
of or omission to do any act, event or condition, in any number of instances,
shall in any way release, discharge, impair or diminish any obligations or
liabilities of the Note Holders under this Agreement, except as otherwise
specifically agreed by the Issuer in writing.
7. Conflicting Documents or Law. All provisions of this Agreement
shall apply notwithstanding any contrary or conflicting terms or provisions
contained in the Note Holder Documents, notwithstanding any contrary or
conflicting provisions of the Uniform Commercial Code or other law.
8. Termination. This Agreement shall terminate:
(a) at the time that the Series C Holders own less than 5% of the
aggregate number of shares of Fully Diluted Common Stock (as defined in the
Purchase Agreement); or
(b) at the time of (a) a consolidation or merger of the Issuer
with one or more corporations, or (b) a sale or transfer of all or substantially
all of the Issuer's stock or assets; provided that in the event of either (a) or
(b), the Series C Preferred Stock has received its full liquidation preference
in accordance with Article IV(C), paragraph (4) of the Issuer's Certificate of
Incorporation or all shares of Series C Preferred Stock have been converted in
accordance with the Issuer's Certificate of Incorporation.
9. Modifications and Notices. No modification or waiver of any
provision of this Agreement, and no consent by the Series C Holders to the
failure of any Note Holders or Issuer to comply with any provision of this
Agreement, shall be effective unless the same shall be in writing and signed by
the party against whom enforcement thereof is sought, and then the modification,
waiver or consent shall be effective only in the specific instance and for the
purpose for which given. No notice by Issuer to or demand by Issuer upon any
Note Holder in any circumstance shall entitle any Note Holder or Issuer to any
other or further notice or demand in the same, similar or other circumstances.
All communications in connection with this Agreement shall be deemed to have
been given when hand-delivered to the party to whom directed, or, if transmitted
by telex, by facsimile transmission or by mail (whether or not registered or
certified), when telexed or transmitted by facsimile transmission or deposited
in the mail postage prepaid, respectively, provided that any notice or
communication to the Note Holders shall be hand-delivered or transmitted to the
Note Holder at addresses set forth for each Note Holder on Exhibit A hereto (or
at another other address specified by the Note Holder in writing to the other
parties hereto from time to time), any such notice or communication to the
Series C Holders shall be hand-delivered or transmitted to each Series C Holder
at the addresses set forth for each Series C Holder on Exhibit A hereto (or at
another address specified by the Series C Holder in writing to the other parties
hereto from time to time), and any such notice or
6
<PAGE> 7
communication to Issuer shall be hand-delivered or transmitted to Issuer at the
address set forth for Issuer on Exhibit A hereto (or at another address
specified by Issuer in writing to the other parties hereto from time to time).
10. Applicable Law and Jurisdiction. The performance and
construction of this Agreement shall be governed by the internal laws of the
State of New York (exclusive of principles of conflicts of laws). Each of the
Note Holders and Issuer agrees that any suit, action or proceeding instituted by
the Series C Holders with respect to this Agreement may be brought in any State
or federal court located in the States of Maryland or New York (in addition to
other courts in which jurisdiction and venue may be appropriate), and each of
the Note Holders and Issuer consents to the in personam jurisdiction of the
courts specified above. Each of the Note Holders and Issuer irrevocably waives
any objection to, and any right of immunity from, the jurisdiction of the courts
specified above or the execution of judgments resulting therefrom, on the
grounds of venue or the convenience of the forum.
11. Successors and Invalidity. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective heirs,
executors, personal representatives, successors and assigns, and each reference
in this Agreement to any of the parties hereto shall be deemed to include the
heirs, executors, personal representatives, successors and assigns of a party,
including, in the case of the Note Holders and Issuer, the debtor in possession
or trustee in any case under any chapter of the United States Bankruptcy Code in
which any Note Holder or Issuer is debtor. If any term, provision or condition,
or any part thereof, of this Agreement shall for any reason be found or held
invalid or unenforceable by any court or governmental agency, the invalidity or
unenforceability shall not affect the remainder of the term, provision or
condition, nor any other term, provision or condition, and this Agreement shall
survive and be construed as if the invalid or unenforceable term, provision or
condition had not been contained herein.
12. Integration. This Agreement contains the entire agreement of
the parties hereto with respect to the matters covered and the transactions
contemplated hereby, and no agreement, statement or promise made by any party
hereto, or by any employee, officer, agent or attorney of any party hereto,
which is not contained herein, shall be valid or binding.
13. Counterparts. This Agreement may be executed in any number of
counterparts and by different parties hereto on separate counterparts, each of
which, when so executed and delivered, shall be an original, but all
counterparts shall together constitute one and the same agreement.
7
<PAGE> 8
IN WITNESS WHEREOF, the Note Holders, Issuer and the Series C
Holders have duly executed, or caused to be duly executed, this Agreement under
seal the day and year first above written.
NOTE HOLDERS:
DLJ MERCHANT BANKING PARTNERS, L.P.
By DLJ MERCHANT BANKING, INC.
Managing General Partner
By: /s/ REID PERPER
-----------------------------------
Name: Reid Perper
Title: Principal
DLJ INTERNATIONAL PARTNERS, C.V.
By DLJ MERCHANT BANKING, INC.
Advisory General Partner
By: /s/ REID PERPER
-----------------------------------
Name: Reid Perper
Title:
DLJ OFFSHORE PARTNERS, C.V.
By DLJ MERCHANT BANKING, INC.
Advisory General Partner
By: /s/ REID PERPER
-----------------------------------
Name: Reid Perper
Title:
8
<PAGE> 9
DLJ MERCHANT BANKING FUNDING, INC.
By: /s/ IVY DODES
-----------------------------------
Name: Ivy Dodes
Title:
DLJ CAPITAL CORPORATION
By: /s/ ROBERT FINZI
-----------------------------------
Name: Robert Finzi
Title: Vice President
SPROUT GROWTH II, L.P.
By: DLJ Capital Corporation,
Managing General Partner
By: /s/ ROBERT FINZI
-----------------------------------
Robert Finzi
Attorney-In-Fact
SPROUT CAPITAL VI, L.P.
By: DLJ Capital Corporation
Managing General Partner
By:
-----------------------------------
Robert Finzi
Attorney- In-Fact
9
<PAGE> 10
DLJ FIRST ESC, L.P.
By: DLJ LBO PLANS MANAGEMENT
CORPORATION
Its General Partner
By: /s/ IVY DODES
-----------------------------------
Name: Ivy Dodes
Title:
SERIES C HOLDERS:
ABS CAPITAL PARTNERS II, L.P.
By: ABS Partners II, LLC
Its General Partner
By: /s/ DONALD B. HEBB
-----------------------------------
Name: Donald B. Hebb, Jr.
Title: Managing Member
DLJ MERCHANT BANKING PARTNERS, L.P.
By DLJ MERCHANT BANKING, INC.
Managing General Partner
By: /s/ REID PERPER
-----------------------------------
Name: Reid Perper
Title: Principal
10
<PAGE> 11
DLJ MERCHANT BANKING FUNDING, INC.
By: /s/ IVY DODES
-----------------------------------
Name: Ivy Dodes
Title: Vice President
DLJ CAPITAL CORPORATION
By: /s/ ROBERT FINZI
----------------------------------
Robert Finzi
Attorney-In-Fact
SPROUT GROWTH II, L.P.
By: DLJ Capital Corporation,
Managing General Partner
By: /s/ ROBERT FINZI
-----------------------------------
Robert Finzi
Attorney-In-Fact
SPROUT CAPITAL VI, L.P.
By: DLJ Capital Corporation
Managing General Partner
By: /s/ ROBERT FINZI
-----------------------------------
Robert Finzi
Attorney-In-Fact
11
<PAGE> 12
DLJ ESC II, L.P.
By: DLJ LBO PLANS MANAGEMENT
CORPORATION
Its General Partner
By: /s/ IVY DODES
-----------------------------------
Name:
Title:
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ IVY DODES
-----------------------------------
Name:
Title:
ISSUER:
PHASE METRICS, INC.
By: /s/ JOHN F. SCHAEFER
-----------------------------------
Name: John F. Schaefer
Title: CEO
12
<PAGE> 13
/s/ WILLIAM E. TERRY
-----------------------------------
William E. Terry
/s/ GILBERT F. AMELIO
-----------------------------------
Dr. Gilbert F. Amelio
13
<PAGE> 14
EXHIBIT A
NOTICE ADDRESSES
If to ABS Capital Partners II, L.P., to:
ABS Capital Partners II, L.P.
101 California Street, 47th Floor
San Francisco, California 94111
Attention: Andrew T. Sheehan
Fax: 415-477-3229
and to:
ABS Capital Partners II, L.P.
One South Street
Baltimore, Maryland 21202
Attention: Donald B. Hebb, Jr.
Fax: 410-895-4380
with a copy to:
Hogan & Hartson, L.L.P.
111 South Calvert Street, Suite 1600
Baltimore, Maryland 21202
Attention: Walter G. Lohr, Jr.
Fax: 410-539-6981
If to DLJMBP, DLJIP, DLJOP, DLJMBF, DLJCC, ESC, ESC II, Sprout II, Sprout VI or
Donaldson, Lufkin & Jenrette Securities Corporation, to:
DLJ Merchant Banking Funding, Inc.
DLJ Merchant Banking Partners, L.P.
277 Park Avenue
New York, New York 10172
Attention: Thompson Dean
Fax: (212) 892-7272
and to:
DLJ International Partners, C.V.
DLJ Offshore Partners, C.V.
c/o DLJ Offshore Management N.V.
John B. Gorsiraweg 6
Willemstad, Curacao
<PAGE> 15
Netherlands Antilles
Pierson Trust (Curacao) N.V
Attention: Germain Sprock
.
DLJ Capital Corporation
Sprout Growth II, L.P.
Sprout Capital VI, L.P.
3000 Sand Hill Road
Building 3, Suite 170
Menlo Park, California 94025
Attention: Robert Finzi
Fax:(650) 234-2779
Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172
Attention: Ivy Dodes
Fax: (212) 892-2689
with a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: George R. Bason, Jr.
Fax: (212) 450-4800
If to the Issuer, to:
Phase Metrics, Inc.
10260 Sorrento Valley Road
San Diego, CA 92121
Attention: John F. Schaefer
Fax: (619) 646-4996
with a copy to:
Brobeck, Phleger & Harrison
38 Technology Drive
Newport Beach, CA 92618
Attention: Richard A. Fink
Fax: (949) 790-6301
2
<PAGE> 16
If to William E. Terry, to:
925 Laurel Glen Drive
Palo Alto, California 94304-1323
Fax: (650) 948-8960 or (650) 852-2955
If to Dr. Gilbert F. Ameilo, to:
The Parkside Group
650 California Street, #2400
San Francisco, California 94108
Fax: (408) 295-1737
3
<PAGE> 1
EXHIBIT 10.15
e SECURITIES PURCHASE AGREEMENT
dated as of
August 3, 1998
among
ABS CAPITAL PARTNERS II, L.P.
DLJ MERCHANT BANKING PARTNERS, L.P.,
DLJ INTERNATIONAL PARTNERS, C.V.,
DLJ OFFSHORE PARTNERS, C.V.,
DLJ MERCHANT BANKING FUNDING, INC.,
DLJ CAPITAL CORPORATION,
SPROUT GROWTH II, L.P.,
SPROUT CAPITAL VI, L.P.,
DLJ ESC II, L.P.
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
DR. GILBERT F. AMELIO
WILLIAM E. TERRY
AND
PHASE METRICS, INC.
RELATING TO THE PURCHASE AND SALE
OF
SECURITIES
OF
PHASE METRICS, INC.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 1....................................................................................1
DEFINITIONS................................................................................1
1.1 Definitions..........................................................................1
ARTICLE 2....................................................................................5
PURCHASE AND SALE..........................................................................5
2.1 Purchase and Sale....................................................................5
2.2 Closing..............................................................................5
2.3 Additional Purchase..................................................................6
2.4 Additional Closing...................................................................6
ARTICLE 3....................................................................................6
REPRESENTATIONS AND WARRANTIES OF THE ISSUER...............................................6
3.1 Corporate Existence and Power.......................................................7
3.2 Governmental Authorization..........................................................7
3.3 Authorization.......................................................................7
3.4 Non-Contravention...................................................................7
3.5 Capitalization......................................................................8
3.6 Financial Statements................................................................9
3.7 Absence of Certain Changes.........................................................10
3.8 No Undisclosed Liabilities.........................................................11
3.9 Certain Interests..................................................................12
3.10 Material Contracts.................................................................12
3.11 Litigation.........................................................................14
3.12 Compliance with Laws; No Defaults..................................................14
3.13 Properties.........................................................................14
3.14 Intellectual Property..............................................................16
3.15 Insurance Coverage.................................................................18
3.16 Licenses and Permits...............................................................18
3.17 Inventories........................................................................18
3.18 Accounts Receivable; Vendor Relationships..........................................19
3.19 Finders' Fees......................................................................19
3.20 Disclosure.........................................................................19
3.21 Directors, Officers and Employees..................................................19
3.22 Labor Matters......................................................................20
3.23 Environmental Matters..............................................................20
3.24 Employee Benefit Plans.............................................................21
3.25 Debt Instruments...................................................................23
3.26 Books and Records..................................................................23
ARTICLE 4...................................................................................24
REPRESENTATIONS AND WARRANTIES OF BUYERS..................................................24
4.1 Existence and Power.................................................................24
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C>
4.2 Authorization........................................................................24
4.3 Governmental Authorization...........................................................24
4.4 Non-Contravention....................................................................24
4.5 Purchase for Investment..............................................................25
4.6 Litigation...........................................................................25
4.7 Finders' Fees........................................................................25
ARTICLE 5....................................................................................25
ADDITIONAL UNDERTAKINGS AND COVENANTS......................................................25
5.1 Best Efforts.........................................................................25
5.2 Certain Filings......................................................................26
5.3 Confidentiality......................................................................26
5.4 Public Announcements.................................................................27
ARTICLE 6....................................................................................27
TAX MATTERS................................................................................27
6.1 Tax Definitions......................................................................27
6.2 Tax Representations..................................................................28
6.3 Covenants............................................................................29
ARTICLE 7....................................................................................30
CONDITIONS TO CLOSING......................................................................30
7.1 Conditions to Obligations of the Issuer..............................................30
7.2 Conditions to Obligation of Buyers...................................................30
ARTICLE 8....................................................................................32
SURVIVAL; INDEMNIFICATION..................................................................32
8.1 Survival.............................................................................32
8.2 Indemnification......................................................................32
8.3 Procedures; Remedies Cumulative......................................................32
8.4 Specific Performance.................................................................33
ARTICLE 9....................................................................................33
MISCELLANEOUS..............................................................................33
9.1 Notices..............................................................................33
9.2 Amendments and Waivers...............................................................36
9.3 Expenses.............................................................................37
9.4 Successors and Assigns...............................................................37
9.5 Governing Law........................................................................37
9.6 Jurisdiction.........................................................................37
9.7 Counterparts; Third Party Beneficiaries..............................................38
9.8 Knowledge............................................................................38
9.9 Appointment of Agent.................................................................38
9.10 Sovereign Immunity..................................................................39
9.11 Entire Agreement....................................................................39
-ii-
</TABLE>
<PAGE> 4
SECURITIES PURCHASE AGREEMENT
THIS AGREEMENT (this "Agreement") dated as of August 3, 1998
among ABS Capital Partners II, L.P., a Delaware limited partnership ("Capital"),
DLJ Merchant Banking Partners, L.P., a Delaware limited partnership ("DLJMB"),
DLJ International Partners, C.V., a Netherlands Antilles limited partnership,
DLJ Offshore Partners, C.V., a Netherlands Antilles limited partnership, DLJ
Merchant Banking Funding, Inc., a Delaware corporation, DLJ Capital Corporation,
a Delaware corporation, Donaldson, Lufkin & Jenrette Securities Corporation, a
Delaware corporation, DLJ ESC II, L.P., a Delaware limited partnership, Sprout
Growth II, L.P., a Delaware limited partnership, Sprout Capital VI, L.P., a
Delaware limited partnership (each of the foregoing, a "DLJ Buyer"), Dr. Gilbert
F. Amelio, William E. Terry (Dr. Amelio and Mr. Terry, together with Capital and
the DLJ Buyers, the "Buyers") and Phase Metrics, Inc., a Delaware corporation
(the "Issuer").
The parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
1.1 Definitions.
(a) The following terms, as used herein, have the following
meanings:
"Affiliate" means, with respect to any Person, any other Person
directly or indirectly controlling, controlled by, or under common control with
such Person, provided that no securityholder of the Issuer shall be deemed an
Affiliate of any other securityholder solely by reason of any investment in the
Issuer. For the purpose of this definition, the term "control" (including with
correlative meanings, the terms "controlling", "controlled by" and "under common
control with"), as used with respect to any Person, shall mean the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of such Person, whether through the ownership of voting
securities or by contract or otherwise.
"Balance Sheet" means the audited consolidated balance sheet of
the Issuer and its Subsidiaries as of December 31, 1997.
"Balance Sheet Date" means December 31, 1997.
"Benefit Arrangement" means any employment, severance or similar
contract or arrangement whether or not written, or any plan, policy, fund,
program or contract or arrangement (whether or not written) providing for
compensation, bonus, profit-sharing, stock option, or other stock related rights
or other forms of incentive or deferred compensation, vacation benefits,
insurance coverage (including any self-insured arrangements), health or medical
benefits, disability benefits, worker's compensation, supplemental unemployment
<PAGE> 5
benefits, severance benefits and post-employment or retirement benefits
(including compensation, pension, health, medical or life insurance or other
benefits) that (i) is not an Employee Plan, (ii) is entered into, maintained,
administered or contributed to, as the case may be, by the Issuer or any
Subsidiary of the Issuer and (iii) covers any employee or former employee of the
Issuer or any Subsidiary of the Issuer.
"Buyers" means, collectively, Capital and the DLJ Buyers.
"Bylaws" means the Bylaws of the Issuer, in substantially the
form attached hereto as EXHIBIT A.
"CERCLA" means the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended.
"Charter" means the Amended and Restated Certificate of
Incorporation of the Issuer, in substantially the form attached hereto as
EXHIBIT B.
"Closing Date" means the date of the Closing.
"Common Stock" means the common stock of the Issuer.
"Disclosure Schedule" means the schedule identified as the
Disclosure Schedule to this Agreement.
"Employee Plan" means any "employee benefit plan", as defined in
Section 3(3) of ERISA, that (i) is subject to any provision of ERISA, (ii) is
maintained, administered or contributed to by the Issuer or any Subsidiary of
the Issuer and (iii) covers any employee or former employee of the Issuer or any
Subsidiary of the Issuer.
"Environmental Laws" means any and all applicable federal, state,
local and foreign statutes, laws, judicial decisions, regulations, ordinances,
rules, judgments, orders, decrees, codes, plans, injunctions, permits,
concessions, grants and governmental restrictions, now or hereafter in effect,
relating to the environment, human health or Releases of Hazardous Substances or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Hazardous Substances or the clean-up
or other remediation thereof.
"Environmental Liabilities" means any and all liabilities of or
relating to the Issuer or any Subsidiary of the Issuer (including any entity
which is, in whole or in part, a predecessor of the Issuer or any Subsidiary of
the Issuer), whether vested or unvested, contingent or fixed, actual or
potential, known or unknown, which (i) arise under or relate to matters covered
by Environmental Laws (including without limitation any matters disclosed or
required to be disclosed in the Disclosure Schedule) and (ii) relate to actions
occurring or conditions existing in whole or in part on or prior to the Closing
Date.
2
<PAGE> 6
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended and the rules and regulations promulgated thereunder.
"ERISA Affiliate" of any entity means any other entity which,
together with such entity, would be treated as a single employer under Section
414 of the Code.
"GAAP" means United States generally accepted accounting
principles as in effect on the date hereof.
"Hart-Scott-Rodino" means the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
"Hazardous Substances" means any wastes, substances, radiation,
or materials (whether solids, liquids or gases) (i) which are hazardous, toxic,
infectious, explosive, radioactive, carcinogenic, or mutagenic; (ii) which are
or become defined as a "pollutants," "contaminants," "hazardous materials,"
"hazardous wastes," "hazardous substances," "toxic substances," "radioactive
materials," "solid wastes," or other similar designations in, or otherwise
subject to regulations under, any Environmental Laws; (iii) without limitation,
asbestos and asbestos-containing materials, lead-based paints, urea-formaldehyde
foam insulation, and petroleum or petroleum products (including, without
limitation, crude oil or any fraction thereof); or (iv) which pose a hazard to
human health, safety, natural resources, industrial hygiene, or the environment,
or an impediment to working conditions.
"Intellectual Property Right" means any trademark, service mark,
trade name, brand name, invention (whether conceived or reduced to practice),
patent, trade secret, copyright, know-how (including any registrations or
applications for of any of the foregoing) or any other similar type of
proprietary intellectual property right.
"Lien" means, with respect to any property or asset, any
mortgage, lien, pledge, charge, security interest, encumbrance or other adverse
claim of any kind in respect of such property or asset. For the purposes of this
Agreement, a Person shall be deemed to own subject to a Lien any property or
asset which it has acquired or holds subject to the interest of a vendor or
lessor under any conditional sale agreement, capital lease or other title
retention agreement relating to such property or asset.
"Material Adverse Effect" means a material adverse effect on the
condition (financial or otherwise), business, assets, results of operations or
prospects of the Issuer or any Subsidiary of the Issuer.
"Multiemployer Plan" means each Employee Plan that is a
"multiemployer plan", as defined in Section 3(37) of ERISA.
"1933 Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
3
<PAGE> 7
"1934 Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
"Notes" means the Convertible Subordinated Notes of the Issuer
due 2005, dated November 23, 1994, in the aggregate initial principal amount
equal to $8,000,000.
"Pending" means, with respect to any action or proceeding, an
action or proceeding in connection with which a complaint or similar document
has been filed and served and which action or proceeding has not been finally
terminated.
"Person" means an individual, corporation, partnership,
association, trust or other entity or organization, including a government or
political subdivision or an agency or instrumentality thereof.
"Regulated Environmental Activity" means any manufacture,
importation, handling, use, processing, generation, treatment, storage,
recycling, transportation or disposal of any Hazardous Substance.
"Release" means any discharge, emission or release, including a
Release as defined in CERCLA at 42 U.S.C. Section 9601(22), into or upon the
environment, including the air, soil, improvements, surface water, groundwater,
the sewer, septic system, storm drain, publicly owned treatment works, or waste
treatment, storage, or disposal systems at, on, from, above, or under the real
property nor or previously owned, operated, or leased by the Issuer or any
Subsidiary of Issuer or any other property at which Hazardous Substances
originating on or from such property or the businesses or Assets of the Investor
or any Subsidiary of the Investor have been stored, treated or disposed. The
term "Released" has a corresponding meaning.
"Series A Preferred Stock" means the Series A Convertible
Preferred Stock of the Issuer, par value $.0001 per share.
"Series B Preferred Stock" means the Series B Convertible
Participating Preferred Stock of the Issuer, par value $.0001 per share.
"Series C Preferred Stock" means the Series C Convertible
Redeemable Preferred Stock of the Issuer, par value $.0001 per share.
"Securities" means shares of the Series C Preferred Stock.
"Securityholders Agreement" means the Amended and Restated
Securityholders Agreement to be entered into by the Issuer, the Buyers and the
other parties listed on the signature pages thereof substantially in the form
attached hereto as EXHIBIT C.
"Inter-Securityholders Agreement" means the Inter-Securityholders
Agreement to be entered into by the holders of the Notes, the Issuer and Capital
substantially in the form attached hereto as EXHIBIT D.
4
<PAGE> 8
"Subsidiary" means, with respect to any Person, any entity
(including, without limitation, any partnership) of which securities or other
ownership interests having ordinary voting power to elect a majority of the
board of directors or other persons performing similar functions (including, in
the case of a partnership, a general partner) are at the time directly or
indirectly owned by such Person.
"Title IV Plan" means an Employee Plan subject to Title IV of
ERISA other than any Multiemployer Plan.
"Transactions" mean the transactions contemplated by the
Transaction Documents.
"Transaction Documents" means this Agreement, the Securityholders
Agreement and the Inter-Securityholders Agreement, and each such document is
sometimes referred to individually as a "Transaction Document".
(b) All financial or accounting terms not defined herein shall
have the meanings afforded them under GAAP.
(c) Any terms not defined in Section 1.1(a) shall have the
meaning assigned to them elsewhere in this Agreement.
ARTICLE 2
PURCHASE AND SALE
2.1 Purchase and Sale.
Upon the terms and subject to the conditions of this Agreement,
the Issuer agrees to issue and sell to each Buyer, and each Buyer agrees,
severally but not jointly, to purchase from the Issuer at the Closing, the
number of shares of Series C Preferred Stock and at the prices indicated
opposite such Buyer's name on Schedule 2.1.
2.2 Closing.
The closing (the "Closing") of the transactions contemplated
hereunder shall take place at the offices of Hogan & Hartson L.L.P., 111 S.
Calvert Street, 16th Floor, Baltimore, Maryland 21202, as soon as possible after
satisfaction of the conditions set forth in Article 7, or at such other time or
place as the parties may agree. At the Closing:
(a) Each Buyer shall deliver to the Issuer the cash
amount indicated opposite such Buyer's name on Schedule 2.1 in immediately
available funds by wire transfer to
5
<PAGE> 9
an account of the Issuer designated by the Issuer, by notice to such Buyers, not
later than two business days prior to the Closing Date.
(b) The Issuer shall deliver to each Buyer certificates
for the
number of shares of Series C Preferred Stock indicated opposite such Buyer's
name on Schedule 2.1, duly registered in the name of such Buyer.
(c) The Issuer shall deliver to the Buyers the documents
required
hereunder to be furnished by the Issuer to the Buyers prior to or at Closing.
2.3 Additional Purchase.
Upon the terms and subject to the conditions of this Agreement,
the Issuer agrees to issue and sell Capital, and Capital agrees, to purchase
from the Issuer, an additional 1,250,001 shares of Series C Preferred Stock (the
"Additional Purchase"), at a purchase price of $4.00 per share, for a total
aggregate additional purchase price of $5,000,004 (the "Additional Purchase
Price") at an additional closing (the "Additional Closing"), provided that (a)
all consents, authorizations and approvals of governmental authorities and of
private persons or entities with respect to the Additional Purchase, including
but not limited to the expiration of any waiting period pursuant to
Hart-Scott-Rodino, have been secured; and (b) the Additional Closing occurs no
later than 120 days from the date of this Agreement.
2.4 Additional Closing.
The Additional Closing shall take place at the offices of Hogan &
Hartson L.L.P., 111 S. Calvert Street, 16th Floor, Baltimore, Maryland 21202, as
soon as possible after satisfaction of the conditions set forth in Section 2.3,
or at such other time or place as the parties may agree (the "Additional Closing
Date"). At the Additional Closing:
(a) Capital shall deliver to the Issuer the Additional
Purchase Price in immediately available funds by wire transfer to an account of
the Issuer designated by the Issuer, by notice to Capital, not later than two
business days prior to the Additional Closing Date.
(b) The Issuer shall deliver to Capital a certificate for
the number of shares of Series C Preferred Stock to be purchased by Capital at
the Additional Closing.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE ISSUER
Except as specifically set forth in the Disclosure Schedule (with
a disclosure with respect to a section of this Agreement to require a specific
reference in the Disclosure Schedule to the section of this Agreement to which
each such disclosure applies, and no disclosure to be deemed to apply with
respect to any Section to which it does not expressly reference), the Issuer
6
<PAGE> 10
represents and warrants (which representation and warranty shall be deemed to
include the disclosure with respect thereto so specified in the Disclosure
Schedule) to each Buyer as follows:
3.1 Corporate Existence and Power.
The Issuer and each Subsidiary of the Issuer are corporations
duly incorporated, validly existing and in good standing under the laws of the
states in which they were incorporated as listed on the Disclosure Schedule. The
Issuer and each Subsidiary of the Issuer have all corporate powers and all
material governmental licenses, authorizations, permits, consents and approvals
required to carry on their businesses as now conducted. The Issuer and each
Subsidiary of the Issuer are duly qualified to do business in each jurisdiction
where such qualification is necessary for the conduct of their businesses as
currently conducted and as conducted on or prior to the Closing and is in good
standing in each such jurisdiction, except to the extent the failure to be so
qualified would not have a Material Adverse Effect. The Issuer has heretofore
delivered to the Buyers true and complete copies of the articles and
certificates of incorporation and Bylaws of the Issuer and each Subsidiary of
the Issuer as currently in effect.
3.2 Governmental Authorization.
Except as set forth on the Disclosure Schedule, the execution,
delivery and performance by the Issuer of the Transaction Documents and the
consummation by the Issuer of the Transactions require, with respect to the
Issuer and each Subsidiary of the Issuer, no action by or in respect of, or
filing with, any governmental body, agency, or official.
3.3 Authorization.
The execution, delivery and performance by the Issuer of each of
the Transaction Documents are within the Issuer's corporate powers and have been
duly authorized by all necessary corporate action on the part of the Issuer.
This Agreement constitutes (and, when executed and delivered, each other
Transaction Document to which the Issuer is a party will constitute) a valid and
binding agreement of the Issuer enforceable in accordance with its terms except
as enforceability may be limited or affected by bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyances and other similar laws and
equitable principles now or hereafter in effect and affecting the rights and
remedies of creditors generally.
3.4 Non-Contravention.
(a) The execution, delivery and performance by the Issuer of the
Transaction Documents and the consummation by the Issuer of the Transactions do
not and will not (i) violate the Charter or Bylaws of the Issuer or any
Subsidiary of the Issuer, (ii) violate any applicable law, rule, regulation,
judgment, injunction, order or decree binding upon the Issuer or any Subsidiary
of the Issuer, (iii) other than as set forth in the Disclosure Schedule, require
any consent or other action by any Person under, constitute a default under, or
give rise to any right
7
<PAGE> 11
of termination, cancellation or acceleration of any right or obligation of the
Issuer or any Subsidiary of the Issuer, or result in the loss of any benefit to
which the Issuer or any Subsidiary of the Issuer is entitled under, any
agreement or other instrument or result in the loss of any license, franchise,
permit or other similar authorization held by the Issuer or (iv) result in the
creation or imposition of any acceleration of indebtedness or any Lien on any
asset of the Issuer or any Subsidiary of the Issuer.
(b) The Disclosure Schedule lists all agreements that require the
consent or acquiescence of any Person or entity not a party to this Agreement
with respect to any aspects of the execution, delivery or performance of this
Agreement or any of the Transaction Documents by the Issuer.
3.5 Capitalization.
(a) As of the date hereof and immediately prior to the Closing,
the authorized capital stock of the Issuer consists of 70,000,000 shares of
Common Stock and 19,717,280 shares of preferred stock, the preferred stock
consisting of 8,250,000 shares of Series A Preferred Stock, 3,857,280 shares of
Series B Preferred Stock, and 7,610,000 shares of Series C Preferred Stock. The
Disclosure Schedule sets forth a true and accurate list of all of the
stockholders of the Issuer and each Subsidiary of the Issuer.
(b) Immediately following the Closing, there will be outstanding
5,600,057 shares of Common Stock, 8,250,000 shares of Series A Preferred Stock,
3,857,280 shares of Series B Preferred Stock and 6,359,999 shares of Series C
Preferred Stock.
(c) The Disclosure Schedule sets forth the authorized capital
stock of each Subsidiary of the Issuer.
(d) All outstanding shares of capital stock of the Issuer and
each Subsidiary of the Issuer have been duly authorized and validly issued and
are fully paid and non-assessable. Except as set forth on the Disclosure
Schedule, no shares of capital stock or other voting or equity securities of the
Issuer or any Subsidiary of the Issuer have been reserved for any purpose.
Except as provided in clause (b) above or set forth on the Disclosure Schedule,
there are no outstanding (i) shares of capital stock or other voting or equity
securities of the Issuer or any Subsidiary of the Issuer, (ii) other than as
provided in clause (b) above or the Notes, securities of the Issuer or any
Subsidiary of the Issuer convertible into or any Subsidiary of the Issuer or
exchangeable for shares of capital stock or other voting or equity securities of
the Issuer or any Subsidiary of the Issuer or (iii) options, warrants or other
rights to acquire from the Issuer or any Subsidiary of the Issuer, or other
obligations of the Issuer or any Subsidiary of the Issuer to issue, any capital
stock other voting or equity securities or securities convertible into or
exchangeable for capital stock or other voting or equity securities of the
Issuer or any Subsidiary of the Issuer (the items in clauses (i), (ii) and (iii)
being referred to collectively as the "Existing Securities"). There are no
outstanding obligations of the Issuer or any Subsidiary of the Issuer or
outstanding agreements affecting or relating to the voting, issuance, purchase,
redemption, repurchase,
8
<PAGE> 12
transfer or registration for sale under the 1933 Act of any Existing Securities
of the Issuer or any Subsidiary of the Issuer, except as contemplated hereunder
or set forth on the Disclosure Schedule. The execution, delivery and performance
by the Issuer of the Transaction Documents and the consummation by the Issuer of
the Transactions will not trigger any antidilution adjustment mechanism in any
issued and outstanding capital stock of the Issuer, or any outstanding warrants,
options, notes or other securities convertible or exerciseable for capital stock
of the Issuer. Except as set forth on the Disclosure Schedule, the Issuer
directly or indirectly owns all of the shares of capital stock and other voting
or equity securities of each Subsidiary of the Issuer.
(e) The shares of Series C Preferred Stock to be acquired
pursuant to Article 2 have been duly authorized by the Issuer and, when issued
and delivered in accordance with the terms of this Agreement, upon payment
therefor by the Buyers as contemplated hereunder, will be validly issued, fully
paid and non-assessable, and will be free and clear of any Lien or other right
or claim and will not be subject to any preemptive or similar rights except as
contemplated by the Securityholders Agreement. The shares of Common Stock to be
issued and delivered upon conversion of the Series C Preferred Stock have been
duly authorized and, upon conversion of the shares of Series C Preferred Stock,
such shares of Common Stock will be validly issued, fully paid and
non-assessable, and will be free and clear of any Lien or other right or claim
and will not be subject to any preemptive or similar rights except as
contemplated by the Securityholders Agreement.
3.6 Financial Statements.
The Issuer has prepared and furnished to the Investors, and there
are included as part of the Disclosure Schedule, the audited consolidated
balance sheets and audited consolidated statements of income and cash flows of
the Issuer as of the end of the fiscal years ending December 31, 1995, 1996 and
1997 and the unaudited consolidated balance sheets and unaudited consolidated
statements of income and cash flows for the three months ended March 31, 1998
and the six months ended June 30, 1998. All of the financial statements,
including, without limitation, the notes thereto, referred to in this section or
furnished to the Investors after the date hereof pursuant to this Agreement: (i)
present fairly the consolidated financial position of the Issuer as of the dates
thereof and its results of operations and cash flows for the periods then ended
in conformity with GAAP applied on a consistent basis and (ii) are in accordance
with the books and records of the entities to which they pertain. The Disclosure
Schedule sets forth all changes in accounting methods (for financial accounting
purposes) at any time made, agreed to, requested or required with respect to the
Issuer or any Subsidiary.
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3.7 Absence of Certain Changes.
Since the Balance Sheet Date, except as set forth in the
Disclosure Schedule and except for matters after the date hereof specifically
contemplated by the Transaction Documents, the business of the Issuer and each
Subsidiary has been conducted in the ordinary course, and there has not been:
(a) any event, occurrence, development or state of circumstances
or facts which has had or, to the best knowledge of Issuer, is reasonably
expected to have a Material Adverse Effect;
(b) any declaration, setting aside or payment of any dividend or
other distribution with respect to any shares of capital stock or other
securities of the Issuer or any Subsidiary of the Issuer, or any repurchase,
redemption or other acquisition by the Issuer or any Subsidiary of the Issuer of
any outstanding shares of capital stock or other securities of, or other
ownership interests in, the Issuer or any Subsidiary of the Issuer;
(c) any amendment of any material term of any outstanding
security of the Issuer or any Subsidiary of the Issuer;
(d) any incurrence, assumption or guarantee by the Issuer or any
Subsidiary of the Issuer of any indebtedness for borrowed money other than in
the ordinary course of business and in amounts and on terms consistent with past
practice, but in any event not exceeding $100,000 in the aggregate;
(e) any creation or assumption by the Issuer or any Subsidiary of
the Issuer of any Lien on any material asset other than in the ordinary course
of business consistent with past practice;
(f) any making of any loan, advance or capital contributions to
or investment in any Person other than loans, advances or capital contributions
to or investments in Subsidiaries made in the ordinary course of business
consistent with past practice;
(g) any damage, destruction or other casualty loss (whether or
not covered by insurance) affecting the business or assets of the Issuer or any
Subsidiary of the Issuer which has had, or is reasonably expected to have, a
Material Adverse Effect;
(h) any transaction or commitment made, or any contract or
agreement entered into, by the Issuer or any Subsidiary of the Issuer relating
to its assets or business (including the acquisition or disposition of any
assets) or any relinquishment by the Issuer or any Subsidiary of the Issuer of
any contract or other right, in either case, material to the Issuer or any
Subsidiary of the Issuer, other than (i) transactions and commitments in the
ordinary course of
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business and (ii) those contemplated by the Transaction Documents;
(i) any change in any method of accounting or accounting practice
by the Issuer or any Subsidiary of the Issuer;
(j) except for any of the following matters undertaken in the
ordinary course of business not exceeding $100,000 individually or $200,000 in
the aggregate, any (i) employment, deferred compensation, severance, retirement
or other similar agreement entered into with any director, officer or employee
of the Issuer or any Subsidiary of the Issuer (or any amendment to any such
existing agreement), (ii) grant of any severance or termination pay to any
director, officer or employee of the Issuer or any Subsidiary of the Issuer, or
(iii) change in compensation or other benefits payable to any director, officer
or employee of the Issuer or any Subsidiary of the Issuer pursuant to any
severance or retirement plans or policies thereof; or
(k) any material labor dispute, other than routine individual
grievances, any activity or proceeding by a labor union or representative
thereof to organize any employees of the Issuer or any Subsidiary of the Issuer,
or any lockouts, strikes, slowdowns, work stoppages or threats thereof by or
with respect to any employees of the Issuer or any Subsidiary of the Issuer.
3.8 No Undisclosed Liabilities.
There are no liabilities of the Issuer or any Subsidiary of the
Issuer of any kind whatsoever, whether accrued, contingent, absolute,
determined, determinable or otherwise, and there is no existing condition,
situation or set of circumstances which is reasonably expected to result in such
a liability, other than:
(a) liabilities provided for in the Balance Sheet or
disclosed in the notes thereto;
(b) liabilities that have arisen in the ordinary course of
business after the Balance Sheet Date; and
(c) liabilities set forth on the Disclosure Schedule.
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3.9 Certain Interests.
(a) Except as set forth in the Disclosure Schedule, no officer or
director of the Issuer or any Subsidiary of the Issuer or any immediate family
member or Affiliate or, to the best knowledge of the Issuer, any immediate
family member or Affiliate of any such officer or director (i) has any interest
in any property, real or personal, tangible or intangible, including licenses,
agencies or Intellectual Property Rights, used in or pertaining to the business
of the Issuer or any Subsidiary of the Issuer, (ii) has any interest in any
business, corporate or otherwise, that is in competition with the business of
the Issuer or any Subsidiary of the Issuer or (iii) has received any loan or
advance that remains unpaid as of the date hereof from or is otherwise a debtor
of, or made any loan or advance to or is otherwise a creditor of, the Issuer or
any Subsidiary of the Issuer (except for travel advances to employees of the
Issuer and its Subsidiaries in the ordinary course of business).
(b) Except as set forth on the Disclosure Schedule, neither any
present or former officer, director or stockholder of the Issuer or any
Subsidiary of the Issuer, nor any Affiliates of the officers, directors or
stockholders, are currently a party to any transaction with the Issuer or a
Subsidiary of the Issuer, including, without limitation, any agreement providing
for the employment of, furnishing of services by, rental of assets from or to,
or otherwise requiring payments to, any of the officers, directors, stockholders
or Affiliates.
3.10 Material Contracts.
(a) The Disclosure Schedule lists and identifies the type of
agreement for all material agreements to which the Issuer or any Subsidiary of
the Issuer is a party or by which the Issuer or any Subsidiary of the Issuer is
bound at the date hereof. Except as set forth on the Disclosure Schedule, the
Issuer is not a party to or bound by any agreement of the type described in any
category of agreements referred to below:
(i) any lease of personal property providing for annual rentals
of $50,000 or more, excluding leases for copiers, laboratory equipment and
office equipment purchased in the ordinary course of business that is currently
in use by the Issuer or a Subsidiary or, if not in use, that has been taken into
account in the restructuring charge appearing on the balance sheet for the six
month period ended June 30, 1998 furnished to the Buyers pursuant to Section
3.6;
(ii) any agreement for the purchase of materials, supplies,
goods, services, equipment or other assets that (A) provides for either annual
payments by the Issuer or any Subsidiary of the Issuer of $1,000,000 or more, or
(B) was not entered into in the ordinary course of business at prevailing market
prices with customary cancellation provisions;
(iii) any sales, distribution or other similar agreement
providing for the sale by the Issuer or any Subsidiary of the Issuer of
materials, supplies, goods, services, equipment or other assets that provides
for either (A) annual payments to the Issuer or any Subsidiary of the
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Issuer of $100,000 or more or (B) aggregate payments to the Issuer or any
Subsidiary of the Issuer of $200,000 or more;
(iv) any partnership, joint venture, shareholders or other
similar agreement or arrangement (including any related management agreements);
(v) any agreement relating to the acquisition or disposition of
any business (whether by merger, sale of stock, sale of assets or otherwise);
(vi) any agreement relating to indebtedness for borrowed money or
the deferred purchase price of property (in either case, whether incurred,
assumed, guaranteed or secured by any asset), except (A) any such agreement with
an aggregate outstanding principal amount not exceeding $200,000, or (B) any
such agreement entered into in the ordinary course of business consistent with
past practices for the purchase of inventory or equipment containing customary
deferred payment terms where the Issuer or any Subsidiary of the Issuer has an
outstanding aggregate liability not exceeding $200,000;
(vii) any material license, franchise or similar agreement;
(viii) any material agency, dealer, sales representative,
marketing or other similar agreement;
(ix) any material consulting or advisory agreements which cannot
be terminated by the Issuer or a Subsidiary, as the case may be, at will;
(x) any agreement that limits the freedom of the Issuer or any
Subsidiary of the Issuer to compete in any line of business;
(xi) any agreement with a value of, or calling for annual
payments in excess of, $50,000 with any director or officer of the Issuer or any
Subsidiary of the Issuer or with any "associate" or any member of the "immediate
family" (as such terms are respectively defined in Rules 12b-2 and 16a-1 of the
1934 Act) of any such director or officer; or
(xii) any other agreement, commitment, arrangement or plan not
made in the ordinary course of business that is material to the Issuer or any
Subsidiary of the Issuer.
(b) Each agreement, commitment, arrangement or plan required to
be disclosed pursuant to this Section is a valid and binding obligation of the
Issuer or a Subsidiary of the Issuer, as the case may be, and is in full force
and effect, and the Issuer and each Subsidiary of the Issuer have in all
material respects performed all the obligations thereunder required to be
performed by them to date, neither the Issuer nor any Subsidiary of the Issuer
is, nor to the knowledge of Issuer or any Subsidiary of the Issuer, without
independent inquiry, is any other party thereto, in default or breach in any
material respect under the terms of any such agreement, contract, plan, lease,
arrangement or commitment and there has not occurred as of the date hereof any
event which (whether with or without notice or lapse of time) would constitute a
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default. All necessary governmental approvals with respect thereto have been
obtained and all necessary filings or registrations therefor have been made, in
each case to the extent that either the Issuer or any Subsidiary of the Issuer
is responsible therefor, and there are no outstanding disputes thereunder, and
there have been no threatened cancellations thereof.
3.11 Litigation.
Except as set forth in the Disclosure Schedule, there is no
action, suit, investigation or proceeding Pending against or, to the best
knowledge of the Issuer, threatened or reasonably anticipated against the Issuer
or any Subsidiary of the Issuer or any of their properties before any court or
arbitrator or any governmental body, agency or official.
3.12 Compliance with Laws; No Defaults.
(a) Neither the Issuer nor any Subsidiary of the Issuer is in any
material respect in violation of, or has violated, any applicable law, rule,
regulation, judgment, injunction, order or decree, including, without
limitation, all laws, regulations, orders and requirements promulgated by any
governmental authority or relating to consumer protection, equal opportunity,
environmental protection, fire, zoning and other building and occupational
safety matters (including workers compensation).
(b) Neither the Issuer nor any Subsidiary of the Issuer has
received notice of any violation (or of any investigation, inspection, audit, or
other proceeding by any governmental authority involving allegations of any
violation) of any law, regulation, order or requirement, or is in material
default with respect to any law, and no investigation, inspection, audit or
other proceeding by any governmental authority involving allegations of
violation of any law, regulation, order or requirement is threatened or
contemplated.
3.13 Properties.
(a) Except as set forth on the Disclosure Schedule, the Issuer
and each Subsidiary of the Issuer have good title to all personal property and
assets material to the operations of the Issuer and each Subsidiary of the
Issuer (whether tangible or intangible), except for property and assets sold
since the Balance Sheet Date in the ordinary course of business, or in the case
of leased property have valid leasehold interests in all personal property and
assets under lease material to the operations of the Issuer and each Subsidiary
of the Issuer.
(b) Except for leased Real Property that is listed on the that
portion of the Disclosure Schedule relating to Section 3.13(j) or leased Real
Property that is not required to be disclosed pursuant to Section 3.13(j), the
Disclosure Schedule lists all the real property currently owned, operated or
used by the Issuer or any Subsidiary of the Issuer (the "Real Property"),
specifying the owner of each parcel thereof, and all such Real Property is
suitable and adequate for the uses for which it is intended or currently
devoted.
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(c) The Issuer and the Subsidiaries of the Issuer are the sole
owners of good, valid, fee simple, marketable and insurable (at standard rates)
title to the Real Property respectively owned by them, including, without
limitation, all buildings, structures, fixtures and improvements thereon and all
equipment, machinery and personal property therein, in each case free and clear
of all encumbrances, except for Liens of the type described in Section
3.13(f)(i)-(iii).
(d) All buildings, structures, fixtures and other improvements on
the Real Property are in good repair, free of defects (latent or patent), and
fit for the uses to which they are currently devoted. All such buildings,
structures, fixtures and improvements on the Real Property conform in all
material respects to all applicable laws, rules or regulations. The buildings,
structures, fixtures and improvements on each parcel of the Real Property lie
entirely within the boundaries of such parcel of the Real Property as specified
in the legal description set forth in the Disclosure Schedule, and no structures
of any kind encroach on the Real Property.
(e) No portion of the Real Property or any building, structure,
fixture or improvement thereon is the subject of, or affected by, any
condemnation, eminent domain or inverse condemnation proceeding currently
instituted or pending, and neither the Issuer nor any Subsidiary of the Issuer
has any knowledge that any of the foregoing are, or will be, the subject of, or
affected by, any such proceeding.
(f) None of the property or assets described in this section
(whether personal property or Real Property) is subject to any Liens, except as
set forth in the Disclosure Schedule and except:
(i) Liens disclosed on the Balance Sheet;
(ii) Liens for taxes not yet delinquent or being contested
in good faith (and for which adequate accruals or reserves have been established
on the Balance Sheet); or
(iii) Liens which do not materially detract from the value
or materially interfere with any present or presently intended use of such
property or assets.
(g) To the best knowledge of the Issuer and any Subsidiary of the
Issuer, there are no developments affecting any of the property or assets
described in this section (whether personal property or Real Property) pending
or threatened, which might materially detract from the value of the property or
assets or materially interfere with any present or intended use of any the
property or assets.
(h) All leases of Real Property to which the Issuer or any
Subsidiary of the Issuer is a party or is bound are valid, binding and
enforceable in accordance with their respective terms, and there does not exist
under any such lease any material default or any event which with notice or
lapse of time or both would constitute such a default.
(i) The plant and equipment owned by the Issuer and each
Subsidiary of the
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Issuer is in good operating condition, and is reasonably adequate and suitable
for its present and intended uses and, in the case of plants, buildings and
other structures (including the roofs thereof), is, to the knowledge of the
Issuer and the Subsidiaries of the Issuer, structurally sound.
(j) The Disclosure Schedule lists all leases under which the
Issuer or any Subsidiary of the Issuer is a lessee or lessor of any Real
Property that either (i) provides for annual lease payments in excess of $50,000
or (ii) expires more than five years from the date of this Agreement. Except as
described in the Disclosure Schedule, the Issuer or a Subsidiary of the Issuer
(as applicable) are the owners and holders of all the leasehold estates
purported to be granted by the documents described in the Disclosure Schedule to
each of them. All Real Property subject to leases is suitable and adequate for
the uses for which it is intended or currently devoted. The Issuer and each
Subsidiary have performed all the material obligations required to be performed
by each of them to date and are not in default in any respect under any of the
foregoing, and there has not occurred any event which (whether with or without
notice, lapse of time or the happening or occurrence of any other event) would
constitute such a default.
(k) All Real Property leased by the Issuer and each Subsidiary of
the Issuer currently has access to (i) public roads or easements for such
ingress to and egress from all such real property and (ii) water supply, storm
and sanitary sewer facilities, telephone, gas and electrical connections, fire
protection, drainage and other public utilities, in each case, as is reasonably
necessary for the conduct of the business of the Issuer and each Subsidiary of
the Issuer as heretofore conducted.
(l) The property and assets (including Intellectual Property
Rights) owned, licensed or leased by the Issuer and each Subsidiary of the
Issuer constitute all of the property and assets reasonably necessary for the
conduct of the businesses of the Issuer as currently conducted.
3.14 Intellectual Property.
(a) The Disclosure Schedule contains a list of (i) all domestic
and foreign patents and patent applications, trademarks, service marks, trade
names, brand names and copyrights (including any registrations or applications
for any of the foregoing) and (ii) all material agreements with respect to
Intellectual Property Rights, in the case of both (i) and (ii), that are owned
by or licensed to Issuer and each Subsidiary of the Issuer, or used or held for
use by the Issuer and any Subsidiary of the Issuer, specifying as to each, as
applicable: (x) the nature of such Intellectual Property Right; (y) the owner of
such Intellectual Property Right; and (z) licenses, sublicenses and other
agreements as to which the Issuer and any Subsidiary of the Issuer is a party
and pursuant to which any Person is authorized to use such Intellectual Property
Right, including the identity of all parties thereto, a description of the
nature and subject matter thereof, the applicable royalty and the term thereof.
The Issuer and each Subsidiary of the Issuer own, or are licensed or otherwise
possess all necessary rights to use all patents, trademarks, tradenames, service
marks, copyrights, know-how and trade secrets that are used in the business or
products of the Issuer and each Subsidiary of the Issuer. Except as set forth on
the Disclosure Schedule, all Intellectual Property Rights owned by the Issuer
and each Subsidiary of the Issuer
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are owned free and clear of any Liens and of any restrictions on the use or
exploitation thereof, and are not subject to any right (including as to
royalties) or license in favor of any other Person. To the best knowledge of the
Issuer and the Subsidiaries of the Issuer, and to the extent required to perfect
title, all prior assignments of Issuer's and its Subsidiaries' Intellectual
Property Rights have been recorded in all appropriate patent, trademark and
copyright offices and there are no breaks in the chain of title with respect to
any of such Intellectual Property Rights. The Intellectual Property Rights
listed in the Disclosure Schedule are valid and in full force and effect. The
patents related to Intellectual Property Rights listed in the Disclosure
Schedule have been duly registered or filed in or issued by the appropriate
patent office or authority in the countries identified in the Disclosure
Schedule to the extent any such registration, filing or issuance is required by
applicable law, and neither the Issuer nor any Subsidiary of the Issuer knows of
no act or failure to act by its employees, agents or counsel during the
registration or prosecution of, or other proceeding relating to, any such patent
related Intellectual Property Rights in any patent office, or of any other fact,
which would make invalid or unenforceable, or negate the right to issuance of,
any of such patent related Intellectual Property Rights listed in the Disclosure
Schedule.
(b) (i) Except as set forth in the Disclosure Schedule, after
January 1, 1992, neither the Issuer nor any Subsidiary of the Issuer has been a
defendant in any action, suit, investigation or proceeding relating to, and
otherwise has not been notified of, any alleged claim or infringement of any
Intellectual Property Rights, and neither the Issuer nor any Subsidiary of the
Issuer has any knowledge of any other such infringement by the Issuer or any
Subsidiary of the Issuer and (ii) neither the Issuer nor any Subsidiary of the
Issuer has any knowledge of any continuing infringement by any other Person of
any Intellectual Property Rights. No Intellectual Property Right is subject to
any outstanding judgment, injunction, order, decree or agreement restricting the
use thereof by the Issuer or any Subsidiary of the Issuer or restricting the
licensing thereof by the Issuer or any Subsidiary of the Issuer to any Person.
Except as set forth on the Disclosure Schedule, neither the Issuer nor any
Subsidiary of the Issuer has entered into any agreement to indemnify any other
Person against any charge of infringement of any Intellectual Property Right.
(c) None of the processes and formulae, research and development
results and other know-how of the Issuer or any Subsidiary of the Issuer,
including, without limitation, trade secrets, the value of which to the Issuer
or any Subsidiary of the Issuer is contingent upon maintenance of the
confidentiality thereof, has been disclosed by the Issuer or any Subsidiary of
the Issuer to any Person in a manner prejudicial to the Issuer's or the
Subsidiary's interest therein, other than to employees, representatives and
agents of the Issuer and its Subsidiaries, all of whom are bound by written
confidentiality agreements substantially in the form attached hereto as part of
the Disclosure Schedule.
(d) Except as set forth on the Disclosure Schedule, there is no
Intellectual Property Right developed by a stockholder, officer, director,
employee or consultant of the Issuer or any Subsidiary of the Issuer that is
used in the business of the Issuer or any Subsidiary of the Issuer that has not
been transferred to, or is not owned free and clear of any liens or encumbrances
by, the Issuer or a Subsidiary of the Issuer.
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3.15 Insurance Coverage.
The Disclosure Schedule Issuer lists and describes all insurance
policies and fidelity bonds relating to the assets, business, operations,
employees, officers or directors of the Issuer and each Subsidiary of the
Issuer. There is no claim in excess of $50,000 by the Issuer or any Subsidiary
of the Issuer pending under any of such policies or bonds as to which coverage
has been questioned, denied or disputed by the underwriters of such policies or
bonds or in respect of which such underwriters have reserved their rights. All
premiums payable under all such policies and bonds have been paid timely, and
the Issuer and each Subsidiary of the Issuer has otherwise complied in all
material respects with the terms and conditions of all such policies and bonds.
Such policies of insurance and bonds (or other policies and bonds providing
substantially similar insurance coverage) are in full force and effect. The
policies and bonds described in this Section are of the type and in amounts
customarily carried by Persons conducting businesses similar to those of the
Issuer and the Subsidiaries of the Issuer and provide adequate insurance
coverage for the assets of the Issuer and the Subsidiaries of the Issuer.
Neither the Issuer nor any Subsidiary of the Issuer knows of any threatened
termination of, material premium increase with respect to, or material
alteration of coverage under, any of such policies or bonds. The Issuer and the
Subsidiaries of the Issuer shall after the Closing continue to have coverage
under such policies and bonds (to the extent coverage is provided under such
policies and bonds) with respect to events occurring prior to the Closing, which
policies and bonds constitute the only insurance policies and fidelity bonds in
effect relating to the assets, businesses, operations, employees, officers and
directors of the Issuer and the Subsidiaries of the Issuer.
3.16 Licenses and Permits.
The Issuer and each Subsidiary of the Issuer have all material
licenses, franchises, permits or other similar authorizations relating to the
ownership of their assets, or necessary for the operation of their businesses
(the "Permits"). Each such Permit is valid and in full force and effect, and
none of the Permits will be terminated or impaired or become terminable, in
whole or in part, as a result of the Transactions.
3.17 Inventories.
The inventories set forth in the Balance Sheet were properly
stated therein at the lesser of cost or fair market value computed on a
first-in-first-out basis determined in accordance with GAAP consistently
maintained and applied by the Issuer. Since the Balance Sheet Date, the
inventories of the Issuer and the Subsidiaries of the Issuer have been
maintained in the ordinary course of business. All such inventory is owned free
and clear of all Liens, except for Liens in favor of the vendors of such
inventory granted pursuant to the Issuer's and its Subsidiaries' ordinary
payment terms. Except as set forth on the Disclosure Schedule, all of the
inventory recorded on the Balance Sheet consists of, and all inventory of the
Issuer and the Subsidiaries of
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the Issuer on the Closing Date will consist of, items of a quality usable or
saleable in the normal course of business consistent with past practices and are
and will be in quantities sufficient for the normal operation of the business of
the Issuer and the Subsidiaries of the Issuer.
3.18 Accounts Receivable; Vendor Relationships.
(a) All accounts, notes receivable and other receivables
reflected on the Balance Sheet (the "Balance Sheet Receivables") are computed in
accordance with generally accepted accounting principles and are valid, genuine
and collectible in the aggregate amount thereof, subject to normal and customary
trade discounts, less any reserves for doubtful accounts and contractual
allowances recorded on the Balance Sheet.
(b) All accounts, notes receivable and other receivables which
arise or are generated after the Balance Sheet Date and on or prior to the
Closing Date are and will be valid and genuine.
(c) Except as set forth on the Disclosure Schedule, neither the
Issuer nor any Subsidiary (i) is currently involved in any dispute with any
supplier or vendor of either the Issuer or a Subsidiary that could potentially
threaten such entities relationship with the supplier or vendor or (ii)
reasonably anticipates any dispute with any supplier or vendor that could
potentially have a Material Adverse Effect.
3.19 Finders' Fees.
There is no investment banker, broker, finder or other
intermediary which has been retained by or is authorized to act on behalf of the
Issuer who might be entitled to any fee or commission from the Issuer, any Buyer
or any of their respective Affiliates upon consummation of the Transactions.
3.20 Disclosure.
The documents and other written information (other than
information in the nature of financial projections and forecasts, as to which no
representation is made other than as set forth in Section 3.6(b)) delivered by
the Issuer and its representatives to the Buyers in connection with the
Transactions, taken as a whole, contain no untrue statement of a material fact
and do not omit to state any material fact necessary in order to make the
statements contained therein not misleading.
3.21 Directors, Officers and Employees.
The Issuer has furnished to the Buyers a true and complete list
of the names, titles, annual salaries and other compensation (including
incentive compensation) of all current directors and officers of the Issuer and
each Subsidiary of the Issuer and all other employees of the Issuer and each
Subsidiary of the Issuer whose annual compensation exceeds $75,000.
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Except as set forth on the Disclosure Schedule, none of the key employees of the
Issuer or any Subsidiary of the Issuer has notified the Issuer or any Subsidiary
of the Issuer in writing that he or she intends to resign or retire as a result
of the Transactions or otherwise within one year after the Closing Date.
3.22 Labor Matters.
The Issuer and each Subsidiary of the Issuer is in material
compliance with all currently applicable laws respecting employment and
employment practices, terms and conditions of employment and wages and hours,
and is not engaged in any unfair labor practice. There is no unfair labor
practice complaint Pending or, to the best knowledge of Issuer and the
Subsidiaries of the Issuer, threatened against the Issuer or any Subsidiary of
the Issuer before the National Labor Relations Board.
3.23 Environmental Matters.
(a) Except as set forth in the Disclosure Schedule:
(i) Issuer and each Subsidiary have complied and are in
compliance with, and any real property owned, leased or operated by the Issuer
or any Subsidiary of Issuer and all improvements thereon are in compliance with,
all Environmental Laws. Neither Issuer nor any Subsidiary of Issuer has any
liability under any Environmental Law, nor is Issuer or any Subsidiary of Issuer
responsible for any liability under Environmental Laws of any other person.
(ii) no notice, notification, demand, request for information,
claim, citation, summons, complaint or order has been issued or made, no
complaint has been filed, no penalty has been assessed and no investigation,
proceeding, or review is pending, or to the knowledge of the Issuer and the
Subsidiaries of the Issuer, threatened by any governmental entity or other
Person, and neither Issuer nor any Subsidiary of Issuer, nor any officer,
director or stockholder thereof knows or suspects any fact(s) which might
reasonably form the basis for any such actions or notices arising out of,
attributable to, or with respect to any (A) alleged violation by the Issuer or
any Subsidiary of the Issuer of any Environmental Law, (B) alleged liability
under any Environmental Law, (C) alleged failure by the Issuer or any Subsidiary
of the Issuer to have any environmental permit, (D) Regulated Environmental
Activity or (E) presence, Release or threatened Release of Hazardous Substances;
(iii) no polychlorinated biphenyls, radioactive material, urea
formaldehyde, asbestos, asbestos-containing material, wetlands, landfill, dump,
filled in land or underground improvement used currently or in the past for
management of Hazardous Substances tank (active or abandoned) is or has been
present at any property now or previously owned, leased or operated by the
Issuer or any Subsidiary of the Issuer;
(iv) no Hazardous Substance has been Released (and no
notification of such Release has been filed or made) at, on, from, or under any
property now or previously owned,
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leased or operated by the Issuer or any Subsidiary of the Issuer and no
Hazardous Substance is or was present at any such property except in accordance
with Environmental Laws;
(v) no property now or previously owned, leased or operated by
the Issuer or any Subsidiary of the Issuer or any property to which the Issuer
or any Subsidiary of the Issuer has, directly or indirectly, transported or
arranged for the transportation of any Hazardous Substances is listed or, to the
knowledge of the Issuer or any Subsidiary of the Issuer, proposed for listing,
on the National Priorities List promulgated pursuant to CERCLA, on CERCLIS (as
defined in CERCLA) or on any other federal, state or foreign list of sites
requiring investigation or clean-up;
(vi) there are no Environmental Permits that are nontransferable
or require consent, notification or other action to remain in full force and
effect following the consummation of the Transactions, and no other consent,
notification, approval or other action is required under any Environmental Law
in order to consummate the Transaction.
(vii) no Lien in favor of any person relating to or in connection
with any claim under any Environmental Law has been filed or has attached to the
real property currently owned, operated, or leased by the Issuer or the
Subsidiaries.
(b) There has been no environmental investigation, study, audit,
test, review or other analysis conducted of which the Issuer or any Subsidiary
of the Issuer has knowledge, or which is in the possession or control of either
of them, in relation to the current or prior business of the Issuer or any
Subsidiary of the Issuer or any property or facility now or previously owned,
operated or leased by the Issuer or any Subsidiary of the Issuer which has not
been delivered to Buyers at least ten days prior to the date hereof.
(c) Seller and the Subsidiaries have been duly issued, and
currently have and will maintain through the Closing Date, all permits,
licenses, certificates and approvals required under any Environmental Law. A
true and complete list of such permits, licenses, certificates and approvals,
all of which are valid and in full force and effect, is set out in the
Disclosure Schedule.
(d) For purposes of this Section, the terms "the Issuer" and
"Subsidiary of the Issuer" shall include any entity which is, in whole or in
part, a predecessor of the Issuer or its Subsidiaries.
3.24 Employee Benefit Plans.
(a) The Disclosure Schedule identifies each Employee Plan. The
Issuer has furnished to the Buyers copies of the Employee Plans (and, if
applicable, related trust agreements) and all amendments thereto and official
written interpretations thereof together with the three most recent annual
reports (Form 5500), if any. Other than a plan covered under Section 401(k) of
the Code, no Employee Plan is, and no Employee Plan maintained by the
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Issuer or any Subsidiary of the Issuer in the past six years has been (i) a
Multiemployer Plan, (ii) a Title IV Plan, (iii) a "pension plan" as such term is
defined in Section 3(2) of ERISA or (iv) maintained in connection with any trust
described in Section 501(c) (9) of the Code.
(b) The Issuer and each Subsidiary of the Issuer (i) currently
has no ERISA Affiliates and (ii) has had no ERISA Affiliates in the past six
years.
(c) No transaction prohibited by Section 406 of ERISA or Section
4975 of the Code, has occurred with respect to any employee benefit plan or
arrangement which is covered by Title I of ERISA which transaction has or will
cause the Issuer or any Subsidiary of the Issuer or any of their ERISA
Affiliates to incur any liability under ERISA, the Code or otherwise excluding
transactions effected pursuant to a statutory or administrative exemption.
(d) Each Employee Plan has been maintained in substantial
compliance with its terms and with the requirements prescribed by any and all
statutes, orders, rules and regulations, including but not limited to ERISA and
the Code, which are applicable to such plans.
(e) The Disclosure Schedule identifies each Benefit Arrangement.
The Issuer has furnished to the Buyers copies or description of each benefit
arrangement (and, if applicable, related trust agreements) and all amendments
thereto and official written interpretations thereof. Each Benefit Arrangement
has been maintained in substantial compliance with its terms and with the
requirements prescribed by any and all applicable statues, orders, rules and
regulations.
(f) As of the date hereof neither the Issuer nor any Subsidiary
of the Issuer nor any affiliate has any unfunded liability for "post-retirement
benefits other than pensions" (within the meaning of Financial Accounting
Standard No. 106 ("FAS 106") for retirees and employees of the Issuer and its
Subsidiaries vested in such benefits as of such date determined in accordance
with FAS 106).
(g) All contributions and payments accrued under each Employee
Plan and Benefit Arrangement, determined in accordance with prior funding and
accrual practices, as adjusted to include proportional accruals for the period
from September 30, 1994 to the Closing Date, will be discharged and paid or
properly accrued on the Balance Sheet on or prior to the Closing Date. There has
been no amendment to, written interpretation of or announcement (whether or not
written) by the Issuer or any Subsidiary of the Issuer or any of its Affiliates
or relating to, or change in employee participation or coverage under, any
Employee Plan or Benefit Arrangement that would increase materially the expense
of maintaining such Employee Plan or Benefit Arrangement above the level of the
expense incurred in respect thereof for the fiscal year ended prior to the date
hereof.
(h) There is no contract, agreement, plan or arrangement covering
any employee or former employee of the Issuer or any Subsidiary of the Issuer
that, individually or collectively, could give rise to the payment of any amount
that would not be deductible pursuant to the terms of Section 280G of the Code.
<PAGE> 26
(i) There has been no failure of a group health plan (as defined
in Section 5000(b) (l) of the Code) to meet the requirements of Code Section
4980B(f) with respect to a qualified beneficiary (as defined in Section
4980B(g)) which would result in a material liability for the Issuer or any
Subsidiary of the Issuer. Neither the Issuer nor any Subsidiary of the Issuer
has contributed to a nonconforming group health plan (as defined in Section
5000(c) of the Code) and no ERISA Affiliate of the Issuer or any Subsidiary of
the Issuer has incurred a tax under Section 5000(a) which is or could become a
liability of the Issuer or any Subsidiary of the Issuer.
(j) Neither the Issuer nor any Subsidiary of the Issuer maintains
any plan that covers non-U.S. residents or individuals with no U.S. sources of
income.
(k) Except pursuant to the Employment Agreements, no employee or
former employee of the Issuer or any Subsidiary of the Issuer will become
entitled to any bonus, retirement, severance, job security or similar benefit or
enhanced such benefit (including acceleration of vesting or exercise of an
incentive award) as a result of the transactions contemplated hereby.
3.25 Debt Instruments.
The Disclosure Schedule lists all mortgages, indentures, notes,
guarantees and other agreements for or relating to borrowed money (including,
without limitation, conditional sales agreements and capital leases) to which
the Issuer or any Subsidiary of the Issuer is a party or which have been assumed
by the Issuer or any Subsidiary of the Issuer or to which any assets of the
Issuer or any Subsidiary of the Issuer are subject and, with respect to each
arrangement so listed, briefly describes the principal amount, interest rate,
original and maturity dates and any sinking fund installments, or prepayment
premiums restrictive covenants and any other material provisions. The Issuer and
each Subsidiary have performed all the material obligations required to be
performed by each of them to date and are not in default in any respect under
any of the foregoing, and there has not occurred any event which (whether with
or without notice, lapse of time or the happening or occurrence of any other
event) would constitute such a default.
3.26 Books and Records.
The books of account, stock records, minute books and other
records of the Issuer and each Subsidiary of the Issuer are true and accurate
and have been maintained in accordance with good business practices and the
matters contained therein are appropriately and accurately reflected in the
financial statements furnished to the Buyers.
3.27 Absence of Violation.
Neither the Issuer nor any Subsidiary of the Issuer nor any of
their officers, directors, employees or agents (or stockholders, distributors,
representatives or other persons acting on the express, implied or apparent
authority of such entity) have paid, given or received
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or have offered or promised to pay, give or receive, any bribe or other
unlawful, questionable payment of money or other thing of value, any
extraordinary discount, or any other unlawful or unusual inducement, to or from
any person, business association or governmental official or entity in the
United States or elsewhere in connection with or in furtherance of the business
of the Issuer or a Subsidiary of the Issuer (including, without limitation, any
offer, payment or promise to pay money or other thing of value (a) to any
foreign official or political party (or official thereof) for the purposes of
influencing any act, decision or omission in order to assist the Issuer or a
Subsidiary of the Issuer in obtaining business for or with, or directing
business to, any person, or (b) to any person, while knowing that all or a
portion of such money or other thing of value will be offered, given or promised
to any such official or party for such purposes). The businesses of the Issuer
and the Subsidiaries of the Issuer are not in any manner dependent upon the
making or receipt of such payments, discounts or other inducements.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYERS
Each Buyer, severally as to itself and not jointly, represents
and warrants to the Issuer as follows:
4.1 Existence and Power.
Such Buyer is a limited partnership duly organized, limited
liability company or a corporation duly incorporated, validly existing and in
good standing under the laws of its jurisdiction of organization.
4.2 Authorization.
The execution, delivery and performance by such Buyer of each
Transaction Document to which it is a party are within the powers (corporate,
partnership or otherwise) of such Buyer and have been duly authorized by all
necessary action on the part of such Buyer. This Agreement constitutes (and,
when executed and delivered by such Buyer, each other Transaction Document to
which such Buyer is a party will constitute) a valid and binding agreement of
such Buyer.
4.3 Governmental Authorization.
The execution, delivery and performance by such Buyer of each of
the Transaction Documents to which it is a party require no action by or in
respect of, or filing with, any governmental body, agency or official.
4.4 Non-Contravention.
The execution, delivery and performance by such Buyer of each of
the
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Transaction Documents to which it is a party do not and will not violate the
partnership agreement, the limited liability company agreement or articles or
certificate of incorporation and bylaws, as the case may be, of such Buyer, (ii)
violate any material indenture, agreement or mortgage to which such Buyer is a
party or by which such Buyer is bound, or (iii) violate any applicable material
law, rule, regulation, judgment, injunction, order or decree or require any
material consent of any other Person.
4.5 Purchase for Investment.
Such Buyer acknowledges that the Securities have not been
registered under the 1933 Act or any state securities laws and that the purchase
and sale of the Securities contemplated hereby is to be effected pursuant to an
exemption from the registration requirements imposed by such laws. In this
regard, such Buyer is purchasing the Securities to be purchased by it hereunder
for its own account and not with a view to, or for sale in connection with, any
distribution thereof in violation of the 1933 Act. Such Buyer (either alone or
together with its advisors) is an "accredited investor" (as defined in
Regulation D under the Securities Act), has sufficient knowledge and experience
in financial and business matters so as to be capable of evaluating the merits
and risks of its investment in such Securities and is capable of bearing the
economic risks of such investment.
4.6 Litigation.
There is no action, suit, investigation or proceeding Pending
against or, to the knowledge of such Buyer, threatened against or affecting such
Buyer before any court or arbitrator or any governmental body, agency or
official which in any manner challenges or seeks to prevent, enjoin, alter or
materially delay the Transactions.
4.7 Finders' Fees.
There is no investment banker, broker, finder or other
intermediary which has been retained by or is authorized to act on behalf of any
Buyer who might be entitled to any fee or commission from the Issuer or any of
its Subsidiaries or Affiliates upon consummation of the Transactions.
ARTICLE 5
ADDITIONAL UNDERTAKINGS AND COVENANTS
5.1 Best Efforts.
Subject to the terms and conditions of this Agreement, each party
will use its best efforts to take, or cause to be taken, all actions and to do,
or cause to be done, all things necessary or desirable under applicable laws and
regulations to consummate the transactions
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contemplated by the Transaction Documents. Each party agrees to execute and
deliver such other documents, certificates, agreements and other writings and to
take such other actions as may be necessary or desirable in order to consummate
or implement expeditiously the Transactions.
5.2 Certain Filings.
(a) The Issuer and the Buyers shall take all measures reasonably
necessary or advisable to secure such consents, authorizations and approvals of
governmental authorities and of private persons or entities with respect to the
Additional Purchase, and to perform of all other obligations of such parties
hereunder, as may be required by any applicable statute or regulation of the
United States or any country, state or other jurisdiction or by any agreement of
any kind whatsoever applicable to the Issuer or the Buyers in connection with
the additional purchase.
(b) The Issuer and the Buyers shall (i) cooperate in the filing
of all forms, notifications, reports and information, if any, required or
reasonably deemed advisable pursuant to applicable statutes, rules, regulations
or orders of any governmental authority in connection with the Additional
Purchase and (ii) use their respective good faith efforts to cause any
applicable waiting periods thereunder to expire and any objections to the
transactions contemplated hereby to be withdrawn before the Additional Closing.
(c) In addition to the obligations set forth above, the Issuer
and Capital shall complete a Hart-Scott-Rodino filing with regard to the
Additional Purchase within 30 days of the date of this Agreement. The Issuer and
the Buyers shall diligently take (or fully cooperate in the taking of) all
actions, and provide any additional information, required or reasonably
requested in order to comply with the requirements of Hart-Scott-Rodino. The
Issuer shall pay the full amount of any Hart-Scott-Rodino filing fee payable by
any Buyer.
5.3 Confidentiality.
(a) Each Buyer hereby acknowledges that it has obtained and may
continue to obtain knowledge of and access to confidential and valuable business
information relating to the Issuer and its Subsidiaries not generally known by
or available to the general public. Each Buyer agrees at all times after the
date hereof to use reasonable efforts, consistent with those employed by it with
respect to its own confidential information, (i) to keep confidential all
information that is identified as being confidential, (ii) not to use any
confidential information on its own behalf, except in connection with the
transactions contemplated hereby, or on behalf of any other person, firm or
entity, and (iii) not to disclose confidential information to any third party
(other than to its counsel, accountants and other consultants in connection with
the transactions contemplated hereby) without the advance written authorization
of the Issuer; provided, however, that the Buyers shall have no obligation of
confidentiality with respect to confidential information that (A) was lawfully
obtained by it not subject to restrictions of confidentiality; (B) is a matter
of public knowledge; (C) has been or is hereafter publicly disclosed other than
by or through the Buyer; or (D) is required to be disclosed by law or judicial
process (in which case the Buyer shall give prompt notice to the Company prior
to such disclosure). In the event of a breach or
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threatened breach by a Buyer of the provisions of this section, the Issuer shall
be entitled to an injunction restraining that Buyer from disclosing, in whole or
in part, the information.
(b) The Issuer hereby acknowledges that it has obtained and may
continue to obtain knowledge of and access to confidential and valuable business
information relating to the Buyers not generally known by or available to the
general public. The Issuer agrees at all times after the date hereof to use,
reasonable efforts, consistent with those employed by it with respect to its own
confidential information, (i) to keep confidential all information that is
identified as being confidential, (ii) not to use any confidential information
on its own behalf, except in connection with the transactions contemplated
hereby, or on behalf of any other person, firm or entity, and (iii) not to
disclose confidential information to any third party (other than to the Issuer's
counsel, accountants and other consultants in connection with the transactions
contemplated hereby) without the advance written authorization of the Buyer
providing the information; provided, however, that the Issuer shall have no
obligation of confidentiality with respect to confidential information that (A)
was lawfully obtained by it not subject to restrictions of confidentiality; (B)
is a matter of public knowledge; (C) has been or is hereafter publicly
disclosed; or (D) is required to be disclosed by law or judicial process (in
which case the Issuer shall give prompt notice to the applicable Buyer prior to
such disclosure). In the event of a breach or threatened breach by the Issuer of
the provisions of this section, the affected Buyer shall be entitled to an
injunction restraining such Person from disclosing, in whole or in part, the
information.
5.4 Public Announcements.
The parties agree to consult with each other before issuing any
press release or making any public statement with respect to any Transaction
Document or the Transactions and, except as may be required by applicable law or
any listing agreement with any national securities exchange, will not issue any
such press release or make any such public statement prior to such consultation.
ARTICLE 6
TAX MATTERS
6.1 Tax Definitions.
The following terms, as used herein, have the following meanings:
"Code" means the Internal Revenue Code of 1986, as amended.
"Tax" means any tax imposed under Subtitle A of the Code and any
net income, alternative or add-on minimum tax, gross income, gross receipts,
sales, use, ad valorem, value
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added, transfer, franchise, profits, license, withholding on amounts paid to or
by the Issuer, payroll, employment, excise, severance, stamp, capital stock,
occupation, property, environmental or windfall profit tax, premium, custom,
duty or other tax, governmental fee or other like assessment or charge, together
with any interest, penalty, addition to tax or additional amount imposed by any
governmental authority (a "Taxing Authority") responsible for the imposition of
any such tax (domestic or foreign).
"Tax Asset" means any net operating loss, net capital loss,
investment tax credit, foreign tax credit, charitable deduction or any other
credit or tax attribute which could reduce Taxes (including without limitation
deductions and credits related to alternative minimum Taxes).
"Tax Sharing Agreements" means all existing Tax sharing
agreements or arrangements (whether or not written) binding the Issuer
(including without limitation any agreements or arrangements which afford any
other person the benefit of any Tax Asset of the Issuer, afford the Issuer the
benefit of any Tax Asset of any other person, or require or permit the transfer
or assignment of income, revenues, receipts, or gains).
6.2 Tax Representations.
The Issuer represents and warrants to each Buyer as follows:
(a) the Issuer and each Subsidiary of the Issuer has filed all
Tax returns, statements, reports and forms (including estimated tax or
information returns and reports) required to be filed with any Taxing Authority
(collectively, the "Returns") and, as of the time of filing, the Returns
correctly reflected the material facts regarding the income, business, assets,
operations, activities and status of the Issuer and each Subsidiary of the
Issuer and any other information required to be shown therein;
(b) the Issuer has furnished to the Buyers true and complete
copies of all Returns filed since January 1, 1995;
(c) except as set forth in the Balance Sheet (including the Notes
thereto) or set forth on the Disclosure Schedule, all Taxes shown as due and
payable on the Returns that have been filed have been timely paid, or withheld
and remitted to the appropriate Taxing Authority;
(d) the charges, accruals and reserves for Taxes with respect to
the Issuer and each Subsidiary of the Issuer reflected on the Issuer's and the
Subsidiaries' books and the Balance Sheet (excluding any provision for deferred
income taxes) are adequate to cover such Taxes;
(e) neither the Issuer nor any Subsidiary of the Issuer is
delinquent in the payment of any Tax, has requested any extension of time within
which to file any Return which Return has not yet been filed, and has granted
any extension or waiver of the statute of limitations period applicable to any
Return, which period (after giving effect to such extension
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or waiver) has not yet expired;
(f) there is no claim, audit, action, suit, proceeding, or
investigation now pending or, to the knowledge of the Issuer Subsidiary of the
Issuer, threatened against or with respect to the Issuer or any Subsidiary of
the Issuer in respect of any Tax or Tax Asset;
(g) neither the Issuer nor any Subsidiary of the Issuer owns any
interest in real property in the State of New York or in any other jurisdiction
in which a Tax is imposed on the transfer of a controlling interest in an entity
that owns any interest in real property;
(h) there are no liens for Taxes upon the assets of the Issuer or
any Subsidiary of the Issuer except liens for current Taxes not yet due;
(i) neither the Issuer nor any Subsidiary of the Issuer has been
a member of any affiliated, consolidated, combined or unitary group or
participated in any arrangement whereby any income, revenues, receipts, gain,
loss or Tax Asset of the Issuer or any Subsidiary of the Issuer was determined
or taken into account for Tax purposes with reference to or in conjunction with
any income, revenues, receipts, gain, loss, asset, liability or Tax Asset of any
other person;
(j) neither the Issuer nor any Subsidiary of the Issuer has
entered into any Tax-Sharing Agreements;
(k) neither the Issuer nor any Subsidiary of the Issuer is a
"United States real property holding corporation" within the meaning of Section
897(c) (2) of the Code;
(l) the Disclosure Schedule contains a list of all jurisdictions
(whether foreign or domestic) in which the Issuer or any Subsidiary of the
Issuer has filed Tax Returns and sets forth (i) all federal tax elections that
are currently in effect with respect to the Issuer or any Subsidiary of the
Issuer; (ii) all elections for purposes of foreign, state or local Taxes in each
case that reasonably could be expected to affect or be binding upon the Issuer
or any Subsidiary of the Issuer or any of their respective assets or operations
after the Closing; and (iii) all changes in accounting methods for Tax purposes
at any time made, agreed to, requested or required with respect to the Issuer or
any Subsidiary of the Issuer; and
(m) all information set forth in the notes to the Balance Sheet
relating to Tax matters is true and complete in all material respects.
6.3 Covenants.
(a) All Returns not required to be filed on or before the date
hereof (i) will be filed when due in accordance with all applicable laws and
(ii) as of the time of filing, will correctly reflect the material facts
regarding the income, business, assets, operations, activities and status of the
Issuer and the Subsidiaries of the Issuer and any other information required to
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be shown therein.
(b) Neither the Issuer nor any Subsidiary of the Issuer shall
reserve any amount for or make any payment of Taxes to any person or any Taxing
Authority, except for such Taxes as are due or payable or have been properly
estimated in accordance with applicable law as applied in a manner consistent
with past practice of the Issuer and the Subsidiaries of the Issuer.
(c) The Issuer shall deliver at such times as any Buyer may
reasonably request a statement issued by the Issuer pursuant to and meeting the
requirements of Treas. Reg. Section 1.897-2(h) (or any successor regulation)
certifying that neither the Issuer nor any Subsidiary of the Issuer is a "United
States real property holding corporation" within the meaning of Section 897(c)
(2) of the Code.
ARTICLE 7
CONDITIONS TO CLOSING
7.1 Conditions to Obligations of the Issuer.
The obligations of the Issuer to consummate the Closing are
subject to the satisfaction of the following conditions:
(a) No provision of any applicable law or regulation and no
judgment, injunction, order or decree shall prohibit the consummation of the
Closing.
(b) No proceeding challenging this Agreement or any of the
Transactions or seeking to prohibit, alter, prevent or materially delay the
Closing shall have been instituted by any Person before any court, arbitrator or
governmental body, agency or official and be Pending, where, in the reasonable
judgment of the Buyers, there is a significant possibility of a determination in
accordance with the plaintiff's demand.
(c) All required third party consents and approvals set forth on
the Disclosure Schedule shall have been obtained.
7.2 Conditions to Obligation of Buyers.
(a) The obligation of the Buyers to consummate the Closing is
subject to the satisfaction of the following further conditions:
(i) No provision of any applicable law or regulation
and no judgment,
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injunction, order or decree shall prohibit the consummation of the Closing.
(ii) No proceeding challenging this Agreement or any of
the Transactions or seeking to prohibit, alter, prevent or materially delay the
Closing shall have been instituted by any Person before any court, arbitrator or
governmental body, agency or official and be Pending, where, in the reasonable
judgment of the Buyers, there is a significant possibility of a determination in
accordance with the plaintiff's demand.
(iii) All required third party consents and approvals set
forth on the Disclosure Schedule shall have been obtained.
(iv) The Issuer, the Buyers and certain securityholders of
the Issuer shall have entered into the Securityholders Agreement.
(v) The Buyers, the holders of the Notes and the Issuer
shall have entered into the Inter-Securityholder Agreement.
(vi) The Buyers shall have received an opinion of Brobeck,
Phleger & Harrison LLP, counsel to the Issuer, dated as of the Closing Date, to
the effect and in the form attached hereto as EXHIBIT E.
(vii) Concurrently with the Closing, the Issuer shall have
provided to the Buyers an incumbency certificate for the officers of the Issuer
executing this Agreement and any of the Transaction Documents and a copy of the
each of the following: (a) the Charter of the Issuer including the amendment
attached hereto as EXHIBIT F and any other filings required to authorize the
issuance of, and designate the terms of, the Series C Preferred Stock, as
certified by the Delaware and by the Secretary of the Issuer as being true and
complete as of the Closing Date; (b) certificates certifying that the Issuer and
each domestic Subsidiary of the Issuer are in good standing (or its equivalent)
in their respective states of incorporation, in each case dated not more than
ten days prior to the Closing Date; (c) the Issuer's By-laws certified by the
secretary of the Issuer as being true and complete as of the Closing Date; (d) a
copy of the resolutions of the Issuer's Board of Directors certified by the
Secretary of the Issuer as being true and complete as of the Closing Date
authorizing the execution, delivery and performance of this Agreement and the
issuance of the Series C Preferred Stock to the Buyers pursuant hereto; and (e)
a copy of the resolutions of the Issuer's securityholders certified by the
Secretary of the Issuer as being true and complete as of the Closing Date
authorizing the amendment to the Issuer's Charter described in clause (a) of
this Section 7.2(a)(viii).
(viii) All other documents required hereunder to be
furnished by the Issuer to the Buyers prior to or at Closing shall have been
furnished.
(b) The obligation of Capital to consummate the Closing is
subject to the satisfaction of the further condition that Capital shall have
received from the Issuer a Kauffman/CalPERS certificate in the form of EXHIBIT G
hereto.
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ARTICLE 8
SURVIVAL; INDEMNIFICATION
8.1 Survival.
All representations, warranties, covenants, indemnities and other
Agreements made by any party to this Agreement herein or pursuant hereto shall
survive the Closing Date until two years after the Closing Date; provided that
(a) the representations and warranties set forth in Section 3.5(d) and the
covenants and agreements set forth in Articles 8 and 9 shall survive
indefinitely, (b) the representations and warranties set forth in Section 3.23
shall survive the Closing until six years after the Closing Date and (c) the
covenants, agreements, representations and warranties contained in Article 6
shall survive for the full period of all applicable statutes of limitations
(giving effect to any waiver, mitigation or extension thereof).
8.2 Indemnification.
(a) Subject to Section 8.2(c), the Issuer hereby agrees to
indemnify each Buyer and each of its Affiliates against and agrees to hold each
of them harmless from any and all damage, loss, liability and expense, net of
any insurance amounts recovered ("Damages"), incurred or suffered by such Buyer
or any of its Affiliates arising out of any breach of representation or
warranty, covenant or agreement made or to be performed by the Issuer pursuant
to this Agreement; provided that the Issuer shall not be liable under this
Section 8.2(a) unless the aggregate amount of Damages with respect to all
matters referred to in this Section 8.2(a) (determined without regard to any
materiality qualification contained in any representation, warranty or covenant
giving rise to the claim for indemnity hereunder) exceeds $100,000.
(b) Notwithstanding anything to the contrary in this Agreement
but subject to Section 8.2(c), the Issuer, hereby agrees to indemnify each Buyer
and each of its Affiliates from and against, and agrees to hold each of them
harmless from any and all, Damages (including without limitation reasonable
expenses of investigation by engineers, environmental consultants and similar
technical personnel) incurred or suffered by such Buyer or any of its Affiliates
arising out of, in respect of or in connection with any and all Environmental
Liabilities.
(c) The Issuer shall not be liable under this Section 8.2 for
Damages in excess of $25,000,000 in the aggregate.
8.3 Procedures; Remedies Cumulative.
(a) The party seeking indemnification under Section 8.2 (the
"Indemnified Party") agrees to give prompt notice to the Issuer of the assertion
of any claim, or the
32
<PAGE> 36
commencement of any suit, action or proceeding in respect of which indemnity may
be sought under such Section. The Issuer may, and at the request of the
Indemnified Party shall, participate in and control the defense of any such
suit, action or proceeding at its own expense. If the Indemnifying Party assumes
control of such defense, the Indemnified Party shall have the right (but not the
obligation) to participate in the defense thereof and to employ separate
counsel, all at the Indemnified Party's expense. The Issuer shall not be liable
under Section 8.2 for any settlement effected without its consent of any claim,
litigation or proceeding in respect of which indemnity may be sought hereunder.
(b) The remedies provided herein shall be cumulative and shall
not preclude the assertion by the Issuer or the Buyers of any other rights or
the seeking of any other remedies against the other, or their respective
successors or assigns.
8.4 Specific Performance.
In addition to any other remedies which the Buyers may have at
law or in equity, the Issuer hereby acknowledges that the Series C Stock and the
Issuer and the Subsidiaries of the Issuer are unique, and that the harm to the
Buyers resulting from breaches by the Issuer of its respective obligation cannot
be adequately compensated by damages. Accordingly, the Issuer agrees that the
Buyers shall have the right to have all obligations, undertakings, Agreements,
covenants and other provisions of this Agreement specifically performed by the
Issuer, and that the Buyers shall have the right to obtain an order or decree of
such specific performance in any of the courts of the United States of America
or of any state or other political subdivision thereof.
ARTICLE 9
MISCELLANEOUS
9.1 Notices.
All notices, requests and other communications to any party
hereunder shall be in writing (including facsimile transmission) and shall be
given:
If to Capital, to:
ABS Capital Partners II, L.P.
101 California Street, 47th Floor
San Francisco, California 94111
Attention: Andrew T. Sheehan
Fax: 415-477-3229
and to:
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<PAGE> 37
ABS Capital Partners II, L.P.
One South Street
Baltimore, Maryland 21202
Attention: Donald B. Hebb, Jr.
Fax: 410-895-4380
with a copy to:
Hogan & Hartson, L.L.P.
111 South Calvert Street, Suite 1600
Baltimore, Maryland 21202
Attention: Walter G. Lohr, Jr.
Fax: 410-539-6981
If to any DLJ Buyer, to:
DLJ Merchant Banking Funding, Inc.
DLJ Merchant Banking Partners, L.P.
277 Park Avenue
New York, New York 10172
Attention: Thompson Dean
Fax: (212) 892-7272
and to:
DLJ International Partners, C.V.
DLJ Offshore Partners, C.V.
c/o DLJ Offshore Management N.V.
John B. Gorsiraweg 6
Willemstad, Curacao
Netherlands Antilles
Pierson Trust (Curacao) N.V.
Attention: Germain Sprock
DLJ Capital Corporation
Sprout Growth II, L.P.
Sprout Capital VI, L.P.
3000 Sand Hill Road
Building 3, Suite 170
Menlo Park, California 94025
Attention: Robert Finzi
Fax: (650) 234-2779
34
<PAGE> 38
Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172
Attention: Ivy Dodes
Fax: (212) 892-2689
with a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: George R. Bason, Jr.
Fax: (212) 450-4800
If to William E. Terry, to:
925 Laurel Glen Drive
Palo Alto, California 94304-1323
Fax: (650) 948-8960 or (650) 852-2955
35
<PAGE> 39
If to Dr. Gilbert F. Amelio, to:
The Parkside Group
650 California Street, #2400
San Francisco, California 94108
Fax: (408) 295-1737
If to the Issuer, to:
Phase Metrics, Inc.
10260 Sorrento Valley Road
San Diego, CA 92121
Attention: John F. Schaefer
Fax: (619) 646-4996
with a copy to:
Brobeck, Phleger & Harrison
38 Technology Drive
Newport Beach, CA 92618
Attention: Richard A. Fink
Fax: (949) 790-6301
All such notices, requests and other communications shall be deemed received on
the date of receipt by the recipient thereof if received prior to 5 p.m. in the
place of receipt and such day is a business day in the place of receipt.
Otherwise, any such notice, request or communication shall be deemed not to have
been received until the next succeeding business day in the place of receipt.
9.2 Amendments and Waivers.
(a) Any provision of this Agreement may be amended or waived if,
but only if, such amendment or waiver is in writing and is signed, in the case
of an amendment, by each party to this Agreement, or in the case of a waiver, by
the party against whom the waiver is to be effective.
(b) No failure or delay by any party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof nor shall any
single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights and
remedies herein provided shall be cumulative and not exclusive of any rights or
remedies provided by law.
36
<PAGE> 40
9.3 Expenses.
The Issuer will pay, up to a maximum of $75,000 in connection
with the Transactions and the Transaction Documents, the reasonable
out-of-pocket expenses of Capital and the reasonable fees and expenses of
counsel and advisors of Capital, including the fees and expenses of Hogan &
Hartson L.L.P. as counsel to Capital. The Issuer will pay, up to a maximum of
$75,000 in connection with the Transactions and the Transaction Documents, the
reasonable out-of-pocket expenses of the DLJ Buyers and the reasonable fees and
expenses of counsel and advisors of the DLJ Buyers, including the fees and
expenses of Davis Polk & Wardwell as counsel to the DLJ Buyers. In addition, the
Issuer will reimburse both Capital and the DLJ Buyers for the filing fees of any
Hart-Scott-Rodino filing required in connection with the transactions
contemplated by this Agreement. The provisions of this Section 9.3 shall apply
whether or not the Transactions are consummated.
9.4 Successors and Assigns.
The provisions of this Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns; provided that no party may assign, delegate or otherwise transfer any
of its rights or obligations under this Agreement without the consent of each
other party hereto except that Capital or any DLJ Buyer may transfer or assign,
in whole or from time to time in part, to one or more of its respective
Affiliates, the right to purchase all or a portion of its Securities, but no
such transfer or assignment will relieve Capital or such DLJ Buyer of its
obligations hereunder.
9.5 Governing Law.
This Agreement shall be governed by and construed in accordance
with the law of the State of the State of New York, without regard to the
conflicts of law rules of such state.
9.6 Jurisdiction.
Except as otherwise expressly provided in this Agreement, any
suit, action or proceeding seeking to enforce any provision of, or based on any
matter arising out of or in connection with, any of the Transaction Documents or
the transactions contemplated hereby and thereby may be brought in the United
States District Court or any federal or state court sitting in Maryland or New
York, and each of the parties hereby consents to the non-exclusive jurisdiction
of such courts (and of the appropriate appellate courts therefrom) in any such
suit, action or proceeding and irrevocably waives, to the fullest extent
permitted by law, any objection which it may now or hereafter have to the laying
of the venue of any such suit, action or proceeding in any such court or that
any such suit, action or proceeding which is brought in any such court has been
brought in an inconvenient forum. Process in any such suit, action or proceeding
may be served on any party anywhere in the world, whether within or without the
jurisdiction of any such court. Without limiting the foregoing, each party
agrees that service of process on such
37
<PAGE> 41
party as provided in Section 9.1 shall be deemed effective service of process on
such party.
9.7 Counterparts; Third Party Beneficiaries.
This Agreement may be signed in any number of counterparts, each
of which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument. No provision of this Agreement is
intended to confer upon any Person other than the parties hereto any rights or
remedies hereunder. Notwithstanding the foregoing, neither DLJ International
Partners, C.V. or DLJ Offshore Partners, C.V. shall have any rights or remedies
under this Agreement unless and until a DLJ Buyer shall have transferred shares
of Series C Preferred Stock to such entity. Upon the consummation of a transfer
of Series C Preferred Stock to either DLJ International Partners, C.V. or DLJ
Offshore Partners, C.V. the party receiving such shares shall be entitled to all
of the rights and remedies conferred to the DLJ Buyers under this Agreement as
if such party had originally acquired shares pursuant to this Agreement on the
Closing Date.
9.8 Knowledge.
For purposes of this Agreement, a matter shall be deemed to be
"to the best knowledge" of a Person, and a Person shall be deemed to have
"knowledge" or "awareness" of a matter, if such Person or any one or more
officers, directors or senior management of such Person has, after reasonable
inquiry, knowledge of the matter in question.
9.9 Appointment of Agent.
Each of the DLJ Buyers hereby irrevocably constitutes and
appoints DLJ Merchant Banking Partners, L.P. as its agent and true and lawful
attorney in fact with full power and discretion, in the name of and for and on
behalf of each of the DLJ Buyers, in connection with all matters arising from,
contemplated by or relating to the Transaction Documents. The powers of DLJ
Merchant Banking Partners, L.P. include, without limitation, the power to
represent each of the DLJ Buyers with respect to all aspects of the Transaction
Documents, which power shall include, without limitation, the power to (i)
receive any payment or transfer to be made pursuant to the Transaction
Documents, (ii) waive any conditions of the Transaction Documents, (iii) amend
the Transaction Documents in any respect, (iv) receive notices or other
communications, (v) deliver any notices, certificates or other documents
required and (vi) take all such other action and to do all such other things as
DLJ Merchant Banking Partners, L.P. deems necessary or advisable with respect to
the Transaction Documents. The Issuer shall have the right to rely upon the acts
taken or omitted to be taken by DLJ Merchant Banking Partners, L.P. on behalf of
the DLJ Buyers, and shall have no duty to inquire as to the acts and omissions
of DLJ Merchant Banking Partners L.P. Each of the DLJ Buyers hereby acknowledges
and agrees that (i) all deliveries by the Issuer to DLJ Merchant Banking
Partners, L.P. shall be deemed deliveries to the DLJ Buyers, (ii) the Issuer
shall not have any liability with respect to any aspect of the distribution or
communication of such deliveries between DLJ Merchant Banking Partners, L.P.
38
<PAGE> 42
and any of the DLJ Buyers or among the DLJ Buyers, and (iii) any disclosure made
to DLJ Merchant Banking Partners, L.P. by or on behalf of the Issuer shall be
deemed to be a disclosure made to each of the DLJ Buyers. The provisions of this
appointment shall be binding upon the successors and permitted assigns of each
of the DLJ Buyers.
9.10 Sovereign Immunity.
To the extent that any Buyer may be entitled, in any jurisdiction
in which judicial proceedings may at any time be commenced with respect to any
Transaction Document, to claim for itself or its revenues, assets or properties
any sovereign immunity from suit, from the jurisdiction of any court (including
but not limited to any court of the United States of America or the States of
Maryland or New York), from attachment prior to judgment, from set-off, from
execution of a judgment or from any other legal process, and to the extent that
in any such jurisdiction there may be attributed such an immunity (whether or
not claimed), each Buyer hereby irrevocably agrees not to claim and hereby
irrevocably waives such immunity.
9.11 Entire Agreement.
The Transaction Documents constitute the entire agreement between
the parties with respect to the subject matter of the Transaction Documents and
supersede all prior agreements and understandings, both oral and written,
between the parties with respect to the subject matter of this Agreement and the
other Transaction Documents. No representation, inducement, promise,
understanding, condition or warranty not set forth herein has been made or
relied upon by any party hereto.
39
<PAGE> 43
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed by their respective authorized officers as of the day and
year first above written.
ABS CAPITAL PARTNERS II, L.P.
By: ABS Partners II, LLC
Its General Partner
By: /s/ DONALD B. HEBB
-------------------------------------
Name: Donald B. Hebb, Jr.
Title:
DLJ MERCHANT BANKING PARTNERS, L.P.
By DLJ MERCHANT BANKING, INC.
Managing General Partner
By: /s/ REID PERPER
-------------------------------------
Name: Reid Perper
Title: Principal
DLJ INTERNATIONAL PARTNERS, C.V.
By DLJ MERCHANT BANKING, INC.
Advisory General Partner
By: /s/ REID PERPER
-------------------------------------
Name: Reid Perper
Title:
40
<PAGE> 44
DLJ OFFSHORE PARTNERS, C.V.
By DLJ MERCHANT BANKING, INC.
Advisory General Partner
By: /s/ REID PERPER
-------------------------------------
Name: Reid Perper
Title:
DLJ MERCHANT BANKING FUNDING, INC.
By: /s/ REID PERPER
-------------------------------------
Name: Reid Perper
Title:
DLJ CAPITAL CORPORATION
By: /s/ IVY DODES
-------------------------------------
Name: Ivy Dodes
Title: Vice President
DLJ ESC II, L.P.
By: DLJ LBO PLANS MANAGEMENT
CORPORATION
By: /s/ IVY DODES
-------------------------------------
Name: Ivy Dodes
Title: Vice President
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ IVY DODES
-------------------------------------
Name: Ivy Dodes
Title: Vice President
41
<PAGE> 45
SPROUT GROWTH II, L.P.
By: DLJ Capital Corporation,
Managing General Partner
By: /s/ ROBERT FINZI
-------------------------------------
Robert Finzi
Attorney-In-Fact
SPROUT CAPITAL VI, L.P.
By: DLJ Capital Corporation
Managing General Partner
By: /s/ ROBERT FINZI
-------------------------------------
Robert Finzi
Attorney-In-Fact
PHASE METRICS, INC.
By: /s/ JOHN F. SCHAEFER
-------------------------------------
Name: John F. Schaefer
Title: CEO
42
<PAGE> 46
/s/ WILLIAM E. TERRY
------------------------------------------
William E. Terry
/s/ DR. GILBERT F. AMELIO
-------------------------------------------
Dr. Gilbert F. Amelio
43
<PAGE> 47
Schedule 2.1
SECURITIES TO BE PURCHASED FROM ISSUER
<TABLE>
<CAPTION>
Aggregate
Buyer Number of Shares Purchase Price
<S> <C> <C>
ABS Capital
Partners II, L.P. 3,749,999 $14,999,996
DLJ Merchant Banking 625,000 $2,500,000
Partners, L.P.
DLJ International 0 $0
Partners, C.V.
DLJ Offshore Partners, 0 $0
C.V.
DLJ Merchant Banking 344,992 $1,379,968
Funding, Inc.
DLJ Capital Corporation 36,472 $145,888
DLJ ESC II, L.P. 229,994 $919,976
Donaldson, Lufkin & Jenrette
Securities Corporation 675,014 $2,700,056
Sprout Growth II, L.P. 358,208 $1,432,832
Sprout Capital VI, L.P. 230,320 $921,280
Dr. Gilbert F. Ameilo 100,000 $400,000
William E. Terry 10,000 $40,000
</TABLE>
44
<PAGE> 48
EXHIBIT E
FORM OF BROBECK, PHLEGER & HARRISON LLP
LEGAL OPINION
(a) The Issuer was incorporated, and is validly existing and in
good standing as of the date of the certificate specified in Paragraph _ above,
under the laws of the State of Delaware. Each Subsidiary was incorporated and is
validly existing and in good standing as of the date of the certificates
specified in Paragraphs _,_,_, and _ above, under the laws of their respective
states of incorporation. The Issuer and each Subsidiary have the corporate power
and corporate authority under their respective articles or certificates of
incorporation and the corporate law of their respective states of incorporation
to own, lease and operate their current properties and to transact the business
in which they are currently engaged.
(b) The Issuer and the Subsidiaries are each authorized and
qualified to transact business in [list Jurisdictions].
(c) The Issuer has the corporate power and corporate authority
under its Charter and the Delaware Corporation Law to execute and deliver the
Purchase Agreement and the Transaction Documents (collectively, the
"Agreements") and to perform its obligations thereunder. The execution, delivery
and performance as of the date hereof by the Issuer of the Agreements have been
duly authorized by all necessary corporate action of the Issuer.
(d) The Agreements have been duly executed and delivered on
behalf of the Issuer and constitute valid and binding obligations of the Issuer,
enforceable in accordance with their respective terms, except as may be limited
by bankruptcy, insolvency, reorganization, moratorium or other laws affecting
creditors' rights (including, without limitation, the effect of statutory and
other law regarding fraudulent conveyances, fraudulent transfers and
preferential transfers) and as may be limited by the exercise of judicial
discretion and the application of principles of equity including, without
limitation, requirements of good faith, fair dealing, conscionability and
materiality (regardless of whether such agreement is considered in a proceeding
in equity or at law).
(e) The execution, delivery and performance as of the date hereof
by the Issuer of the Agreements do not (i) require any approval of its
shareholders or board of directors which has not been obtained, (ii) violate the
Delaware Corporation Law, as amended or the Charter or Bylaws of the Issuer,
(iii) violate any applicable law, rule, regulation, order, judgment or decree of
any federal or state governmental agency, (iv) breach or constitute a default
under any agreement or contract to which the Issuer is a party or to which the
Issuer is subject and of which such counsel has knowledge or (v) to
1
<PAGE> 49
our knowledge, result in the creation of any lien upon any of the properties of
the Issuer pursuant to any of the foregoing.
(f) No approval or consent of, or registration or filing with any
federal or state governmental agency is required to be obtained or made by the
Issuer in connection with the execution, delivery and performance as of the date
hereof by the Issuer of the Agreements (other than any filings required pursuant
to Hart-Scott-Rodino and the filing of a Form D with the Securities and Exchange
Commission and any required Blue Sky filings.
(g) When issued in accordance with the provisions of the Purchase
Agreement, the shares of Series C Redeemable Convertible Preferred Stock
("Shares") will be validly issued, fully paid and non-assessable. When issued
upon conversion of the Shares pursuant to the terms thereof, the common shares
underlying the Shares (the "Common Shares") will be validly issued, fully paid
and non-assessable. The Issuer has taken all necessary corporate actions to
reserve the Conversion Shares for issuance. The authorized, issued and
outstanding capital stock of the Issuer, and the holders of record thereof, are
as set forth in the table appearing in Section ____ of the Disclosure Schedule
to the Purchase Agreement. All shares of capital stock of the Issuer shown as
issued and outstanding in said table are duly authorized and, assuming the
receipt of consideration as provided in resolutions of the Issuer's Board of
Directors authorizing issuance thereof, are validly issued, fully paid and
non-assessable under the Delaware Corporation Law. Other than as set forth on
Section ____ of the Disclosure Schedule to the Purchase Agreement, to our
knowledge, the Issuer has not issued any outstanding securities convertible into
or exchangeable for, or outstanding options, warrants or other rights
(preemptive or otherwise) to purchase or to subscribe for, any shares of stock
or other securities of the Issuer. There are no preemptive rights of any person
applicable to the issuance of the Shares or the Conversion Shares.
(i) To our knowledge, there are no actions, suits or proceedings
pending or threatened against the Issuer or any Subsidiary, or in which the
Issuer or any Subsidiary is a party, before any court or governmental
department, commission, board, bureau, agency or instrumentality that question
the validity of the Agreements or any action taken or to be taken pursuant
thereto, or that seek to enjoin or otherwise prevent the consummation of the
transactions contemplated by the Agreements or to recover in damages or obtain
other relief as a result thereof, or that, if determined adversely to the Issuer
or a Subsidiary, as the case may be, would result in any material liability on
the part of the Issuer or the Subsidiary subject to the action, or in any
material adverse change in the financial condition of the Issuer.
2
<PAGE> 1
EXHIBIT 12.1
PHASE METRICS, INC.
STATEMENT REGARDING COMPUTATION OF RATIOS
(IN THOUSANDS, EXCEPT RATIOS)
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30, ENDED JUNE 30,
-------------------------------------------- ----------------- -----------------
1993 1994 1995 1996 1997 1997 1998 1997 1998
---- ------ ------- -------- ------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income (loss) before income
taxes and extraordinary
items..................... $361 $ 943 $ 6,193 $(19,842) $(9,812) $ (797) $(30,723) $ 294 $(36,933)
Fixed charges:
Interest expense.......... -- 651 5,625 8,448 11,573 2,827 3,770 5,393 7,201
Rental expense interest
factor(1)............... 35 60 178 1,133 1,700 425 425 850 850
---- ------ ------- -------- ------- ------ -------- ------ --------
Total fixed
charges............ 35 711 5,803 9,581 13,273 3,252 4,195 6,243 8,051
---- ------ ------- -------- ------- ------ -------- ------ --------
Earnings (loss) available to
cover fixed charges......... $396 $1,654 $11,996 $(10,261) $ 3,461 $2,455 $(26,528) $6,537 $(28,882)
==== ====== ======= ======== ======= ====== ======== ====== ========
Combined fixed charges and
preferred stock dividend
requirements(2)............. $ 35 $1,598 $10,390 $ 14,581 $18,145 $4,502 $ 5,123 $8,743 $ 9,906
==== ====== ======= ======== ======= ====== ======== ====== ========
Ratio of earnings (loss) to
fixed charges(3)............ 11.3x 1.0x 1.2x -- -- -- -- -- --
==== ====== ======= ======== ======= ====== ======== ====== ========
</TABLE>
- ---------------
(1) The portion of operating lease rental expense that is representative of the
interest factor is deemed to be one-third of total operating lease rental
expense.
(2) During loss periods, a combined statutory rate of 40% was used for purposes
of determining the pre-tax earnings required to cover the preferred stock
dividend requirements.
(3) For the years ended December 31, 1996 and 1997, the three months ended June
30, 1997 and 1998 and the six months ended June 30, 1997 and 1998, earnings
were inadequate to cover Fixed Charges by $24.8 million, $14.7 million, $2.0
million, $31.7 million, $2.2 million and $38.8 million, respectively. For
the year ended December 31, 1997 and the six months ended June 30, 1998,
giving effect to the Note Offering as if it has occurred on January 1, 1997,
interest expense increased by approximately $3.3 million and $0.1 million,
respectively and earnings were inadequate to cover fixed charges on a pro
forma basis by $18.0 million and $38.9 million, respectively.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
To the Board of Directors and Stockholders
of Phase Metrics, Inc.
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-48817 of Phase Metrics, Inc.; Air Bearings, Incorporated; Applied Robotic
Technologies, Inc.; Helios, Incorporated; and Santa Barbara Metric, Inc. on Form
S-4 of our reports dated January 30, 1998, with respect to the consolidated
financial statements of Phase Metrics, Inc. and September 6, 1996 with respect
to the financial statements of Air Bearings, Incorporated appearing in the
Prospectus, which is a part of this Registration Statement, and to the
references to us under the heading "Experts" in such Prospectus.
Our audits of the financial statements referred to in our aforementioned
report dated January 30, 1998 also included the consolidated financial statement
schedule of Phase Metrics, Inc., listed in Item 21(b). This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
San Jose, California
August 28, 1998
